UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 6-K

 

 

REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13a-16 OR 15d-16

UNDER THE SECURITIES EXCHANGE ACT OF 1934

For the month of March, 2021

Commission File Number: 1-14942

 

 

MANULIFE FINANCIAL CORPORATION

(Translation of registrant’s name into English)

 

 

200 Bloor Street East

North Tower 10

Toronto, Ontario, Canada M4W 1E5

(416) 926-3000

(Address of principal executive office)

 

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

Form 20-F  ☐            Form 40-F  ☑

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):  ☐

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):  ☐

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

Yes  ☐            No  ☑

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82- ________.

 

 

 


DOCUMENTS FILED AS PART OF THIS FORM 6-K

The following documents, filed as exhibits to this Form 6-K, are incorporated by reference as part of this Form 6-K:

 

Exhibit

  

Description of Exhibit

99.1    2020 Annual Report
99.2    Notice of Annual Meeting of Shareholders
99.3    Management Information Circular
99.4    Shareholder Proxy Form

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

MANULIFE FINANCIAL CORPORATION
By:   /s/ James D. Gallagher
Name:   James D. Gallagher
Title:   General Counsel

Date: March 19, 2021


EXHIBIT INDEX

 

Exhibit

  

Description of Exhibit

99.1    2020 Annual Report
99.2    Notice of Annual Meeting of Shareholders
99.3    Management Information Circular
99.4    Shareholder Proxy Form
Table of Contents

Exhibit 99.1

 

LOGO

Ill Manulife
Annual Report 2020
Manulife Financial Corporation


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LOGO

Our mission Decisions made easier. Lives made better. Our five strategic priorities Portfolio Optimization We are actively managing our legacy businesses to improve returns and cash generation while reducing risk. Expense Efficiency We are getting our cost structure into fighting shape and simplifying and digitizing our processes to position us for efficient growth. Accelerate Growth We are accelerating growth in our highest-potential businesses. Digital, Customer Leader We are improving our customer experiences, using digitization and innovation to put customers first. High-Performing Team We are building a culture that drives our priorities. Learn more about the progress we are making on our five strategic priorities on page 17. Our values Our values represent how we operate. They reflect our culture, inform our behaviours, and help define how we work together. Obsess about customers We predict their needs and do everything in our power to satisfy them. Do the right thing We act with integrity and do what we say. Think big Anything is possible. We can always find a better way. Get it done together We’re surrounded by an amazing team. Do it better by working together. Own it We feel empowered to make decisions and take action to deliver our mission. Share your humanity We build a supportive, diverse, and thriving workplace.


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LOGO

Who we are Manulife Financial Corporation is a leading international financial services group that helps people make their decisions easier and lives better. With our global headquarters in Toronto, Canada, we operate as Manulife across our offices in Canada, Asia, and Europe, and primarily as John Hancock in the United States. We provide financial advice, insurance, as well as wealth and asset management solutions for individuals, groups, and institutions. At the end of 2020, we had more than 37,000 employees, over 118,000 agents, and thousands of distribution partners, serving over 30 million customers. Manulife by the numbers
Core Earnings (C$ billions) $5.5 billion Total company core earnings declined 9% versus 2019. Assets Under Management and Administration (C$ billions) $1,297 billion $1.3 trillion in AUMA, 10% increase versus 2019.
1,005 1,071 1,084 2016 2017 2018 2019 2020 1,297 2016 2017 2018 2019 2020    
Net Income Attributed to Shareholders (C$ billions) $5.9 billion Net income attributed to shareholders increased $0.3 billion from 2019. New Business Value (C$ billions) $1.8 billion Newbusinessvaluedeclined13%comparedwith2019, due to the challenging sales environment.
2.0 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020    
“Our values were on display every day and helped us frame the many decisions we made throughout this challenging time.” Roy Gori President and Chief Executive Officer Common Share Dividend (C$) $1.12/share Dividend payout ratio1 of41% in 2020. $1.12/sh    2016 2017 2018 2019 2020 1 Dividend payout ratio is common share dividends as a percent of diluted core earnings per common share.
Note: Percentage changes are stated on a constant exchange rate basis, a non-GAAP measure. AUMA values are reported as at December 31.
III Manulife 1


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Letter to shareholders from John Cassaday Chairman of the Board Fellow shareholders, Last year in this letter, we highlighted how Manulife was focused on achieving success while always doing the right thing. This year, against the back drop of the global COVID-19 pandemic, another of Manulife’s values serves as a helpful lens through which to reflect on the year that passed: sharing our humanity. In a year like no other, your Board is proud of Manulife’s many accomplishments achieved under the strong and empathetic leadership of Roy Gori, President and CEO, and your company’s Executive Leadership Team (ELT). We are also humbled by the resilience, agility, and passion shown by every Manulife employee around the world who continued to serve our company’s customers through the uncertainty and upheaval unfolding around them on a daily basis. Even as our businesses had to adjust quickly and dramatically in response to the pandemic, we ensured that everyone at Manulife understood the importance of human kindness—to our customers, communities, and colleagues alike—and that we never lost sight of a simple but powerful fact: we are all in this together. We were thrilled to be able to offer a thank you day off to employees, as well as a “pay it forward” grant, through our Act of Kindness program, which enabled employees to make a monetary donation to a charity of their choice in their local communities. We also saw the importance of making arrange of mental, physical, and other supports available to our employees. We were gratified to see employee engagement scores rise substantially across the organization in 2020. Sharing our humanity also encompasses our strong commitment to diversity, equity, and the inclusive culture and workplace we are building. As the fight against racism took on heightened urgency in 2020, Manulife responded with a meaningful financial investment to promote diversity, equity, and inclusion, in addition to establishing concrete leadership and recruitment goals to increase the representation of Black, Indigenous, and People of Colour across its North American businesses. Manulife also introduced substantial enhancements to our maternity leave program and added parental and adoption leave, leading surrogacy and fertility benefits, and coverage for gender affirmation services. Your Board’s activities in 2020 While the pandemic showed us how a global crisis can upend even the best laid plans, your Board’s top priority was ensuring we could continue to provide over sight and guidance to the management team virtually. We successfully leveraged technology to continue to interact with each other during our Board sessions. We gathered ongoing director feedback to confirm that our effectiveness was not being impacted and that all directors still felt their voices were being heard. While we will eventually meet again in person, once it is safe to do so, we’ve also learned that there’s no need for every meeting to be in person, and that avoiding lengthy travel could make us a more effective group without sacrificing the connectedness that we currently value and enjoy. As Chairman, it was critically important to maintain personal contact with our independent directors and executive
2 | 2020 Annual Report


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LOGO

Manulife’s Board of Directors met virtually in 2020. From top left: Nicole Arnaboldi, Guy Bainbridge, Joseph Caron,    John Cassaday, Susan Dabarno,John Palmer, Sheila Fraser, Roy Gori,Julie Dickson, Donald Lindsay, Tsun-yan Hsieh, Andrea Rosen, Jim Prieur, and Leagh Turner. leaders—and we did so with an even greater frequency than is usual. This helped ensure that our directors’ voices were heard and that the tone at the top was appropriate. It also signalled to management that there was always a way to be heard by the Board. As the pandemic unfolded, we set up frequent briefings with management, as well as informal updates with Roy, to ensure that your Board had a clear line of sight into the company’s COVID-19 response, its approach for an eventual return to the office, and overall progress on its strategic priorities. We also continued to leverage your Board’s diverse mix of skills to conduct focused deep dives into topics of key importance to Manulife, such as IFRS 17 implementation, customer centricity, macroeconomic trends, and strategy. These sessions were attended by a subset of directors having expertise in the relevant area and who provided context and input into our deliberations with the full Board. The Board maintained close oversight of Manulife’s near-and long-term strategy throughout the year, in particular the large and compelling growth opportunity presented by the company’s business in Asia and Global Wealth and Asset Management. We also held a number of virtual in-depth sessions focused on leadership succession and talent to help ensure Manulife maintains an exceptional level of bench strength in terms of management leadership and Board stewardship alike. Our shareholder outreach and annual meeting also became virtual, but we remained as dedicated as always to discussing what matters to our investors. Among other matters, we held fulsome and robust conversations with shareholders on the topic of executive compensation and our preparations for the adoption of IFRS 17. Your Board continued to take an active role in Manulife’s environmental, social, and governance (ESG) performance. The Board’s Corporate Governance and Nominating Committee reviewed the progress being made against Manulife’s sustainability frame work and stayed informed of ESG trends, risks, and opportunities through management reporting. Two new directors joined the Board in 2020, each with expertise in areas critical to Manulife’s on going growth. Nicole Arnaboldi, former Vice Chairman, Credit Suisse Asset Management, is an accomplished financial services executive with a depth of critical wealth and asset management knowledge. Leagh Turner, President and Chief Operating Officer at Ceridian HCM Holding Inc., brings extensive experience in leadership, technology, and driving transformational change, and is a passionate supporter of diversity. We are proud to report that six of our 13 independent directors are women, effectively reaching our aspiration of gender parity in representation among independent directors. Thank you In closing, we would like to thank the Honourable Rona Ambrose, who resigned asadirectorinAugust2020toaccepta full-time employment position. We valued the advice and counsel she provided during her three years on the Board. We would also like to express our appreciation to Roy and the ELT for delivering a year of solid results during the worst global crisis in recent history, all while continuing to go above and beyond for customer sand engaging and inspiring the team with values-driven leadership. We want to send a special thank you to every Manulife employee. Your unwavering commitment to our mission and values, and the passion you’ve shown in the face of intense adversity, is what makes Manulife’s success possible, day in and day out. The Board sends you its unreserved gratitude for your continued service. And last but certainly not least, we want to thank you, our fellow shareholders, for your trust, support, and candor. While the world continues to grapple with the COVID-19 pandemic, we at Manulife are united by a powerful sense of togetherness and a firm belief that we will come out of this crisis stronger than ever. Sincerely, John Cassaday Chairman of the Board III Manulife 3


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LOGO

Letter to shareholders from Roy Gori President and Chief Executive Officer Dear fellow shareholders, When I wrote to you last year, our team was excited about the year ahead. We were focused on implementing plans to build on our positive momentum and to continue our transformation into the most digital, customer-centric global company in our industry. But when the COVID-19 pandemic hit, our focus quickly shifted to two key objectives: ensuring the health and safety of our team and supporting our customers, who needed us more than ever. The pandemic has tested us all, brought heartbreak and loss to people around the world, and challenged our resilience and determination. At the same time, it has reminded us of the power of community and the importance of gratitude and empathy. It’s why, before talking more specifically about our company, I want to express tremendous gratitude to all those who have been caring for the sick, ensuring the availability of food and supplies, developing and distributing vaccines, keeping our communities running, and doing so much more. On behalf of all of us at Manulife, thank you for your incredible dedication and selflessness. We are in this together, and we remain committed to supporting the communities where we live and work globally, much aswedidthroughout2020. Helping our customers navigate the new reality From concerns about how to protect their savings and investments, to securing products that would help with their medical needs and well-being, to enduring the devastating loss of a loved one, our customers turned to us in record numbers during this difficult time. In keeping with our mission—decisions made easier, lives made better—we helped customers who were stranded while travelling, we re-allocated business teams to handle increased call volumes, and we proactively extended grace periods for certain premium and mortgage payments. Understanding it was more important than ever to help our customers improve and protect their health, we grew our behavioural insurance offerings, which support them in taking actions to live healthier lives. We expanded the range of wearable devices offered by John Hancock Vitality in the U.S., increased reward opportunities for Manulife Vitality customers in Canada, and added Health Score, a health assessment tool for Manulife MOVE in Asia. Fortunately, as part of our digital transformation, we invested heavily in technology and services leading up to 2020.Our digital tools and contact centre 4 2020 Annual Report


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LOGO

teams were ready to help answer customers’ questions, process claims, and provide prospective customers with information about products and solutions remotely and quickly. We also accelerated the delivery of new digital capabilities to support virtual sales and to enhance the overall customer and advisor experience, including new eForms and Virtual Assistants. Since many markets where we operate require meeting in person to complete product purchases, we worked with local regulators to quickly find new ways to safely and simply connect with our distribution partners, agents, and customers. The impact these changes have had on our ability to serve our customers and make lives better has been tremendous, and we are grateful for the openness these regulators showed to new digital approaches. Once customers had the chance to interact with us in these new ways, many told us they welcomed the new speed and flexibility. As a result of these innovative efforts, a large majority of our products are now available via virtual face- to-face methods. We also took this opportunity to accelerate our digital innovation efforts in many other area so four business, expanding automatic underwriting, introducing a new claims system for our group benefits customers in Canada, further automating payments, and driving more straight-through processing. We made many other changes in response to customer feedback to enhance their overall experience as well. All these efforts contributedtoafour-pointincreasein2020 in our net promoter score, the indicator of how likely a customer is to recommend our company to others. Leveraging our strong foundation The strategy we embarked on a few years ago gave us a strong foundation to weather the extraordinary headwinds we faced last year. Thanks to the priority we had placed on investing in our technology and digital infrastructure, and strong focus on business continuity planning, when COVID-19was declared a global pandemic in March, we wereabletorapidlypivottohaving95%of our global team working remotely. Having worked over the past several years to embrace a culture of strong cost stewardship, we achieved $1billion of sustainable expense efficiencies, reaching our2022targettwoyears ahead of schedule. We prioritized optimizing our legacy portfolio, which is reflected in the releaseof$5.9billionofcapitalsince2018 and has further strengthened our capital position. Thanks to all of these efforts and, most importantly, the continued trust of our customers, we achieved net income attributable to shareholders of $5.9 billion in 2020, up $0.3billion from 2019. We delivered core earnings of$5.5 billion, a decreaseof9%compared with 2019, a resilient performance that reflects the diversity of our franchise and robust demand for our products. In addition, our assets under management and administration continued to grow, finishing the year at $1.3trillion, up10%fromlastyear. We maintained a focus on Asia and Global Wealth and Asset Management, two of our highest potential businesses. In Asia, we extended our banc assurance agreement with Bank Danamon Indonesia to 2036. We signed an agreement to establish an exclusive, 16-year banc assurance “From concerns about how to protect their savings and investments, to securing products that would help with their medical needs and wellbeing, to enduring the devastating loss of a loved one, our customers turned to us in record numbers during this difficult time.”
III Manual life 5


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LOGO

“Throughout the pandemic I have been repeatedly awed by the incredible heart, passion, and ‘can do’ spirit of our team.” partnership with Vietin Bank, one of Vietnam’s largest banks, and agreed to purchase Aviva plc’s Vietnam insurance operations, both of which will strengthen our leadership position in this fast-growing market. At the same time, our insurance agencyforceacrossAsiagrewby21%and nowexceeds115,000 agents focused on serving our customers in some of Asia’s fastest-growing markets. In our Global Wealth and Asset Management business, we completed the formation of our retail and institutional joint venture with Mahindra Finance in India and acquired a minority stake in Albamen Capital Partners, a private equity infrastructure investment manager with a focus on assets in mainland China. In addition, we announced a strategic alliance with Allianz Global Investors, strengthening our position as the largest Hong Kong Mandatory Provident Fund scheme sponsor. The fundamentals underpinning our global franchise remain strong and we expect future demand for our products and services will remain robust, supported by macroeconomic and demographic mega trends, such as the rise of Asia’s middle class and the aging global population. The pandemic has changed many attitudes regarding risk, which led more people to examine or purchase insurance and wealth products to help them prepare for the future and care for loved ones. An inspired, inclusive, and engaged team Throughout the pandemic I have been repeatedly awed by the incredible heart, passion, and “can do” spirit of our team. Our values were on display every day and helped us frame the many decisions we made throughout this challenging time. Earlyon, we knew some members of our team needed to have the support of additional time off to care for family or their own well-being, and we responded with additional paid leave. We recognized that so many of our people were challenged to do their work while caring for their children and adopted flexible schedules to accommodate their needs. Managers were provided with additional support to help coach and lead remotely. Knowing our teammates’ children needed something to look forward to, we launched a virtual summer camp followed by afterschool clubs. We also provided a range of speakers, entertainment, and virtual parties for everyone on our team, including their families. Along the way, we made it a priority to say “thank you” and recognize each other through a new company-wide program in which everyone can celebrate colleagues for their help, hard work, and for living our values. This struck a chord with nearly 400,000recognitionmomentsinjustafew months. To take it one step further, we gave everyone a thank you day off in June and five additional personal paid days off in 2021to rest, recharge, and have some fun. As2020cametoan end, we gave every 6 2020 Annual Report


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LOGO

member of our team a grant to fund an “Act of Kindness” to help those in need in their local community. Besides dealing with the impacts of the pandemic, we also made it a priority to ensure our company is a place where everyone feels they can be authentic, respected for who they are, and included. We committed to invest more than $3.5millionoverthenexttwoyearsto promote diversity, equity, and inclusion through expanded hiring commitments, education, and community support for organizations helping Black, Indigenous, and People of Colour. Most heartening was how our actions were appreciated by our high-performing team, as we earned outstanding scores on our annual engagement survey and were voted one of the world’s best employers by Forbes, ranking in the top 100. Our team and culture have evolved inaverypositiveandpowerfulwayin2020, and its growing strength remains critical to our long-term success. Our commitment to sustainability Making sustainable business decisions is more than just the right thing to do—it creates long-term value for our stakeholders and communities. For us, this means working towards measuring and evaluating our practices by integrating environmental, social, and governance (ESG) factors across our business, from supporting the transition to a low-carbon economy to investing in the health and well-being of our team and our communities. We are maintaining our focus on climate change and remain steadfast in our commitment to investing in the transition to a low-carbon economy. As the world’s largest institutional timberland investment manager and one of the largest farmland investment managers, we are actively contributing nature-based solutions to this challenge. We have achieved green building certifications for over 80% of our real estate portfolio managed by Global Wealth and Asset Management. Our own portfolio of green investments totalled $29.2billionattheendof2020,including renewable energy, energy efficiency, green buildings, and sustainably managed timberland and farmland. The world’s leading proponent of responsible investment, the Principles for Responsible Investment (PRI),included Manulife Investment Management in their PRI Leaders’ Group 2020, recognizing our efforts to integrate climate data and analysis into these portfolios. We offer our investment clients “sustain ability as standard,” considering sustain ability in all our investments made on their behalf. As part of our sustain ability journey, we are actively engaging with industry groups and global associations, such as Climate Action100+andtheSustainableMarkets Initiative, to collaborate with like-minded organizations looking to embed ESG practices and to make significant impacts across industries and geographies. Thank you Inclosing, I am proud of all we were able to accomplish in 2020. The support and excellent guidance of our Board of Directors and our Chairman, John Cassaday, were invaluable as we navigated such an unprecedented time. I’d also like to thank you, my fellow shareholders and customers, for your ongoing confidence and trust in us. On a personal level, I am deeply grateful for the partnership and tireless efforts of my colleagues across the senior leadership team. I truly appreciate all their efforts over the past year. As we embark on the year ahead, I am confident that the energy and optimism of our global team will enable us to continue to build an even stronger Manulife. Sincerely, Roy Gori President and Chief Executive Officer
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Caution regarding forward-looking statements

 

From time to time, Manulife Financial Corporation (“MFC”) makes written and/or oral forward-looking statements, including in this document. In addition, our representatives may make forward-looking statements orally to analysts, investors, the media and others. All such statements are made pursuant to the “safe 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 Company’s strategic priorities and 2022 targets for net promoter score, employee engagement, its highest potential businesses, expense efficiency and portfolio optimization, and our business continuity plans and measures implemented in response to the COVID-19 pandemic and its expected impact on our businesses, operations, earnings and results, and also relate to, among other things, our objectives, goals, strategies, intentions, plans, beliefs, expectations and estimates, and can generally be identified by the use of words such as “may”, “will”, “could”, “should”, “would”, “likely”, “suspect”, “outlook”, “expect”, “intend”, “estimate”, “anticipate”, “believe”, “plan”, “forecast”, “objective”, “seek”, “aim”, “continue”, “goal”, “restore”, “embark” and “endeavour” (or the negative thereof) and words and expressions of similar import, and include statements concerning possible or assumed future results. Although we believe that the expectations reflected in such forward-looking statements are reasonable, such statements involve risks and uncertainties, and undue reliance should not be placed on such statements and they should not be interpreted as confirming market or analysts’ expectations in any way.

Certain material factors or assumptions are applied in making forward-looking statements and actual results may differ materially from those expressed or

implied in such statements. Important factors that could cause actual results to differ materially from expectations include but are not limited to: general business and economic conditions (including but not limited to the performance, volatility and correlation of equity markets, interest rates, credit and swap spreads, currency rates, investment losses and defaults, market liquidity and creditworthiness of guarantors, reinsurers and counterparties); the severity, duration and spread of the COVID-19 outbreak, as well as actions that have been, or may be taken by governmental authorities to contain COVID-19 or to treat its impact; changes in laws and regulations; changes in accounting standards applicable in any of the territories in which we operate; changes in regulatory capital requirements; our ability to execute strategic plans and changes to strategic plans; downgrades in our financial strength or credit ratings; our ability to maintain our reputation; impairments of goodwill or intangible assets or the establishment of provisions against future tax assets; the accuracy of estimates relating to morbidity, mortality and policyholder behaviour; the accuracy of other estimates used in applying accounting policies, actuarial methods and embedded value methods; our ability to implement effective hedging strategies and unforeseen consequences arising from such strategies; our ability to source appropriate assets to back our long-dated liabilities; level of competition and consolidation; our ability to market and distribute products through current and future distribution channels; unforeseen liabilities or asset impairments arising from acquisitions and dispositions of businesses; the realization of losses arising from the sale of investments classified as available-for-sale; our liquidity, including the availability of financing to satisfy existing financial liabilities on expected maturity dates when required; obligations to pledge additional collateral; the availability of letters of credit to provide capital

management flexibility; accuracy of information received from counterparties and the ability of counterparties to meet their obligations; the availability, affordability and adequacy of reinsurance; legal and regulatory proceedings, including tax audits, tax litigation or similar proceedings; our ability to adapt products and services to the changing market; our ability to attract and retain key executives, employees and agents; the appropriate use and interpretation of complex models or deficiencies in models used; political, legal, operational and other risks associated with our non-North American operations; acquisitions and our ability to complete acquisitions including the availability of equity and debt financing for this purpose; the disruption of or changes to key elements of the Company’s or public infrastructure systems; environmental concerns; our ability to protect our intellectual property and exposure to claims of infringement; and our inability to withdraw cash from subsidiaries.

Additional information about material risk factors that could cause actual results to differ materially from expectations and about material factors or assumptions applied in making forward-looking statements may be found in this document under “Risk Factors and Risk Management” and “Critical Actuarial and Accounting Policies” and in the “Risk Management” note to the Consolidated Financial Statements as well as elsewhere in our filings with Canadian and U.S. securities regulators. The forward-looking statements in this document are, unless otherwise indicated, stated as of the date hereof and are presented for the purpose of assisting investors and others in understanding our financial position and results of operations, our future operations, as well as our objectives and strategic priorities, and may not be appropriate for other purposes. We do not undertake to update any forward-looking statements, except as required by law.

 

 

8   |  2020 Annual Report


Table of Contents

 

Manulife

Financial

Corporation

 

 

 

Table of

contents

 

Annual

Report

2020

10

   Management’s Discussion and Analysis
   10    Manulife Financial Corporation
   19    Asia
   22    Canada
   25    US
   28    Global Wealth and Asset Management
   32    Corporate and Other
   34    Investments
   39    Fourth Quarter Financial Highlights
   42    Risk Factors and Risk Management
   81    Capital Management Framework
   84    Critical Actuarial and Accounting Practices
   95    Controls and Procedures
   96    Performance and Non-GAAP Measures
   100    Additional Disclosures

110

   Consolidated Financial Statements

115

   Notes to Consolidated Financial Statements

187

   Additional Actuarial Disclosures

189

   Board of Directors

189

   Executive Leadership Team

190

   Office Listing

191

   Glossary of Terms

193

   Shareholder Information

193

   Dividend Information
 

 

LOGO            9


Table of Contents

Management’s Discussion

and Analysis

   LOGO

This Management’s Discussion and Analysis (“MD&A”) is current as of February 10, 2021.

1. Manulife Financial Corporation

Manulife Financial Corporation is a leading international financial services group that helps people make their decisions easier and lives better. With our global headquarters in Toronto, Canada, we operate as Manulife across our offices in Canada, Asia, and Europe, and primarily as John Hancock in the United States. We provide financial advice, insurance, and wealth and asset management solutions for individuals, groups and institutions. At the end of 2020, we had more than 37,000 employees, over 118,000 agents, and thousands of distribution partners, serving over 30 million customers. At the end of 2020, we had $1.3 trillion (US$1.0 trillion) in assets under management and administration, and during 2020, we made $31.6 billion in payments to our customers. Our principal operations are in Asia, Canada and the United States where we have served customers for more than 155 years. We trade as ‘MFC’ on the Toronto, New York, and the Philippine stock exchanges, and under ‘945’ in Hong Kong.

Our reporting segments are:

 

 

Asia – providing insurance products and insurance-based wealth accumulation products in Asia.

 

Canada – providing insurance products, insurance-based wealth accumulation products, and banking services in Canada and has an in-force variable annuity business.

 

U.S. – providing life insurance products, insurance-based wealth accumulation products and has an in-force long-term care insurance business and an in-force annuity business.

 

Global Wealth and Asset Management (“Global WAM”) – providing fee-based wealth solutions to our retail, retirement and institutional customers around the world.

 

Corporate and Other – comprised of investment performance on assets backing capital, net of amounts allocated to operating segments; financing costs; costs incurred by the corporate office related to shareholder activities (not allocated to operating segments); our Property and Casualty (“P&C”) Reinsurance business; and run-off reinsurance business lines.

In this document, the terms “Company”, “Manulife”, “we” and “our” mean Manulife Financial Corporation (“MFC”) and its subsidiaries. The term “MLI” means The Manufacturers Life Insurance Company and its subsidiaries.

Profitability

Profitability

 

As at and for the years ended December 31,

($ millions, unless otherwise stated)

  2020     2019     2018  

Net income attributed to shareholders

  $ 5,871     $   5,602     $ 4,800  

Core earnings(1)

  $ 5,516     $ 6,004     $ 5,610  

Diluted earnings per common share ($)

  $ 2.93     $ 2.77     $ 2.33  

Diluted core earnings per common share ($)(1)

  $ 2.75     $ 2.97     $ 2.74  

Return on common shareholders’ equity (“ROE”)

      11.6%       12.2%         11.6%  

Core ROE(1)

    10.9%       13.1%       13.7%  

Expense efficiency ratio(1)

    52.9%       52.0%       52.0%  

 

(1)

This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.

Our net income attributed to shareholders was $5.9 billion in 2020 compared with $5.6 billion in 2019. Net income attributed to shareholders is comprised of core earnings1 (consisting of items we believe reflect the underlying earnings capacity of the business), which amounted to $5.5 billion in 2020 compared with $6.0 billion in 2019, and items excluded from core earnings of $0.4 billion of net gains in 2020 compared with $0.4 billion of net charges in 2019.

The $0.3 billion increase in net income attributed to shareholders compared with 2019 was primarily due to gains from the direct impact of interest rates in 2020, including gains from the sale of available-for-sale bonds (“AFS”) held in Corporate and Other, (compared with losses in 2019, including a $0.5 billion charge related to updated Ultimate Reinvestment Rate (“URR”) assumptions issued by the Canadian Actuarial Standards Board), partially offset by losses on investment-related experience (compared with gains in 2019, including $400 million of core investment gains1) and losses from the direct impact of equity markets and variable annuity guarantee liabilities (compared with gains in 2019).

The $0.5 billion decrease in core earnings compared with 2019 reflects the absence of core investment gains in the year (compared with gains in the prior year), lower investment income in Corporate and Other, less favourable impact of markets on seed money investments in new segregated and mutual funds, and lower new business volumes. These items were partially offset by the impact of in-force business growth, favourable policyholder experience, favourable new business product mix in Hong Kong and Asia Other2, and higher average AUMA in Global Wealth and Asset Management. Core earnings in 2020 included net policyholder experience gains of $83 million post-tax ($76 million pre-tax) compared with a net charge of $17 million post-tax ($55 million pre-tax) in 2019.3 Actions to improve the capital efficiency of our legacy businesses resulted in $37 million lower core earnings in 2020 compared with 2019.

 

1 

This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.

2 

Asia Other excludes Hong Kong and Japan.

3 

Policyholder experience includes gains of $60 million post-tax in 2020 (2019 – gains of $83 million post-tax) from the release of margins on medical policies in Hong Kong that have lapsed for customers who have opted to change their existing policies to the new Voluntary Health Insurance Scheme (“VHIS”) products. These gains did not have a material impact on core earnings as they were mostly offset by new business strain.

 

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Core earnings by segment is presented in the following table. See Asia, Canada, U.S., and Global WAM sections below.

 

For the years ended December 31,

($ millions)

                     % change(1)        
  2020     2019     2020 vs 2019     2018  

Core earnings by segment (1),(2),(3)

         

Asia

  $ 2,110       $ 2,005       4%     $ 1,766  

Canada

    1,174         1,201       (2)%       1,327  

U.S.

    1,995         1,876       5%       1,789  

Global Wealth and Asset Management

    1,100         1,021       7%       985  

Corporate and Other (excluding core investment gains)

    (863       (499     (73)%       (657

Core investment gains(2),(4)

                  400       (100)%       400  

Total core earnings

  $   5,516             $   6,004       (9)%     $   5,610  

 

(1)

Percentage change is on a constant exchange rate basis. See “Performance and Non-GAAP Measures” below.

(2)

This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.

(3)

2018 comparatives for core earnings in each segment have been updated to reflect the 2019 methodology for allocating capital and interest on surplus to our insurance segments from the Corporate and Other segment.

(4)

See note (2) in the table below.

The table below reconciles 2020, 2019 and 2018 net income attributed to shareholders to core earnings and provides further details for each of the items excluded from core earnings.

 

For the years ended December 31,

($ millions)

   2020      2019      2018          

Core earnings(1)

   $ 5,516      $ 6,004      $ 5,610     

Items to reconcile core earnings to net income (loss) attributed to shareholders:

           

Investment-related experience outside of core earnings(2)

     (792      366        200     

Direct impact of equity markets and interest rates and variable annuity guarantee liabilities

     932        (778)        (857)     

Direct impact of equity markets and variable annuity guarantee liabilities(3)

     (228)        456        (928)     

Fixed income reinvestment rates assumed in the valuation of policy liabilities(4)

       (1,015)          (1,130)        354     

Sale of AFS bonds and derivative positions in the Corporate and Other segment

     2,175        396        (283)     

Changes to the Ultimate Reinvestment Rate(5)

            (500)            

Change in actuarial methods and assumptions(6)

     (198)        (21)        (51)     

Reinsurance transactions(7)

     341        81        175     

Restructuring charge(8)

                   (263)     

Tax-related items and other(9)

     72        (50)        (14)           

Total items excluded from core earnings

     355        (402)        (810)           

Net income attributed to shareholders

   $ 5,871      $ 5,602      $   4,800           

 

(1)

This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.

(2)

In accordance with our definition of core earnings, we include up to $400 million of net favourable investment-related experience reported in a single year, as core investment gains (see “Performance and Non-GAAP Measures” below). Items excluded from core earnings include net investment-related experience in excess of $400 million per annum or net unfavourable investment-related experience on a year-to-date basis. In 2020, the investment-related experience net charge of $792 million reflected lower-than-expected returns (including fair value changes) on alternative long-duration assets (“ALDA”) primarily driven by investments in oil & gas and real estate, partially offset by the favourable impact of fixed income reinvestment activities. In 2019, investment-related experience net gains of $766 million were generated, reflecting the favourable impact of fixed income reinvestment activities on the measurement of our policy liabilities, strong returns (including changes in fair value) on ALDA, and strong credit experience.

(3)

In 2020, the net charge related to equity markets of $228 million included a charge of $1,641 million from gross equity exposure and a modest charge of $7 million from macro hedge experience partially offset by a gain of $1,420 million from dynamic hedging experience. In 2019, the net gain of $456 million included a gain of $443 million from gross equity exposure and a gain of $45 million from dynamic hedging experience, partially offset by a charge of $32 million from macro hedge experience.

(4)

In 2020, the charge due to fixed income reinvestment rates of $1,015 million was primarily due to the reduction in risk-free rates and, to a much lesser extent, lower corporate spreads, with spreads for some tenors and ratings being slightly below their respective 2019 levels. In 2019, the net charge due to fixed income reinvestment rates of $1,130 million was primarily due to the narrowing of corporate spreads, the impact of lower risk-free rates and a steepening of the yield curve.

(5)

In 2019, the Actuarial Standards Board (“ASB”) issued new assumptions with reductions to the URR and updates to the calibration criteria for stochastic risk-free rates. The updated standard included a reduction of 15 basis points in the URR and a corresponding change to stochastic risk-free rate modeling which resulted in a $500 million charge. The long-term URR for risk-free rates in Canada is prescribed at 3.05% and we use the same assumption for the U.S. Our assumption for Japan is 1.6%. The ASB is currently conducting another review of the URR with any changes expected to be announced and implemented in 2021.

(6)

See “Critical Actuarial and Accounting Policies – Review of Actuarial Methods and Assumptions” section below for further information on the 2020 and 2019 charges.

(7)

In 2020, reinsurance transactions in the U.S., Asia and Canada contributed gains of $262 million, $58 million and $21 million, respectively. The 2019 net gain of $81 million included gains resulting from reinsurance transactions primarily related to our legacy businesses in Canada and the U.S.

(8)

The 2018 charge of $263 million primarily related to the voluntary exit program in our Canadian operation transformation program and to our North American voluntary early retirement program as well as costs to optimize our real estate footprint in the U.S. and Canada.

(9)

In 2020, we reported tax benefits from the U.S. CARES Act, as a result of carrying back net operating losses to prior years, which had higher tax rates. Tax-related items and other charges in 2019 primarily related to a tax rate change in the province of Alberta, Canada.

Diluted earnings per common share was $2.93 in 2020, compared with $2.77 in 2019 primarily related to the increase in net income attributed to common shareholders. Diluted core earnings per common share1 was $2.75 in 2020, compared with $2.97 in 2019 primarily related to the decrease in core earnings. The diluted weighted average common shares outstanding was 1,943 million in 2020 and 1,962 million in 2019.

 

 

1 

This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.

 

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Return on common shareholders’ equity (ROE) for 2020 was 11.6%, compared with 12.2% for 2019 and core return on shareholders’ equity (“core ROE”)1 was 10.9% in 2020 compared with 13.1% in 2019. The decrease in 2020 core ROE was predominantly driven by an increase in common shareholders’ equity, due to the impact of lower interest rates on AFS debt securities.

Expense efficiency ratio1 was 52.9% for 2020, compared with 52.0% in 2019. The 0.9 percentage point increase in the ratio compared with 2019 was driven by a 7%2 decline in 2020 pre-tax core earnings1, partially offset by a reduction in general expenses included in core earnings (“core general expenses”) of 3%.1 The reduction in core general expenses reflected the results of our efficiency programs, as well as temporary reductions in discretionary and distribution-related expenditures.

Business Performance

Growth metrics

 

As at and for the years ended December 31,

($ millions, unless otherwise stated)

  2020     2019     2018  

Asia APE sales

  $ 3,869     $ 4,278     $ 4,012  

Canada APE sales

    1,148       1,057       975  

U.S. APE sales

    609       702       553  

Total APE sales(1)

    5,626       6,037       5,540  

Asia new business value

    1,387       1,595       1,443  

Canada new business value

    255       237       207  

U.S. new business value

    160       218       98  

Total new business value(1)

    1,802       2,050       1,748  

Global Wealth and Asset Management gross flows ($ billions)(1)

    130.2       114.2       119.0  

Global Wealth and Asset Management net flows ($ billions)(1)

    8.9       (0.9     1.6  

Global Wealth and Asset Management assets under management and administration ($ billions)(1)

    753.6       681.4       608.8  

Total assets under management and administration ($ billions)(1)

      1,297.4         1,188.9         1,083.5  

 

(1)

This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.

Annualized premium equivalent (“APE”) sales1 were $5.6 billion in 2020, a decrease of 8% compared with 2019. In Asia, APE sales decreased 11% compared with 2019 primarily as a result of lower Japan APE sales, which decreased 30% due to accelerated sales of corporate-owned life insurance (“COLI”) products in the first quarter of 2019 in advance of a change in tax regulations and the adverse impact of COVID-19. Hong Kong APE sales decreased 10% compared with 2019 driven by the adverse impact of COVID-19 containment measures, and lower sales to mainland Chinese visitors. Asia Other APE sales in 2020 were in-line with 2019, as growth in mainland China and Vietnam was offset by the adverse impact of COVID-19 in other markets. In Canada, APE sales increased 9% compared with 2019, primarily driven by higher large-case group insurance sales, higher sales in our lower risk segregated funds and higher affinity market sales within individual insurance, partially offset by lower retail insurance sales due to the adverse impact of COVID-19. In the U.S., APE sales decreased 14% compared with 2019, as lower international universal life, domestic protection universal life, and variable universal life sales, more than offset higher term life and domestic indexed universal life sales. The decline in U.S. APE sales was driven by higher prior year domestic universal life sales in advance of anticipated regulatory changes, as well as the unfavourable impact of COVID-19.

New business value (“NBV”)1 was $1.8 billion in 2020, a decrease of 13% compared with 2019. In Asia, NBV of $1.4 billion was down 14% compared with 2019, driven by lower sales volumes in Hong Kong and Japan and a decline in market interest rates in Hong Kong and Asia Other, partially offset by favourable product mix in Asia Other. In Canada, NBV of $255 million was up 8% compared with 2019, primarily due to higher margins and higher sales in our insurance businesses. In the U.S., NBV of $160 million was down 27% compared with 2019 primarily driven by lower sales volumes.

Global WAM gross flows1 of $130.2 billion increased $16.0 billion or 13% compared with 2019, driven by higher gross flows across all geographies. See “Global Wealth and Asset Management” section below for further details.

Global WAM net inflows1 were $8.9 billion in 2020, compared with net outflows of $0.9 billion in 2019. In Asia, net inflows were $3.9 billion in 2020 compared with net inflows of $4.8 billion in 2019, reflecting lower retail net flows mainly in mainland China and Hong Kong, partially offset by higher net flows in Indonesia Retail and Hong Kong Retirement. In Canada, net inflows were $14.6 billion in 2020 compared with net outflows of $3.6 billion in 2019, driven by improved net inflows in Institutional Asset Management, from the non-recurrence of an $8.5 billion redemption in 2019 and the funding of a $6.9 billion mandate from a new client in the second quarter of 2020 (“2Q20”), and in Retirement, from lower plan redemptions and individual withdrawals. In the U.S., net outflows were $9.6 billion in 2020 compared with net outflows of $2.0 billion in 2019, driven by a $5.0 billion redemption of an equity mandate, and the non-recurrence of several large sales in Institutional Asset Management in 2019, as well as higher redemptions in Retirement, mainly due to member withdrawals under the U.S. CARES Act during the year.

 

1 

This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.

2 

Percentage growth / declines in core earnings, core general expenses, pre-tax core earnings, APE sales, gross flows, net flows, NBV, assets under management and administration, assets under management, core EBITDA and Global Wealth and Asset Management revenue are stated on a constant exchange rate basis. Constant exchange rate basis is a non-GAAP measure. See “Performance and Non-GAAP measures” below.

 

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Assets under Management and Administration (“AUMA”)1

AUMA as at December 31, 2020 was $1.3 trillion, an increase of 10%, compared with December 31, 2019, primarily due to the favourable impact of markets and net inflows. The Global Wealth and Asset Management portion of AUMA as at December 31, 2020 was $754 billion, an increase of 12%, compared with December 31, 2019, driven by the favourable impact of markets and net inflows of $8.9 billion.

Assets under Management and Administration

 

As at December 31,

($ millions)

  2020     2019     2018  

General fund

  $ 410,977     $ 378,527     $ 353,664  

Segregated funds net assets(1)

    367,436       343,108       313,209  

Mutual funds, institutional asset management and other(1),(2)

    356,335       321,826       292,200  

Total assets under management

    1,134,748       1,043,461       959,073  

Other assets under administration

    162,688       145,397       124,449  

Total assets under management and administration

  $   1,297,436     $   1,188,858     $   1,083,522  

 

(1)

Segregated fund assets, mutual fund assets and other funds are not available to satisfy the liabilities of the Company’s general fund.

(2)

Other funds represent pension funds, pooled funds, endowment funds and other institutional funds managed by the Company on behalf of others.

Revenue

Revenue includes (i) premiums received on life and health insurance policies and fixed annuity products, net of premiums ceded to reinsurers; (ii) investment income comprised of income earned on general fund assets, credit experience and realized gains and losses on assets held in the Corporate and Other segment; (iii) fee and other income received for services provided; and (iv) realized and unrealized gains and losses on assets supporting insurance and investment contract liabilities and on our macro hedging program. Premium equivalents from administrative services only (“ASO”), as well as deposits received by the Company on investment contracts such as segregated funds, mutual funds and managed funds are not included in revenue; however, the Company does receive fee income from these products, which is included in revenue. Fees generated from deposits and ASO premium and deposit equivalents are an important part of our business and as a result, revenue does not fully represent sales and other activity taking place during the respective periods.

In 2020, revenue before realized and unrealized investment gains and losses was $59.9 billion compared with $61.4 billion in 2019. The decrease was primarily due to higher ceded premiums in 2020 from the reinsurance of a block of legacy U.S. Bank-Owned Life Insurance (“BOLI”) business partially offset by higher investment income.

In 2020, the net realized and unrealized investment gains on assets supporting insurance and investment contract liabilities and on the macro hedging program were $19.0 billion compared with gains of $18.2 billion for 2019. The 2020 and 2019 gains were primarily due to a decrease in interest rates and higher equity markets.

See “Impact of Fair Value Accounting” below.

Revenue

 

For the years ended December 31,

($ millions)

  2020     2019     2018  

Gross premiums

  $   41,408     $ 41,059     $ 39,150  

Premiums ceded to reinsurers

    (8,491       (5,481)         (15,138

Net premium income

    32,917       35,578       24,012  

Investment income

    16,433       15,393       13,560  

Other revenue

    10,591       10,399       10,428  

Revenue before realized and unrealized investment gains and losses

    59,941       61,370       48,000  

Realized and unrealized investment gains and losses on assets supporting insurance and investment contract liabilities and on the macro hedge program

    18,967       18,200       (9,028

Total revenue

  $ 78,908     $ 79,570     $ 38,972  

 

1 

This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.

 

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Financial Strength

Financial strength metrics

 

As at and for the years ended December 31,

($ millions, unless otherwise stated)

  2020     2019     2018  

MLI’s LICAT total ratio(1)

    149%       140%       143%  

Financial leverage ratio

    26.6%       25.1%       28.6%  

Consolidated capital(1)

  $   61,064     $   57,369     $   56,010  

Book value per common share ($)

  $ 25.00     $ 23.25     $ 21.38  

Book value per common share excluding accumulated other comprehensive income (“AOCI”) ($)

  $ 21.74     $ 19.94     $ 18.23  

 

(1)

This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.

The Life Insurance Capital Adequacy Test (LICAT) total ratio for MLI was 149% as at December 31, 2020, compared with 140% as at December 31, 2019. The nine percentage point increase from December 31, 2019 was driven by market movements primarily from lower risk-free interest rates, by net capital issuances1, and by the reinsurance of a block of legacy U.S. BOLI business, partly offset by several smaller items.

MFCs financial leverage ratio increased to 26.6% as at December 31, 2020 from 25.1% as at December 31, 2019, driven by the impact of net issuance of $2.4 billion of securities, partially offset by the growth in retained earnings.

Consolidated capital2 was $61.1 billion as at December 31, 2020 compared with $57.4 billion as at December 31, 2019, an increase of $3.7 billion. The increase was primarily driven by growth in retained earnings of $3.4 billion, net capital issuances of $0.7 billion, which does not include MFC senior debt as it does not qualify as regulatory capital,3 and an increase in unrealized gains of AFS debt securities of $0.4 billion, partially offset by a reduction in participating policyholders’ equity of $0.5 billion and the impact of a stronger Canadian dollar of $0.4 billion.

Book value per common share as at December 31, 2020 was $25.00, an increase of 8% compared with $23.25 as at December 31, 2019, and the book value per common share excluding accumulated other comprehensive income (“AOCI”) was $21.74 as at December 31, 2020, an increase of 9% compared with $19.94 as at December 31, 2019. The increase in the book value per common share was primarily driven by net income attributed to shareholders net of dividends and a net increase in AOCI. The number of common shares outstanding was 1,940 million as at December 31, 2020 and 1,949 million as at December 31, 2019.

Impact of Fair Value Accounting

Fair value accounting policies affect the measurement of both our assets and our liabilities. The difference between the reported amounts of our assets and liabilities determined as of the balance sheet date and the immediately preceding balance sheet date in accordance with the applicable fair value accounting principles is reported as investment-related experience and the direct impact of equity markets and interest rates and variable annuity guarantees, each of which impacts net income.

We reported $19.0 billion of net realized and unrealized investment gains in investment income in 2020 (2019 – gains of $18.2 billion).

As outlined under “Critical Actuarial and Accounting Policies” below, net insurance contract liabilities under IFRS are determined using Canadian Asset Liability Method (“CALM”), as required by the Canadian Institute of Actuaries (“CIA”). The measurement of policy liabilities includes the estimated value of future policyholder benefits and settlement obligations to be paid over the term remaining on in-force policies, including the costs of servicing the policies, reduced by the future expected policy revenues and future expected investment income on assets supporting the policies. Investment returns are projected using the current asset portfolios and projected reinvestment strategies. Experience gains and losses are reported when current period activity differs from what was assumed in the policy liabilities at the beginning of the period. We classify gains and losses by assumption type. For example, current period investing activities that increase (decrease) the future expected investment income on assets supporting the policies will result in an investment-related experience gain (loss). See description of investment-related experience in “Performance and Non-GAAP Measures” below.

Public Equity Risk and Interest Rate Risk

At December 31, 2020, excluding impacts from asset-based fees earned on assets under management and policyholder account value, the impact of a 10% decline in equity markets was estimated to be a charge of $610 million and the impact of a 50 basis point decline in interest rates, across all durations and markets, on our earnings was estimated to be neutral. See “Risk Factors and Risk Management” below.

Impact of Foreign Exchange Rates

We have worldwide operations, including in Canada, the United States and various markets in Asia, and generate revenues and incur expenses in local currencies in these jurisdictions, all of which are translated into Canadian dollars. The bulk of our exposure to foreign exchange rates is to movements in the U.S. dollar.

 

1 

LICAT reflects capital redemptions once the intention to redeem has been announced. As a result, the December 31, 2020 LICAT ratio reflects the impact of the $350 million of MLI subordinated debentures redeemed in January 2021 (announced in November 2020).

2 

This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.

3 

Consolidated capital does not include MFC senior debt (net issuance of $1.7 billion in 2020) as this form of financing does not meet OSFI’s definition of regulatory capital at the MFC level. The Company has down-streamed the proceeds from this financing into operating entities in a form that qualifies as regulatory capital at the subsidiary level.

 

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Table of Contents

Items impacting our Consolidated Statements of Income are translated to Canadian dollars using average exchange rates for the respective quarterly period. For items impacting our Consolidated Statements of Financial Position, period end rates are used for currency translation purpose. The following table provides the most relevant foreign exchange rates for 2020 and 2019.

 

Exchange rate   Quarterly           Full Year  
  4Q20     3Q20     2Q20     1Q20     4Q19           2020     2019  

Average(1)

               

U.S. dollar

    1.3030       1.3321       1.3854       1.3449       1.3200         1.3414       1.3269  

Japanese yen

    0.0125       0.0126       0.0129       0.0124       0.0122         0.0126       0.0122  

Hong Kong dollar

    0.1681       0.1719       0.1787       0.1731       0.1687         0.1729       0.1693  

Period end

               

U.S. dollar

    1.2732       1.3339       1.3628       1.4187       1.2988         1.2732       1.2988  

Japanese yen

    0.0124       0.0126       0.0126       0.0131       0.0120         0.0124       0.0120  

Hong Kong dollar

    0.1642       0.1721       0.1758       0.1830       0.1668         0.1642       0.1668  

 

(1)

Average rates for the quarter are from Bank of Canada which are applied against Consolidated Statements of Income items for each period. Average rate for the full year is a 4-point average of the quarterly average rates.

Net income attributed to shareholders and core earnings from the Company’s foreign operations are translated to Canadian dollars, and in general, our net income attributed to shareholders and core earnings benefit from a weakening Canadian dollar and are adversely affected by a strengthening Canadian dollar. However, in a period of net losses in foreign operations, the weakening of the Canadian dollar has the effect of increasing the losses. The relative impact of foreign exchange in any given period is driven by the movement of currency rates as well as the proportion of earnings generated in our foreign operations.

Changes in foreign exchange rates, primarily due to the weakening of the Canadian dollar compared with the U.S. dollar, increased core earnings by approximately $60 million in 2020 compared with 2019. The impact of foreign currency on items excluded from core earnings does not provide relevant information given the nature of these items.

Strategic priorities progress update

Strategy

Our ambition is to be the most digital, customer-centric global company in our industry. These are our goals for our three important stakeholder groups:

 

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Customers

Improve Net Promoter Score by +30 points and delight customers1

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Employees

Engage our employees — achieve top quartile engagement2

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Shareholders

Deliver top quartile returns3

 

1 

As compared to a baseline of +1 in 2017.

2 

Top quartile employee engagement compared to global financial services companies and insurance peers by 2022.

3 

Top quartile shareholder returns compared to our peer group.

 

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Our mission, strategic priorities and values are summarized below:

 

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Strategic Priorities

Our strategy is underpinned by five strategic priorities that were introduced in June 2018. These priorities drive our focus as we strive to be the most digital, customer-centric global company in our industry.

Portfolio Optimization – We are continually optimizing our portfolio and have already surpassed our original target to release $5 billion of capital by 2022, delivering $5.9 billion of cumulative capital benefits through 2020. In 2020, we broadened the portfolio optimization priority to include all of our global in-force insurance and annuity management. Focal areas within this pillar are to:

 

 

Deliver capital release from legacy businesses, including legacy annuity businesses, long-term care insurance and select long-duration, guaranteed insurance products.

 

Optimize our portfolio in order to improve our risk profile

 

Optimize our portfolio in order to improve our Return on Equity

 

Create tangible value through in-force management initiatives

Expense Efficiency – We are focused on driving efficient growth, targeting a less than 50% expense efficiency ratio and have already delivered on our original target of $1 billion in expense efficiencies. Focal areas within this pillar are to:

 

 

Leverage our global scale and operating environment

 

Streamline business processes

 

Eliminate activity not valued by our end customers

 

Continue to sustain a culture of expense efficiency and driving efficient growth

Accelerate Growth – Our growth ambition seeks to generate two-thirds of core earnings from our high potential businesses. Focal areas within this pillar are to:

 

 

Execute on organic and inorganic growth opportunities in Asia

 

Execute on organic and inorganic growth opportunities in Global Wealth and Asset Management

 

Expand our behavioural insurance offering to provide innovative solutions and support positive health in our customer base

 

Drive new business growth through group insurance

Digital, Customer Leader – In line with our mission to become the most digital, customer-centric global company in our industry, we aim to improve Net Promoter Score by 30 points. Focal areas within this pillar are to:

 

 

Invest in digital assets to improve customer experience

 

Deploy a globally consistent NPS system

 

Utilize a human-centered design approach for the development of new products and services

 

Leverage global agile capabilities to drive improvements in our ways of working

 

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Table of Contents

High Performing Team – We are committed to enabling a high performing team and achieving top quartile employee engagement. Focal areas within this pillar are to:

 

 

Drive organizational effectiveness and speed of decision making

 

Deepen Manulife’s diversity and inclusion

 

Develop our talent with differentiated capabilities

 

Leverage a global recognition program to reward excellence and promote company values

Progress Update

Manulife’s mission – Decisions made easier. Lives made better – guided our business throughout 2020. Our focused efforts produced solid results on our five strategic priorities as noted below.

 

   Strategic priorities   2022 Targets1   2020 Performance   Highlights on our progress

1.  Portfolio Optimization

 

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•   Release a total of $5 billion in capital from legacy businesses

 

•   Achieved 3 years ahead of schedule

•   Delivered $5.9 billion of cumulative capital benefits, including $0.8 billion in 2020

 

•   $3.6 billion from reinsurance and other actions in our North American Legacy businesses including $0.5 billion from reinsuring a block of legacy U.S. BOLI business in 2020

•   $2.3 billion from a reduction in the allocation to ALDA in the portfolio asset mix supporting legacy business

2.  Expense Efficiency

 

 

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•   Achieve a less than 50% expense efficiency ratio

•   Deliver $1 billion in expense efficiencies

 

•   Expense efficiency ratio of 52.9% in 2020, compared to 52.0% in 2019

•   Cumulative expense efficiencies of $1.0 billion in pre-tax annual savings, achieved 2 years ahead of schedule, including over $300 million of sustainable savings in 2020

 

•   The maturity of our expense efficiency program has played a crucial role throughout the economic downturn and enabled us to be responsive to headwinds.

•   Core general expenses declined by 3% in 2020 compared to 2019

•   Consolidated our real estate footprint

•   Implemented automation, robotic solutions, and leveraged artificial intelligence to adjudicate less complex transactions

•   Renegotiated various contracts with third-party vendors

•   Despite headwinds related to the global pandemic, we are on track to achieve our target expense efficiency ratio of less than 50% by 2022.1

3.  Accelerate Growth

 

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•   Generate two-thirds of core earnings from highest potential businesses2

 

•   66% of our core earnings in 2020 were generated from highest potential businesses, compared to 57% in 2019

 

•   Continued our expansion in bancassurance with an exclusive 16-year partnership with VietinBank3 to better meet the growing financial and insurance needs of the Vietnamese people and an extension of our agreement with PT Bank Danamon Indonesia to 2036

•   Continued our expansion of behavioural-based wellness insurance products through our Manulife Vitality program in Canada, “Vitality for All” strategy in the U.S. and ManulifeMOVE in Asia

•   Solidified our position as the largest MPF scheme sponsor in Hong Kong through strategic alliance with Allianz Global Investors, expected to close in 20211

•   Experienced 7% growth in Global WAM core earnings increasing to 20% of total core earnings in 2020

•   Normalizing for the absence of core investment gains in the denominator, our highest potential businesses would have contributed 62% of core earnings, which is a 5 percentage point increase versus 2019

 

1 

See “Caution regarding forward-looking statements” above.

2 

Asia, Global WAM, group insurance in Canada, and behavioural insurance products.

3 

Subject to regulatory approval.

 

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   Strategic priorities   2022 Targets1   2020 Performance   Highlights on our progress

4.  Digital, Customer Leader

 

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•   Improve Net Promoter Score by 30 points, as compared to a baseline of +1 in 2017

 

•   rNPS2 score of +12, an 11 point improvement from the 2017 baseline and a 4 point improvement from 2019

•   2020 scores remain competitive with global benchmarks

 

•   2020 was a challenging year for many people and in order to make things easier and safer for customers, we responded to the pandemic by reorienting customer experiences through the enhancement and acceleration of our digital capabilities

•   Launched a new, fully underwritten term life product in the U.S. which enables customers to purchase up to US$1 million in life insurance coverage digitally

•   Launched a new retirement planner tool in our Global WAM U.S. business to deliver an innovative and engaging way for customers to visualize and plan for their retirement

•   Introduced facial and video recognition, and intelligent guide script into the sales process in mainland China

•   Expanded our partnership with Akira Health to provide a broader range of online medical services to insurance customers in Canada

•   Vast majority of our products are available to prospective customers through virtual face-to-face methods3: 97% of APE sales in both Asia and Canada4, 80% of APE sales in the U.S.4 and 90% of Global WAM AUMA5

5.  High Performing Team

 

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•   Achieve top quartile employee engagement compared to global financial services and insurance peers

 

•   Ranked in the top quartile amongst our designated peer group on employee engagement in 2020

 

•   Ranked in the 80th percentile amongst global financial services and insurance peers on our 2020 employee engagement survey

•   Named a World’s Best Employer by Forbes, ranked in the top 100 best employers globally

•   Committed to invest more than $3.5 million over the next two years to promote diversity, equity and inclusion in our workplace and communities we serve.

 

 

 

1 

See “Caution regarding forward-looking statements” above.

2 

Relationship Net Promoter Score (“rNPS”).

3 

Virtual face-to-face, includes digital as well as non-digital solutions.

4 

Represents the percentage of 2019 APE sales that are currently available for sale via virtual face-to-face methods (applies to Asia, Canada and U.S.).

5 

Reflects Global WAM’s AUMA available to new and existing retail and retirement customers.

 

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2. Asia

Our Asia segment is a leading provider of insurance products and insurance-based wealth accumulation products, driven by a customer-centric strategy and leveraging the asset management expertise and products managed by our Global Wealth and Asset Management segment. Present in many of Asia’s largest and fastest growing economies, we are well positioned to capitalize on the attractive underlying demographics of the region, underpinned by a rigorous focus on creating value for our customers, employees and shareholders.

We have insurance operations in 11 markets1: Japan, Hong Kong, Macau, Singapore, mainland China, Vietnam, Indonesia, the Philippines, Malaysia and Cambodia, and have recently started operations in Myanmar.

We have a diversified multi-channel distribution network, including over 115,000 contracted agents and over 100 bank partnerships. We also work with many independent agents, financial advisors and brokers. Among our bancassurance partnerships we have nine exclusive partnerships, including a long-term partnership with DBS Bank across Singapore, Hong Kong, mainland China and Indonesia, that give us access to over 16 million bank customers.

In 2020, Asia contributed 33% of the Company’s core earnings from operating segments and, as at December 31, 2020, accounted for 11% of the Company’s assets under management and administration.

Profitability

Asia reported net income attributed to shareholders of $1,762 million in 2020 compared with $1,935 million in 2019. Net income attributed to shareholders is comprised of core earnings, which was $2,110 million in 2020 compared with $2,005 million in 2019, and items excluded from core earnings, which amounted to a net charge of $348 million for 2020 compared with a net charge of $70 million in 2019.

Expressed in U.S. dollars, the presentation currency of the segment, net income attributed to shareholders was US$1,322 million in 2020 compared with US$1,457 million in 2019 and core earnings were US$1,576 million in 2020 compared with US$1,511 million in 2019. Items excluded from core earnings are outlined in the table below and amounted to a net charge of US$254 million in 2020 and a net charge of US$54 million in 2019.

Core earnings in 2020 increased 4% compared with 2019, after adjusting for the impact of changes in foreign currency exchange rates. Core earnings increased by 10% in Hong Kong and 8% in Asia Other and declined by 18% in Japan. Hong Kong and Asia Other core earnings benefited from in-force business growth, favourable new business product mix, and improved policyholder experience, partially offset by lower new business volumes in Hong Kong. Japan core earnings were impacted by lower new business volumes partially offset by in-force business growth and favourable policyholder experience.

The table below reconciles net income attributed to shareholders to core earnings for Asia for 2020, 2019 and 2018.

 

For the years ended December 31,

($ millions)

  Canadian $           US $  
  2020     2019     2018           2020     2019     2018  

Core earnings(1),(2)

  $   2,110     $   2,005     $   1,766       $   1,576     $   1,511     $   1,363  

Items to reconcile core earnings to net income attributed to shareholders:

             

Investment-related experience related to fixed income trading, market value increases in excess of expected alternative assets investment returns, asset mix changes and credit experience

    218       195       284         167       147       219  

Direct impact of equity markets and interest rates and variable annuity guarantee liabilities(3)

    (583     (258     (375       (433     (196     (287

Change in actuarial methods and assumptions

    (41     (7     27         (32     (5     21  

Reinsurance transactions

    58             5         44             4  

Other

                (3                   (3

Net income attributed to shareholders(2)

  $ 1,762     $ 1,935     $ 1,704       $ 1,322     $ 1,457     $ 1,317  

 

(1) 

This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.

(2) 

2018 comparatives for core earnings and net income attributed to shareholders have been updated to reflect the 2019 methodology for allocating capital and interest on surplus to our insurance segments from the Corporate and Other segment.

(3) 

The direct impact of markets in 2020 was a charge of US$433 million and included a charge of US$415 million related to fixed income reinvestment rates and a charge of US$18 million related to equity markets and variable annuity guarantee liabilities. The charge in 2019 primarily related to the impact of fixed income reinvestment rates and the URR partially offset by a gain related to equity markets.

Business Performance

(all percentages quoted are on a constant exchange rate basis)

Annualized premium equivalent (“APE”) sales in 2020 were US$2,892 million, representing a decrease of 11% compared with 2019. APE sales were lower in Japan and Hong Kong and consistent with 2019 in Asia Other. In Japan, APE sales in 2020 were US$600 million, a

 

1 

In 2019, we made the decision to exit Thailand, and have reached an agreement to sell the operation. Regulatory approval has been obtained and we expect to complete the transaction in the first half of 2021.

 

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decrease of 30% compared with 2019 due to accelerated sales of COLI products in the first quarter of 2019 in advance of a change in tax regulations and the adverse impact of COVID-19. Hong Kong APE sales in 2020 were US$773 million, a decrease of 10% compared with 2019, driven by the adverse impact of COVID-19 and a decrease in sales to mainland Chinese visitors. Asia Other APE sales in 2020 of US$1,519 million were in-line with 2019 as growth in Vietnam and mainland China was fully offset by the adverse impact of COVID-19 on sales in the other markets.

New business value (“NBV”) was US$1,037 million in 2020, a decrease of 14% compared with 2019. We experienced lower NBV in Japan and Hong Kong, partially offset by higher NBV in Asia Other. In Japan, NBV in 2020 was US$131 million, a decrease of 50% compared with 2019 due to lower APE sales and a higher COLI mix. In Hong Kong, NBV in 2020 was US$463 million, a decrease of 14% compared with 2019 driven by lower sales and a decline in market interest rates. Asia Other NBV in 2020 was US$443 million, an increase of 9% compared to 2019, primarily as a result of favourable product mix, partially offset by a decline in market interest rates. The new business value margin (“NBV margin”)1 was 38.8% in 2020, a decrease of 1.0 percentage point compared with 2019.

APE Sales and NBV

 

For the years ended December 31,

($ millions)

  Canadian $           US $  
  2020     2019     2018           2020     2019     2018  

Annualized premium equivalent sales(1)

  $   3,869     $   4,278     $   4,012       $   2,892     $   3,224     $   3,094  

New business value(1)

    1,387       1,595       1,443         1,037       1,202       1,112  

 

(1) This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.

 

Assets under Management1

Asia’s assets under management were US$108.7 billion as at December 31, 2020, an increase of US$15.2 billion or 13% compared with December 31, 2019, driven by net customer inflows of US$9.9 billion and market growth during 2020.

 

Assets under Management(1)

 

  

 

 

 

As at December 31,

($ millions)

  Canadian $           US $  
  2020     2019     2018           2020     2019     2018  

General fund(2)

  $   115,430     $   100,418     $ 88,776       $ 90,639     $ 77,304     $ 65,075  

Segregated funds

    22,948       20,968       19,333         18,015       16,138       14,176  

Total assets under management

  $ 138,378     $ 121,386     $   108,109       $   108,654     $   93,442     $   79,251  

 

(1) 

This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.

(2) 

The 2018 comparative for general fund assets under management has been updated to reflect the 2019 methodology for allocating capital and interest on surplus to our insurance segments from the Corporate and Other segment.

Revenue

Total revenue of US$21.2 billion in 2020 decreased US$0.4 billion compared with 2019. Revenue before net realized and unrealized investment gains and losses increased US$0.5 billion compared with 2019 due to an increase in net premium income and higher investment income. The net premium income increase was primarily driven by the growth of in-force business, partly offset by a decline in new business.

Revenue

 

For the years ended December 31,

($ millions)

  Canadian $           US $  
  2020     2019     2018           2020     2019     2018  

Gross premiums

  $   21,592     $   20,724     $   18,768       $   16,129     $   15,620     $   14,483  

Premiums ceded to reinsurers

    (1,113     (717     (656       (834     (540     (507

Net premium income

    20,479       20,007       18,112         15,295       15,080       13,976  

Investment income(1)

    2,874       2,570       2,355         2,145       1,938       1,817  

Other revenue

    1,346       1,215       1,296         1,004       917       1,000  

Revenue before net realized and unrealized

investment gains and losses

    24,699       23,792       21,763         18,444       17,935       16,793  

Net realized and unrealized investment gains and
losses(2)

    3,756       4,881       (2,053       2,783       3,670       (1,599

Total revenue

  $ 28,455     $ 28,673     $ 19,710       $ 21,227     $ 21,605     $ 15,194  

 

(1) 

The 2018 comparative for investment income has been updated to reflect the 2019 methodology for allocating capital and interest on surplus to our insurance segments from the Corporate and Other segment.

(2) 

See “Financial Performance – Impact of Fair Value Accounting” above.

 

 

1 

This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.

 

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Strategic Highlights

Asia continues to be a core driver of growth for Manulife, supported by a clear strategy, a focus on execution, a strong team, and a diversified footprint in 11 markets with a compelling economic backdrop. We operate in many of the fastest growing markets in the world, and middle-class emergence, combined with an estimated doubling of household wealth in Asia from 2015 to 2025, will continue to drive demand for financial solutions.

We continued to accelerate our growth by expanding our distribution reach and we implemented several changes to enhance customer experience. In 2020, we:

 

 

Increased the number of agents by 21% to over 115,000. Our active number of agents grew by 14% year-on-year. We now have 6,400 Million Dollar Round Table agents compared with 3,700 in 2019;

 

Continued our expansion in bancassurance with the signing of an agreement with VietinBank1 to establish an exclusive 16-year bancassurance partnership to better meet the growing financial and insurance needs of the Vietnamese people. Our nine exclusive bancassurance partnerships, including a major pan-Asia partnership with DBS Bank, give us access to over 16 million bank customers,

 

Extended our strategic bancassurance arrangement with PT Bank Danamon Indonesia Tbk in the first quarter of 2020. The new agreement extends the term covered in the original agreement to 2036;

 

Grew our customer base to more than 12 million customers and saw positive momentum in rNPS. We sold our first policy in Myanmar, a digitally savvy market with one of the lowest insurance penetration rates in Asia; and

 

Received approval from China Banking and Insurance Regulatory Commission to begin preparation work to establish a new branch in Shaanxi Province.

We continued to enhance our digital capabilities and rolled out a number of key customer initiatives and advanced our digital strategy. In 2020, we:

 

 

Expanded our distribution capabilities, with approximately 97%2 of our product shelf now accessible to customers through virtual face-to-face methods3;

 

Expanded the deployment of e-claims to Malaysia, Philippines and Cambodia;

 

Collaborated with Dacadoo, a Swiss-based global digital health platform provider to strengthen our existing health engagement platform, ManulifeMOVE. This initiative will enable customers to more easily understand their health and be guided to develop healthier habits. We ended 2020 with over 1,000,000 policyholders enrolled in ManulifeMOVE, almost doubling the number of policyholders enrolled at the end of 2019; and

 

Entered into a partnership with Cong Dong Bau, a community with more than 5 million members that improves access to financial advice and solutions for expectant and new mothers.

We made progress on building our high performing team. Our overall employee engagement score improved, contributing to the year-on-year improvement for the wider group. We continue to develop our talent and secured executives in key leadership roles by appointing an emerging market General Manager and a regional Chief Marketing Officer.

 

1 

Pending regulatory approval; not included in the nine exclusive bank arrangements, which includes bancassurance partnership with UAB that received regulatory approval in January 2021.

2 

This represents the percentage of 2019 APE sales that are currently available for sale via virtual face-to-face methods.

3 

Virtual face-to-face, includes digital as well as non-digital solutions.

 

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3. Canada

Our Canada segment is a leading financial services provider, offering insurance products, insurance-based wealth accumulation products and banking services, has an in-force variable annuity business, and leveraging the asset management expertise and products managed by our Global Wealth and Asset Management segment. The comprehensive solutions we offer target a broad range of customer needs and foster holistic long-lasting relationships.

We offer financial protection solutions to individuals, families and business owners through a combination of competitive products, professional advice and quality customer service. We provide group life, health and disability insurance solutions to Canadian employers, with approximately 24,000 Canadian businesses and organizations entrusting their employee benefit programs to Manulife’s Group Insurance. We also provide life, health and specialty products, such as mortgage creditor and travel insurance, through advisors, sponsor groups and associations, as well as direct-to-customer. We continue to increase the proportion of products with behavioural insurance features.

Manulife Bank offers flexible debt and cash flow management solutions as part of a customer’s overall financial plan. Products include savings and chequing accounts, GICs, lines of credit, investment loans, mortgages and other specialized lending programs, offered through financial advisors supported by a broad distribution network.

In 2020, Canada contributed 19% of the Company’s core earnings from operating segments and, as at December 31, 2020, accounted for 12% of the Company’s assets under management and administration.

Profitability

Canada’s full year 2020 net income attributed to shareholders was $195 million compared with $1,122 million in 2019. Net income attributed to shareholders is comprised of core earnings, which was $1,174 million in 2020 compared with $1,201 million in 2019, and items excluded from core earnings, which amounted to a net charge of $979 million for 2020 compared with a net charge of $79 million in 2019. Items excluded from core earnings are outlined in the table below.

The $27 million or 2% decrease in core earnings was driven by the unfavourable impact of travel claims, lower retail sales in our individual insurance business, the non-recurrence of gains from the second phase of our segregated fund transfer program in 2019 and a number of smaller experience-related items, partially offset by favourable policyholder experience in both group and individual insurance.

The table below reconciles net income attributed to shareholders to core earnings for Canada for 2020, 2019 and 2018.

 

For the years ended December 31,

($ millions)

  2020     2019     2018  

Core earnings(1),(2)

  $   1,174     $   1,201     $   1,327  

Items to reconcile core earnings to net income attributed to shareholders:

     

Investment-related experience related to fixed income trading, market value increases in excess of expected alternative assets investment returns, asset mix changes and credit experience

    (260     477       240  

Direct impact of equity markets and interest rates and variable annuity guarantee liabilities(3)

    (817     (414     (307

Change in actuarial methods and assumptions

    77       (108     (370

Charge related to decision to change portfolio asset mix supporting our legacy businesses

                 

Reinsurance transactions

    21       (30     102  

Tax-related items and other(4)

          (4     (10

Net income attributed to shareholders(2)

  $ 195     $ 1,122     $ 982  

 

(1) 

This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.

(2) 

2018 comparatives for core earnings and net income attributed to shareholders have been updated to reflect the 2019 methodology for allocating capital and interest on surplus to our insurance segments from the Corporate and Other segment.

(3) 

The direct impact of markets in 2020 was a charge of $817 million and included a charge of $708 million related to fixed income reinvestment rates and a charge of $109 million related to the direct impact of equity markets and variable annuity guarantee liabilities. The charge in 2019 included charges related to fixed income reinvestment rates including a charge related to changes in the URR and were partially offset by the direct impact of equity markets and variable annuity guarantee liabilities.

(4) 

The 2019 charge of $4 million relates to the impact of tax rate changes in the province of Alberta, Canada.

Business Performance

APE sales were $1,148 million in 2020, an increase of $91 million or 9% compared with 2019. Individual insurance APE sales in 2020 of $409 million increased $13 million or 3% compared with 2019, driven by higher affinity market sales, partially offset by lower retail sales due to the adverse impact of COVID-19. Group insurance APE sales of $493 million in 2020 increased $44 million or 10% compared with 2019 due to higher large-case sales, partially offset by lower small and mid-size business sales. Annuities APE sales in 2020 of $246 million increased $34 million or 16% compared with 2019 due to higher sales of our lower risk segregated fund products.

Sales

 

For the years ended December 31,

($ millions)

   2020      2019      2018  

APE sales(1)

   $   1,148      $   1,057      $   975  

 

(1)

This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.

 

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Manulife Bank average net lending assets were $22.5 billion in 2020, up $0.6 billion or 3% compared with 2019.

Assets under Management

Assets under management of $159.3 billion as at December 31, 2020 increased by $8.0 billion or 5% from $151.3 billion at December 31, 2019, due to the impact of lower interest rates on asset values.

Assets under Management(1)

 

As at December 31,

($ millions)

   2020      2019      2018  

General fund(2)

   $   121,657      $   115,613      $   108,607  

Segregated funds

     37,650        35,645        33,306  

Total assets under management

   $   159,307      $   151,258      $   141,913  

 

(1)

This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.

(2)

The 2018 comparative for general fund assets under management has been updated to reflect the 2019 methodology for allocating capital and interest on surplus to our insurance segments from the Corporate and Other segment.

Revenue

Total revenue of $18.6 billion in 2020 decreased $1.0 billion from $19.6 billion in 2019. Revenue before net realized and unrealized investment gains and losses of $13.9 billion in 2020 decreased $0.9 billion from $14.8 billion in 2019 due to lower investment income as a result of declines in oil and gas prices in the first quarter of 2020 (“1Q20”) and the impact of lower interest rates.

Revenue

 

For the years ended December 31,

($ millions)

   2020      2019      2018  

Gross premiums

   $   10,756      $   10,667      $   10,974  

Premiums ceded to reinsurers

     (1,589      (1,592      (1,547

Net premium income

     9,167        9,075        9,427  

Investment income(1)

     3,711        4,597        4,119  

Other revenue

     1,013        1,088        1,446  

Revenue before net realized and unrealized investment gains and losses

     13,891        14,760        14,992  

Net realized and unrealized investment gains and losses(2)

     4,747        4,849        (1,394

Total revenue

   $ 18,638      $ 19,609      $ 13,598  

 

(1)

The 2018 comparative for investment income has been updated to reflect the 2019 methodology for allocating capital and interest on surplus to our insurance segments from the Corporate and Other segment.

(2)

See “Financial Performance – Impact of Fair Value Accounting” above.

Strategic Highlights

In 2020, we took actions to protect the health and well-being of our customers. We have made important progress in advancing our digital capabilities to interact with customers in new and different ways and simplify our processes to make our products more accessible. We continued to modernize our business by developing innovative product solutions and continuing to build a customer-centric digital platform. We continued to successfully execute on our expense reduction strategy to strengthen financial results and improve the risk-return profile in our home market. Our Canada segment remains focused on building and fostering holistic long-lasting relationships with our clients by expanding and integrating our insurance, insurance-based wealth accumulation and banking solutions to meet customers’ needs and by leveraging the strength of our group franchise.

We continued to grow our business by developing innovative product solutions and modernizing our delivery process. In 2020, we:

 

 

Enhanced our Group Benefits product offering with the introduction of Health by Design, a proactive approach using the latest science, technology and predictive analytics to help our members with their unique health journey;

 

Released a new Return to Work Playbook incorporating physical and mental health and safety guidance to support our Group Benefits clients as they return to their workplaces;

 

Continued to see growth in our group insurance Vitality program, the first evidence-rich program of its kind in Canada, designed to encourage participants to make healthy choices using proven behavioural science;

 

Enhanced our product offerings and provided relief for our customers since the onset of the pandemic, including a temporary extension of emergency out-of-country coverage for our group and individual customers who experienced travel delays; and

 

Introduced flexible financial solutions to support our banking clients, such as deferrals and relief programs for residential and commercial mortgages, loans and credit cards.

 

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We have executed on a number of initiatives to expand our digital capabilities focused on non-face-to-face product accessibility and personalized customer service. In 2020, we:

 

 

Continued to focus on acceleration of our digital capabilities to improve the client experience, with approximately 97%1 of our product shelf accessible to customers through virtual face-to-face methods2;

 

Expanded our partnership with Akira Health to provide a broader range of online medical services to our insurance clients to better support their health and wellness;

 

Continued to advance a number of new group insurance digital platforms to simplify the enrolment experience, claims submission and processing as well as communication with group insurance members;

 

Introduced a new mortgage creditor tool becoming the first mortgage insurance provider to offer an online mortgage insurance application; and

 

Received a Gold dotcom international award for the redesign of manulifebank.ca and launched a refreshed user experience with personalized insights in our top-rated iOS and Android app for Manulife Bank customers.

 

1 

Represents the percentage of 2019 APE sales that are currently available for sale via virtual face-to-face methods.

2 

Virtual face-to-face, includes digital as well as non-digital solutions.

 

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4. U.S.

Our U.S. segment provides a range of life insurance products, insurance-based wealth accumulation products, and has an in-force long-term care insurance business and an in-force annuity business.

The insurance products we offer are designed to provide estate, business and income-protection solutions for high net worth, emerging affluent markets and the middle market, and to leverage the asset management expertise and products managed by our Global Wealth and Asset Management business. Behavioural insurance features are standard on all our new insurance product offerings. The primary distribution channel is licenced financial advisors. We aim to establish lifelong customer relationships that benefit from our holistic protection and wealth product offerings in the future.

Our in-force long-term care insurance policies provide coverage for the cost of long-term services and support.

Our in-force annuity business includes fixed deferred, variable deferred, and payout products.

In 2020, U.S. contributed 31% of the Company’s core earnings from operating segments and, as at December 31, 2020, accounted for 18% of the Company’s assets under management and administration.

Profitability

U.S. reported net income attributed to shareholders of $1,269 million in 2020 compared with $1,428 million in 2019. Net income attributed to shareholders is comprised of core earnings, which was $1,995 million in 2020 compared with $1,876 million in 2019, and items excluded from core earnings, which amounted to a net charge of $726 million in 2020 compared with a net charge of $448 million in 2019.

Expressed in U.S. dollars, the functional currency of the segment, 2020 net income attributed to shareholders was US$987 million compared with US$1,074 million in 2019 and core earnings were US$1,485 million in 2020 compared with US$1,414 million in 2019. Items excluded from core earnings are outlined in the table below and amounted to a net charge of US$498 million in 2020 compared with a net charge of US$340 million in 2019.

The US$71 million increase in core earnings was driven by higher in-force earnings and a focus on reduced spending in the current economic environment, partially offset by the non-recurrence of a favourable true-up of prior year tax provisions in 2019. Insurance policyholder experience was consistent with the prior year, as unfavourable life insurance experience, which included COVID-19 related claim losses, was offset by favourable long-term care experience resulting from claim terminations due to the impact of COVID-19.

The table below reconciles net income attributed to shareholders to core earnings for the U.S. for 2020, 2019 and 2018.

 

For the years ended December 31,

($ millions)

  Canadian $           US $  
  2020     2019     2018           2020     2019     2018  

Core earnings(1),(2)

  $ 1,995     $ 1,876     $ 1,789       $   1,485     $   1,414     $   1,380  

Items to reconcile core earnings to net income attributed to shareholders:

             

Investment-related experience related to fixed income trading, market value increases in excess of expected alternative assets investment returns, asset mix changes and credit experience

    (717     66       17         (515     49       10  

Direct impact of equity markets and interest rates and variable annuity guarantee liabilities(3)

    30       (693     236         46       (525     191  

Change in actuarial methods and assumptions

    (301     71       286         (226     54       219  

Charge related to decision to change portfolio asset mix supporting our legacy businesses

                                     

Reinsurance transactions

    262       111       68         197       84       51  

Tax-related items and other(4)

          (3     (105             (2     (83

Net income (loss) attributed to shareholders(2)

  $   1,269     $   1,428     $   2,291       $ 987     $ 1,074     $ 1,768  

 

(1)

This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.

(2)

The 2018 comparatives for core earnings and net income (loss) attributed to shareholders have been updated to reflect the 2019 methodology for allocating capital and interest on surplus to our insurance segments from the Corporate and Other segment.

(3)

The direct impact of markets in 2020 was a gain of US$46 million and included a gain of US$113 million related to fixed income reinvestment rates, partially offset by a charge of US$67 million related to the direct impact of equity markets and variable annuity guarantee liabilities. The charge in 2019 is primarily related to fixed income reinvestment rates and changes to the URR, partially offset by gains from the direct impact of equity markets and variable annuity guarantee liabilities.

(4)

Tax-related items and other in 2019 was fees related to legacy transactions. Charges in 2018 primarily relate to U.S. tax reform.

Business Performance

U.S. APE sales in 2020 of US$455 million decreased 14% compared with 2019, as lower international universal life, domestic protection universal life, and variable universal life sales more than offset higher term life and domestic indexed universal life sales. The decline in APE sales was due to higher domestic universal life sales in advance of anticipated regulatory changes in 2019 and the unfavourable

 

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impact of COVID-19 in 2020. Sales of products with the John Hancock Vitality PLUS feature in 2020 were US$220 million, an increase of 17% compared with 2019.

Sales

 

For the years ended December 31,

($ millions)

  Canadian $           US $  
  2020     2019     2018           2020     2019     2018  

APE sales(1)

  $   609     $   702     $   553       $   455     $   530     $   426  

 

(1)

This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.

Assets under Management

U.S. assets under management of US$188 billion as at December 31, 2020 increased 6% from December 31, 2019. The increase was driven by the favourable impact of markets partially offset by the continued run-off of our annuities business and the reinsurance of a block of our legacy U.S. BOLI business in the third quarter of 2020 (“3Q20”).

Assets under Management(1)

 

As at December 31,

($ millions)

  Canadian $           US $  
  2020     2019     2018           2020     2019     2018  

General fund(2)

  $ 162,508     $ 153,731     $ 150,772       $ 127,638     $ 118,364     $ 110,520  

Segregated funds

    77,053       76,625       72,874         60,519       58,996       53,420  

Total assets under management

  $   239,561     $   230,356     $   223,646       $   188,157     $   177,360     $   163,940  

 

(1)

This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.

(2)

The 2018 comparatives for general fund assets under management have been updated to reflect the 2019 methodology for allocating capital and interest on surplus to our insurance segments from the Corporate and Other segment.

Revenue

Total revenue in 2020 of US$17.3 billion decreased US$1.2 billion compared with 2019. Revenue before net realized and unrealized investment gains and losses was US$9.6 billion, a decrease of US$2.6 billion compared with 2019 primarily due to the net impact of the reinsurance of a block of our legacy U.S. BOLI business in 3Q20 and lower investment income, partially offset by the impact of a one-time ceded premium in 2019 from the reinsurance of legacy annuity business.

Revenue

 

For the years ended December 31,

($ millions)

  Canadian $           US $  
  2020     2019     2018           2020     2019     2018  

Gross premium income

  $ 8,952     $ 9,588     $ 9,335       $ 6,678     $ 7,227     $    7,201  

Premiums ceded to reinsurers

    (5,821     (3,204     (12,961       (4,355     (2,414     (9,878

Net premium income

    3,131       6,384       (3,626       2,323       4,813       (2,677

Investment income(1)

    7,029       7,140            7,291         5,254       5,382          5,624  

Other revenue

    2,711       2,654       2,542         2,025       2,000       1,966  

Revenue before items noted below

    12,871       16,178       6,207         9,602       12,195       4,913  

Net realized and unrealized investment gains and losses(2)

    10,490       8,416       (5,621       7,701       6,320       (4,423

Total revenue

  $   23,361     $   24,594     $ 586       $   17,303     $   18,515     $ 490  

 

(1)

The 2018 comparative for investment income has been updated to reflect the 2019 methodology for allocating capital and interest on surplus to our insurance segments from the Corporate and Other segment.

(2)

See “Financial Performance – Impact of Fair Value Accounting” above.

Strategic Highlights

At John Hancock, we are focused on building more holistic and long-lasting customer relationships by offering innovative products and solutions and making it easier for customers to do business with us. We are focused on growing our insurance business by expanding our product offerings, modernizing the delivery process, and enhancing customer experience. In 2020, we:

 

 

Continued to see growth in our “Vitality for All” strategy with two versions of Vitality: Vitality GO and Vitality PLUS, and extending Vitality benefits to all insurance customers;

 

Announced a strategic collaboration with Amazon which adds the Halo wellness band to devices supported by John Hancock’s Vitality Program;

 

Launched numerous digital services, such as chat bots, SMS texts, non-paper apps and digital payment tools, with the goal of improving customer satisfaction and rNPS including a new, fully underwritten term life product in the U.S. which enables customers to purchase up to US$1 million in life insurance coverage digitally;

 

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Launched an eApplication to be used by brokers to streamline the application process. This online platform is a major step toward offering a fully digital end-to-end application experience;

 

Implemented a digital new business/policy issue process that eliminates the reliance on paper applications for International insurance customers; and

 

Extended the grace period for our life insurance policyholders to make premium payments and increased the payout limits permitted via phone for our annuity and life customers to accommodate their needs during the COVID-19 pandemic.

We continued to make significant progress to optimize our portfolio through both organic and inorganic initiatives and create tangible shareholder value through various in-force management initiatives despite the current macroenvironmental and COVID-19 challenges. In 2020, we:

 

 

Completed legacy optimization initiatives that contributed over $2.1 billion of cumulative capital benefits through December 31, 2020, including $765 million in 2020;

 

Completed an agreement with Global Atlantic Financial Group to reinsure a block of legacy U.S. BOLI business that resulted in a capital benefit of $465 million;

 

Continued our Annuity Guaranteed Minimum Withdrawal Benefit offer program that has released $200 million of capital since the start of the program, including $125 million in 2020;

 

Reinsured individual and group payout annuity policies and sold the associated ALDA which enabled us to release $90 million of capital. We expanded reinsurance coverage of certain universal life no lapse guarantee products that resulted in the release of $70 million of capital;

 

Executed on additional organic initiatives (LTC Claims Management & Wellness program) to optimize the performance of the legacy block that released an additional $15 million of capital in 2020; and

 

Continued to make progress in securing long-term care premium rate increases.

 

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5. Global Wealth and Asset Management

Our Global Wealth and Asset Management segment, branded as Manulife Investment Management (“MIM”), provides investment advice and innovative solutions to retirement, retail, and institutional clients. Our leading capabilities in public and private markets are strengthened by an investment footprint that spans 17 countries and territories1, including 10 markets and 120 years of on-the-ground experience in Asia. We complement these capabilities by providing access to a network of unaffiliated asset managers from around the world.

In retirement, we provide financial guidance, advice, and investment solutions to nearly 8 million plan participants and members in North America and Asia. In North America, our Canadian retirement business focuses on providing retirement solutions through defined contribution and defined benefit plans, and also to group plan members when they retire or leave their plan; and in the United States, we provide employer sponsored retirement plans as well as personal retirement accounts when individuals leave their plan. In Asia, we provide retirement offerings to employers and individuals, including Mandatory Provident Fund (“MPF”) schemes and administration in Hong Kong. Additionally, we provide retirement solutions in several emerging retirement markets in Asia including Indonesia and Malaysia.

We distribute investment funds to retail clients primarily through intermediaries and banks in North America, Europe and Asia and offer investment strategies across the world, through our affiliated and from unaffiliated asset managers. In Canada, we also provide personalized investment management, private banking and wealth and estate solutions to high net worth clients.

Our institutional asset management business provides comprehensive asset management solutions for pension plans, foundations, endowments, financial institutions and other institutional investors worldwide. Our solutions span all major asset classes including equities, fixed income, alternative assets (including real estate, timberland, farmland, private equity/debt, infrastructure, and liquid alternatives). In addition, we offer multi-asset investment solutions covering a broad range of clients’ investment needs.

We are committed to investing responsibly across our businesses. We continue to enhance and develop innovative global frameworks for sustainable investing, and maintain a high standard of stewardship where we own and operate assets.

In 2020, Global WAM contributed 17% of the Company’s core earnings from operating segments and, as at December 31, 2020, represented 58% of the Company’s total assets under management and administration.

Profitability

Global WAM’s 2020 net income attributed to shareholders was $1,100 million compared with $1,022 million in 2019, and core earnings were $1,100 million in 2020 compared with $1,021 million in 2019. Items excluded from core earnings are outlined in the table below and amounted to nil in 2020 compared with a net gain of $1 million in 2019.

Core earnings increased $79 million or 7% on a constant exchange rate basis driven by higher average assets under management and administration and lower general expenses from ongoing efficiency initiatives. The increase was partially offset by unfavorable product mix, lower fee spread in U.S. Retirement, and lower tax benefits.

The table below reconciles net income attributed to shareholders to core earnings for the Global WAM segment for 2020, 2019 and 2018.

 

For the years ended December 31,

($ millions)

  2020      2019      2018  

Core earnings(1)

       

Asia

  $ 344      $ 289      $ 257  

Canada

    363        319        266  

U.S.

    393        413        462  

Core earnings

    1,100        1,021        985  

Items to reconcile core earnings to net income attributed to shareholders:

       

Tax-related items and other(2)

           1        (31

Net income attributed to shareholders

  $   1,100      $   1,022      $   954  

 

(1)

This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.

(2)

The 2018 charge of $31 million primarily relates to the integration of businesses acquired from Standard Chartered.

In 2020, core EBITDA2 for Global WAM was $1,676 million, $576 million higher than core earnings. In 2019, core EBITDA was $1,536 million, $515 million higher than core earnings. The increase in core EBITDA of $140 million or 8% on a constant exchange rate basis was driven by higher net fee income and lower general expenses. Core EBITDA margin1 was 29.2% in 2020 compared with 27.5% in 2019. The 170 basis points increase was driven by the factors noted above and reflects our scale and commitment to expense efficiency.

 

 

1 

United States, Canada, Japan, Hong Kong, Singapore, Taiwan, Indonesia, Vietnam, Malaysia, India, the Philippines, the United Kingdom, Switzerland, and mainland China. In addition, we have timberland/farmland operations in Australia, New Zealand, and Brazil.

2 

This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.

 

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Core EBITDA

 

For the years ended December 31,

($ millions)

  2020      2019      2018  

Core earnings(1)

  $ 1,100      $ 1,021      $ 985  

Amortization of deferred acquisition costs and other depreciation

    319        311        301  

Amortization of deferred sales commissions

    85        81        98  

Core income tax expense (recovery)

    172        123        113  

Core EBITDA(1)

  $ 1,676      $ 1,536      $ 1,497  

Core EBITDA margin(1)

      29.2%          27.5%          27.4%  

 

(1)

This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.

Business Performance

Gross Flows and Net Flows

In 2020, gross flows of $130.2 billion increased $16.0 billion or 13% compared with 2019, driven by higher gross flows across all geographies. In Asia, gross flows increased $2.4 billion or 10% compared with 2019, primarily driven by higher retail gross flows in Indonesia and higher retirement gross flows in Hong Kong. In Canada, gross flows increased $6.8 billion or 28% compared with 2019, driven by the funding of a $6.9 billion mandate from a new client in Institutional Asset Management in 2Q20. In the U.S., gross flows increased $6.8 billion or 9% compared with 2019, driven by strong intermediary sales and higher institutional model allocations in Retail partially offset by the non-recurrence of several large sales in Institutional Asset Management in 2019.

Net inflows were $8.9 billion in 2020, compared with net outflows of $0.9 billion in 2019. In Asia, net inflows were $3.9 billion in 2020 compared with net inflows of $4.8 billion in 2019 reflecting lower retail net flows mainly in mainland China and Hong Kong, partially offset by higher net flows in Indonesia Retail and Hong Kong Retirement. In Canada, net inflows were $14.6 billion in 2020 compared with net outflows of $3.6 billion in 2019, driven by improved net inflows in Institutional Asset Management from the non-recurrence of an $8.5 billion redemption in 2019 and the funding of a $6.9 billion mandate from a new client in 2Q20, and in Retirement, from lower plan redemptions and individual withdrawals. In the U.S., net outflows were $9.6 billion in 2020 compared with net outflows of $2.0 billion in 2019, driven by a $5.0 billion redemption of an equity mandate, and the non-recurrence of several large sales in Institutional Asset Management in 2019, as well as higher redemptions in Retirement, mainly due to member withdrawals under the U.S. CARES Act during the year.

Asia WAM

 

 

Gross flows in Asia in 2020 were $23.4 billion, an increase of 10% compared with 2019, driven by higher gross flows across all business lines. Growth was driven primarily by higher gross flows of retail money market funds in Indonesia, higher retirement gross flows in Hong Kong, and institutional fixed income product launches in mainland China.

 

Net inflows in 2020 were $3.9 billion compared with net inflows of $4.8 billion in 2019, driven by retail redemptions in Indonesia, Hong Kong, and mainland China and higher redemptions in Hong Kong Retirement. This was partially offset by higher gross flows as mentioned above.

Canada WAM

 

 

Gross flows in Canada in 2020 were $30.9 billion, an increase of 28% compared with 2019, driven by the funding of a $6.9 billion mandate from a new client in Institutional Asset Management in Canada in 2Q20 and higher gross flows across our product line-up in Retail. This was partially offset by the lower new plan sales in Retirement.

 

Net inflows in 2020 were $14.6 billion compared with net outflows of $3.6 billion in 2019, driven by improved net flows in Institutional Asset Management from the non-recurrence of an $8.5 billion redemption in 2019 and the 2Q20 funding of a $6.9 billion mandate mentioned above, and lower plan redemptions and individual withdrawals in Retirement.

U.S. WAM1

 

 

Gross flows in the U.S. in 2020 were $75.9 billion, an increase of 9% compared with 2019. The increase was driven by strong intermediary sales and higher institutional model allocations in Retail, partially offset by the non-recurrence of several large sales in Institutional Asset Management in 2019.

 

Net outflows in 2020 were $9.6 billion, compared with net outflows of $2.0 billion in 2019, driven by a $5.0 billion redemption of an equity mandate in Institutional Asset Management in 3Q20, higher redemptions in Retirement mainly due to member withdrawals under the U.S. CARES Act during the year, and higher retail redemptions amid market volatility in the first half of 2020. This was partially offset by higher gross flows as mentioned above.

 

1 

Includes performance by our operations in Europe.

 

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Gross Flows and Net Flows(1)

 

For the years ended December 31,

($ millions)

  2020        2019        2018  

Gross flows

  $   130,212        $   114,246        $   119,002  

Net flows

    8,919          (879        1,563  

 

(1)

This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.

Assets under Management and Administration

In 2020, AUMA for our wealth and asset management businesses were $753.6 billion, 12% higher than December 31, 2019 on a constant exchange rate basis driven by the favourable impact of markets and year-to-date net inflows of $8.9 billion. As of December 31, 2020, Global WAM also managed $212.4 billion in assets for the Company’s non-WAM reporting segments. Including those assets, AUMA managed by Global WAM was $966.0 billion compared with $879.2 billion as at December 31, 2019.

Assets under Management and Administration(1)

 

For the years ended December 31,

($ billions)

  2020        2019        2018  

Balance January 1,

  $ 681        $ 609        $ 609  

Acquisitions/Dispositions

    1          (1        1  

Net flows

    9          (1        2  

Impact of markets and other

    63          74          (3

Balance December 31,

  $ 754        $ 681        $ 609  

Average assets under management and administration

  $   698        $   651        $   639  

 

(1)

This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.

Revenue

Total revenue in 2020 of $5.7 billion increased 2% compared with 2019, driven by higher average assets under management and administration, partially offset by the impact of changes in product mix and lower fee spread in the U.S. Retirement business.

Revenue

 

As at December 31,

($ millions)

  2020        2019        2018  

Fee income

  $ 5,710        $ 5,562        $ 5,472  

Investment income

    39          33          (9

Total revenue

  $   5,749        $   5,595        $   5,463  

Strategic Highlights

Leveraging our integrated business model and global scale; we have a clear strategy to pursue high-growth opportunities in the most attractive markets globally through our three business lines: Retirement, Retail and Institutional Asset Management. Our strategy includes becoming a global retirement leader by supporting financial wellness; expanding our presence in regional retail mutual fund distribution across the globe; leveraging a multi-manager model; and providing differentiated active asset management capabilities across high-performing equity and fixed income strategies, outcome-oriented solutions and alternative assets.

We executed on a number of initiatives to accelerate growth in our franchise. In 2020, we:

 

 

Acquired a minority stake in Albamen Capital Partners, a private equity infrastructure investment manager with a focus on renewable energy, data centers and other power-intensive infrastructure assets in mainland China. This deal realizes a strategic goal for an on-the-ground infrastructure private equity capability in the Asia Pacific region and underlines the firm’s strong commitment to the China market;

 

Completed the formation of our previously announced joint venture with Mahindra Finance, through which we aim to expand fund offerings, drive fund penetration, and achieve long term wealth creation in India;

 

Continued to develop innovative products with the launch of Hong Kong’s first MPF retirement income fund, aiming to provide regular and stable income in retirement. Additionally, we announced a strategic alliance with Allianz Global Investors, strengthening our position as the largest MPF scheme sponsor;1 and

 

Once again earned top scores in the United Nations-supported Principles for Responsible Investment (“PRI”) annual assessment report for integrating environmental, social, and governance (“ESG”) considerations into our investment practices across a range of asset classes. Manulife Investment Management was also recognized in the PRI Leaders’ Group 2020, a 10-year initiative honouring

 

1 

Market share of assets under management and net cash flows by scheme sponsor as reported in the Mercer MPF Market Share Reports for March 31, June 30, September 30, 2020.

 

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signatories at the cutting edge of responsible investment. In addition, we released our second annual Sustainable and Responsible Investing Report the first that covers both Public and Private Markets.

We continued to make progress on our digital customer leader strategy. In 2020, we:

 

 

Made extensive efforts in all regions to support clients virtually during the pandemic, prioritizing digital initiatives that simplify and enhance client interactions;

 

Continued to expand our Asia online investment platform iFunds beyond Hong Kong with the launch of the technology in Malaysia. iFunds provides customers with easily accessible market and fund information to allow enhanced investment decisions;

 

Launched a new retirement planner tool in the U.S. that delivers an innovative and engaging way for customers to visualize and plan for their retirement. Over 200,000, or 6% of plan participants, visited the retirement planner since it was launched in May, with 14% of those users increasing their contributions;

 

Accelerated our Retail wealth digital transformation in Canada by launching several online tools and automations that make account maintenance, accessing forms and statements easier for advisors to service their customers; and

 

Launched our new institutional website, which provides investors with a unified message and an integrated presentation of our global investment solutions across both public and private market asset classes.

 

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6. Corporate and Other

Corporate and Other is comprised of investment performance on assets backing capital, net of amounts allocated to the operating segments; financing costs; costs incurred by the corporate office related to shareholder activities (not allocated to the operating segments); our P&C Reinsurance business; as well as our run-off reinsurance operation, including variable annuities and accident and health.

For segment reporting purposes, settlement costs for macro equity hedges and other non-operating items are included in Corporate and Other earnings. This segment is also where we reclassify favourable investment-related experience to core earnings from items excluded from core earnings, subject to certain limits (see “Performance and Non-GAAP Measures” below). In each of the operating segments, we report all investment-related experience in items excluded from core earnings.

Profitability

Corporate and Other reported net income attributed to shareholders of $1,545 million in 2020 compared with a net income attributed to shareholders of $95 million in 2019. Net income (loss) attributed to shareholders was comprised of core loss and items excluded from core loss. Core loss was $863 million in 2020 compared with a core loss of $99 million in 2019. Items excluded from core loss amounted to a net gain of $2,408 million in 2020 compared with a net gain of $194 million in 2019.

The unfavourable variance in the year-to-date core loss of $764 million was primarily attributable to nil core investment gains in 2020 compared with $400 million in the same period of 2019, lower investment income, less favourable impact of markets on seed money investments in new segregated and mutual funds, net losses on AFS equities in 2020 compared to net gains in 2019 and higher Corporate expenses mainly due to impairment of capitalized IT assets, primarily software, partially offset by lower interest on external debt.

The items excluded from core earnings are outlined below.

The table below reconciles net income (loss) attributed to shareholders to core loss for Corporate and Other for 2020, 2019 and 2018.

 

For the years ended December 31,

($ millions)

  2020        2019        2018  

Core loss excluding core investment gains(1)

  $ (863      $   (499      $ (657

Core investment gains(2)

             400          400  

Total core loss(2)

    (863        (99        (257

Items to reconcile core loss to net loss attributed to shareholders:

           

Direct impact of equity markets and interest rates(3)

    2,302          588          (411

Changes in actuarial methods and assumptions

            67          23          6  

Investment-related experience related to mark-to-market items(4)

    (33        27          59  

Reclassification to core investment gains above

             (400        (400

Restructuring charge(5)

                      (263

Tax-related items and other(6)

    72          (44        135  

Net income (loss) attributed to shareholders(1)

  $ 1,545        $ 95        $   (1,131

 

(1)

The 2018 comparatives for core loss excluding core investment gains and net loss attributed to shareholders have been updated to reflect the 2019 methodology for allocating capital and interest on surplus to our insurance segments from the Corporate and Other segment.

(2)

This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.

(3)

The direct impact of markets in 2020 included gains of $2,175 million (2019 – charges of $396 million) related to the sale of AFS bonds. Other gains of $127 million in 2020 were mostly from fixed income investments supporting a portion of the capital in Asia that are classified as fair value through profit and loss.

(4)

Investment-related experience includes mark-to-market gains or losses on ALDA assets other than gains on AFS equities and seed money investments in new segregated or mutual funds.

(5)

Please see “Manulife Financial Corporation – Profitability” above for explanation of the restructuring charge.

(6)

In 2020, we reported tax benefits from the U.S. CARES Act, as a result of carrying back net operating losses to prior years, which had higher tax rates. Tax-related items and other charges in 2019 are due to a tax rate change in the province of Alberta, Canada.

Revenue

Revenue of $2,705 million in 2020 increased $1,606 million compared with $1,099 million in 2019 primarily related to investment income. The increase in investment income was mainly driven by higher realized gains on AFS bonds, partially offset by lower investment income, lower gains from seed money investments and net losses from AFS equities compared to net gains in the prior year.

 

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Revenue

 

For the years ended December 31,

($ millions)

  2020        2019        2018  

Net premium income

  $ 140        $ 112        $      98  

Investment income (loss)(1)

    2,830          1,073          (211

Other revenue(2)

    (189        (120        (328

Revenue before net realized and unrealized investment gains and losses and on the macro hedge program

    2,781          1,065          (441

Net realized and unrealized investment gains and losses(3) and on the macro hedge program

    (76        34          56  

Total revenue

  $   2,705        $   1,099        $ (385

 

(1)

The 2018 comparative for investment income has been updated to reflect the 2019 methodology for allocating capital and interest on surplus to our insurance segments from the Corporate and Other segment.

(2)

Includes a consolidation adjustment related to asset management fees earned by Manulife Investment Management from affiliated business (the offset to the consolidation adjustment is investment expense).

(3)

See “Manulife Financial Corporation – Impact of Fair Value Accounting” above.

Strategic Highlights

Our P&C Reinsurance business provides substantial retrocessional capacity for a very select clientele in the property and casualty reinsurance market. The business is largely non-correlated to Manulife’s other businesses and helps diversify our overall business mix. We manage the risk exposure of this business in relation to the total Company balance sheet risk and volatility as well as the prevailing market pricing conditions. The business is renewable annually, and we currently estimate our exposure limit in 2021 for a single event to be approximately US$300 million (net of reinstatement premiums) and for multiple events to be approximately US$500 million (net of all premiums).1

 

1 

See “Caution regarding forward-looking statements” above.

 

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7. Investments

Our investment philosophy for the General Fund is to invest in an asset mix that optimizes our risk adjusted returns and matches the characteristics of our underlying liabilities. We follow a bottom up approach which combines our strong asset management skills with an in-depth understanding of the characteristics of each investment. We invest in a diversified mix of assets, including a variety of alternative long-duration asset classes. Our diversification strategy has historically produced superior risk adjusted returns while reducing overall risk. We use a disciplined approach across all asset classes, and we do not chase yield in the riskier end of the fixed income or alternative asset market. Our risk management strategy is outlined in the “Risk Factors and Risk Management” section below.

General Fund Assets

As at December 31, 2020, our General Fund invested assets totaled $411.0 billion compared with $378.5 billion at the end of 2019. The following table shows the asset class composition as at December 31, 2020 and December 31, 2019.

 

    2020           2019  

As at December 31,

($ billions)

  Carrying value     % of total     Fair value           Carrying value     % of total     Fair value  

Cash and short-term securities

  $ 26.2       6     $ 26.2       $ 20.3       5     $ 20.3  

Debt Securities and Private Placement Debt

             

Government bonds

    80.8       20       80.8         73.4       20       73.4  

Corporate bonds

    134.8       33       134.8         121.3       32       121.3  

Securitized / asset-backed securities

    3.1       1       3.1         3.4       1       3.4  

Private placement debt

    40.8       10       47.9         38.0       10       41.8  

Mortgages

    50.2       12       54.2         49.4       14       51.5  

Policy loans and loans to bank clients

    8.4       2       8.4         8.2       2       8.2  

Public equities(1)

    23.7       6       23.7         22.8       5       22.8  

Alternative Long-Duration Assets (“ALDA”)

             

Real Estate

    12.8       3       14.0         12.9       4       14.3  

Infrastructure

    9.1       2       9.4         8.9       2       9.0  

Timberland and Farmland

    4.8       1       5.4         4.7       1       5.2  

Private Equity

    8.0       2       8.0         6.4       2       6.4  

Oil & Gas

    2.3       1       2.3         3.2       1       3.3  

Other ALDA

    2.0       0       2.0         1.7       0       1.7  

Leveraged Leases and Other

    4.0       1       4.0         3.9       1       3.9  

Total general fund invested assets

  $   411.0       100     $   424.2       $   378.5       100     $   386.5  

 

(1)

Includes $229 million of public equities that are managed in conjunction with our alternative long duration asset strategy.

The carrying values for invested assets are generally equal to their fair values, however, mortgages and private placement debt are carried at amortized cost; loans to bank clients are carried at unpaid principal balances less allowance for credit losses; real estate held for own use is carried at cost less accumulated depreciation and any accumulated impairment losses; private equity investments, including power and infrastructure and timber, are accounted for as associates using the equity method, or at fair value; and oil and gas investments are carried at cost using the successful efforts method. Certain government and corporate bonds and public equities are classified as AFS, with the remaining classified as “fair value through profit or loss”.

As at December 31, 2020, the carrying value of renewable energy assets, including energy efficiency projects, was $13.7 billion (2019 – $14.0 billion).

Shareholders’ accumulated other comprehensive pre-tax income (loss) at December 31, 2020 consisted of a $2,056 million gain for bonds (2019 – gain of $1,626 million) and a $255 million gain for public equities (2019 – gain of $350 million). Included in the $2,056 million gain for bonds was a $317 million loss related to the fair value hedge basis adjustments on AFS bonds (2019 – loss of $497 million).

Debt Securities and Private Placement Debt

We manage our high-quality fixed income portfolio to optimize yield and quality while ensuring that asset portfolios remain diversified by sector, industry, issuer, and geography. As at December 31, 2020, our fixed income portfolio of $259.5 billion (2019 – $236.1 billion) was 97% investment grade (rated BBB or better) and 73% was rated A or higher (2019 – 98% and 75%, respectively). Our private placement debt holdings provide diversification benefits (issuer, industry, and geography) and, because they often have stronger protective covenants and collateral than debt securities, they typically provide better credit protection and potentially higher recoveries in the event of default. Geographically, 25% is invested in Canada (2019 – 25%), 47% is invested in the U.S. (2019 – 47%), 4% is invested in Europe (2019 – 4%) and the remaining 24% is invested in Asia and other geographic areas (2019 – 24%).

 

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Debt Securities and Private Placement Debt – by Credit Quality(1)

 

    2020           2019  

As at December 31,

($ billions)

  Debt
securities
    Private
placement
debt
    Total     % of
Total
          Debt
securities
    Private
placement
debt
    Total     % of
Total
 

AAA

  $ 40.7     $ 1.1     $ 41.8       16       $ 36.1     $ 1.1     $ 37.2       16  

AA

    37.1       4.8       41.9       16         34.3       5.5       39.8       17  

A

    89.4       15.6       105.0       41         84.2       14.3       98.5       42  

BBB

    47.2       15.8       63.0       24         40.6       14.1       54.7       23  

BB

    3.0       1.2       4.2       2         2.0       0.9       2.9       1  

B & lower, and unrated

    1.3       2.3       3.6       1         0.9       2.1       3.0       1  

Total carrying value

  $   218.7     $   40.8     $   259.5       100       $   198.1     $   38.0     $   236.1       100  
(1)

Reflects credit quality ratings as assigned by Nationally Recognized Statistical Rating Organizations (“NRSRO”) using the following priority sequence order: S&P Global Ratings (“S&P”), Moody’s Investors Services (“Moody’s”), DBRS Limited (“DBRS”), Fitch Ratings Inc. (“Fitch”), Rating and Investment information, and Japan Credit Rating. For those assets where ratings by NRSRO are not available, disclosures are based upon internal ratings as described in the “Risk Factors and Risk Management” section below.

Debt Securities and Private Placement Debt – by Sector

 

As at December 31,

Per cent of carrying value

  2020           2019  
  Debt
securities
    Private
placement
debt
    Total           Debt
securities
    Private
placement
debt
    Total  

Government and agency

    37       12       33         37       12       33  

Utilities

    15       39       18         15       41       19  

Financial

    15       8       14         15       6       13  

Industrial

    8       12       9         8       10       8  

Consumer (non-cyclical)

    7       14       8         6       14       8  

Energy – Oil & Gas

    8       5       8         5       5       5  

Energy – Other

    0       1       0         4       1       4  

Consumer (cyclical)

    3       6       3         3       7       3  

Securitized (MBS/ABS)

    1       1       1         2       1       2  

Telecommunications

    2       0       2         2       1       2  

Basic materials

    2       2       2         2       2       2  

Technology

    1       0       1         1             1  

Media and internet and other

    1       0       1                      

Total per cent

    100       100       100         100       100       100  

Total carrying value ($ billions)

  $   218.7     $   40.8     $   259.5       $   198.1     $   38.0     $   236.1  

As at December 31, 2020, gross unrealized losses on our fixed income holdings were $0.6 billion or 0.3% of the amortized cost of these holdings (2019 – $0.6 billion or 0.3%). Of this amount, $16 million (2019 – $71 million) related to debt securities trading below 80% of amortized cost for more than 6 months. Securitized assets represented $10 million of the gross unrealized losses and none of the amounts trade below amortized cost for more than 6 months (2019 – $4 million and none, respectively). After adjusting for debt securities supporting participating policyholder and pass-through products and the provisions for credit included in the insurance and investment contract liabilities, the potential impact to shareholders’ pre-tax earnings for debt securities trading at less than 80% of amortized cost for greater than 6 months was approximately $14 million as at December 31, 2020 (2019 – $48 million).

Mortgages

As at December 31, 2020, our mortgage portfolio of $50.2 billion represented 12% of invested assets (2019 – $49.4 billion and 13%, respectively). Geographically, 65% of the portfolio is invested in Canada (2019 – 65%) and 35% is invested in the U.S. (2019 – 35%). As shown below, the overall portfolio is also diversified by geographic region, property type, and borrower. Of the total mortgage portfolio, 14% is insured (2019 – 15%), primarily by the Canada Mortgage and Housing Corporation (“CMHC”) – Canada’s AAA rated government-backed national housing agency, with 31% of residential mortgages insured (2019 – 33%) and 2% of commercial mortgages insured (2019 – 2%).

 

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As at December 31,

($ billions)

  2020           2019  
  Carrying value     % of total           Carrying value     % of total  

Commercial

         

Retail

  $ 8.6       17       $ 8.8       18  

Office

    8.7       17         8.9       18  

Multi-family residential

    5.8       11         5.4       11  

Industrial

    2.9       6         2.5       5  

Other commercial

    3.5       7         3.2       6  
    29.6       58         28.8       58  

Other mortgages

         

Manulife Bank single-family residential

    20.4       41         20.1       41  

Agricultural

    0.3       1         0.5       1  

Total mortgages

  $   50.2       100       $   49.4       100  

Our commercial mortgage loans are originated with a hold-for-investment philosophy. They have low loan-to-value ratios, high debt-service coverage ratios, and as at December 31, 2020 there were no loans in arrears. Geographically, of the total commercial mortgage loans, 42% are in Canada and 58% are in the U.S. (2019 – 41% and 59%, respectively). We are diversified by property type and largely avoid risky market segments such as hotels, construction loans and second liens.

Non-CMHC Insured Commercial Mortgages(1)

 

    2020           2019  
As at December 31,   Canada     U.S.           Canada     U.S.  

Loan-to-Value ratio(2)

    62%       58%         62%       56%  

Debt-Service Coverage ratio(2)

    1.46x       1.83x         1.48x       1.87x  

Average duration (years)

    4.9       6.8         4.8       6.5  

Average loan size ($ millions)

  $ 17.9     $ 18.9       $ 17.7     $ 18.0  

Loans in arrears(3)

      0.00%         0.00%           0.00%         0.00%  

 

(1)

Excludes Manulife Bank commercial mortgage loans of $407 million (2019 – $361 million).

(2)

Loan-to-Value and Debt-Service Coverage are based on re-underwritten cash flows.

(3)

Arrears defined as over 90 days past due in Canada and over 60 days past due in the U.S.

Public Equities

As at December 31, 2020, public equity holdings of $23.7 billion represented 6% (2019 – $22.8 billion and 6%) of invested assets and, when excluding assets supporting participating policyholder and pass-through products, represented 1% (2019 – 2%) of invested assets. The portfolio is diversified by industry sector and issuer. Geographically, 27% (2019 – 27%) is held in Canada; 36% (2019 – 36%) is held in the U.S.; and the remaining 37% (2019 – 37%) is held in Asia, Europe and other geographic areas.

Public Equities – classified by type of product-line supported

 

As at December 31,

($ billions)

  2020           2019  
  Carrying value     % of total           Carrying value     % of total  

Participating Policyholders

  $ 13.1       55       $ 11.6       51  

Pass-through products

    5.8       25         5.4       24  

Corporate and Other segment(1)

    3.2       14         4.6       20  

Non-participating products

    1.6       7         1.2       5  

Total public equities(2)

  $   23.7       100       $   22.8       100  

 

(1)

Includes $1.8 billion of AFS equities and $1.4 billion of seed money investments in new segregated and mutual funds.

(2)

Includes $229 million of public equities that are managed in conjunction with our alternative long duration asset strategy.

Alternative Long-Duration Assets (“ALDA”)

Our ALDA portfolio is comprised of a diverse range of asset classes with varying degrees of correlations. The portfolio typically consists of private assets representing investments in varied sectors of the economy which act as a natural hedge against future inflation and serve as an alternative source of asset supply to long-term corporate bonds. In addition to being a suitable match for our long-duration liabilities, these assets provide enhanced long-term yields and diversification relative to traditional fixed income markets. The vast majority of our ALDA are managed in-house.

As at December 31, 2020, carrying value of ALDA of $39.0 billion represented 9% (2019 – $37.8 billion and 10%) of invested assets. The fair value of total ALDA was $41.0 billion at December 31, 2020 (2019 – $39.9 billion). The carrying value and corresponding fair value by sector and/or asset type are outlined above (see table in the section “General Fund Assets”).

 

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Real Estate

Our real estate portfolio is diversified by geographic region; of the total fair value of this portfolio, 40% is located in the U.S., 43% in Canada, and 17% in Asia as at December 31, 2020 (2019 – 43%, 43%, and 14%, respectively). This high-quality portfolio has virtually no leverage and is primarily invested in premium urban office towers, concentrated in cities with stable growth, and highly diverse economies, in North America and Asia. The portfolio is well positioned with an average occupancy rate of 92% (2019 – 94%) and an average lease term of 6.2 years (2019 – 5.7 years). During 2020, we executed 5 acquisitions representing $0.3 billion market value of commercial real estate assets (2019 – 1 acquisition and $0.1 billion). As part of ongoing portfolio management initiatives, $0.6 billion of commercial real estate assets were sold during 2020.

The composition of our real estate portfolio based on fair value is as follows:

 

As at December 31,

($ billions)

  2020           2019         
  Fair value     % of total           Fair value     % of total    

 

 

Company Own-Use

  $ 3.0       21       $ 3.3       23    

Office – Downtown

    5.3       38         5.6       39    

Office – Suburban

    1.5       11         1.7       12    

Industrial

    1.6       11         1.0       7    

Residential

    1.9       14         1.9       13    

Retail

    0.4       3         0.4       3    

Other

    0.3       2         0.4       3          

Total real estate(1)

  $   14.0       100       $   14.3       100          

 

(1)

These figures represent the fair value of the real estate portfolio. The carrying value of the portfolio was $12.8 billion and $12.9 billion at December 31, 2020 and December 31, 2019, respectively.

Infrastructure

We invest both directly and through funds in a variety of industry specific asset classes, listed below. The portfolio is well-diversified with almost 400 portfolio companies. The portfolio is predominately invested in the U.S. and Canada, but also in the United Kingdom, Western Europe, Latin America and Australia. Our power and infrastructure holdings are as follows:

 

As at December 31,
($ billions)
  2020           2019         
  Carrying value     % of total           Carrying value     % of total    

 

 

Power generation

  $ 4.1       45       $ 3.9       44    

Transportation (including roads, ports)

    2.5       27         2.1       24    

Electric and gas regulated utilities

    0.4       5         1.0       12    

Electricity transmission

    0.1       1         0.1       1    

Water distribution

    0.1       1         0.1       1    

Midstream gas infrastructure

    0.6       7         0.5       6    

Maintenance service, efficiency and social infrastructure

    0.2       2         0.2       2    

Telecommunications/Tower

    1.0       11         0.7       8    

Other infrastructure

    0.1       1         0.3       2          

Total infrastructure

  $   9.1       100       $   8.9       100          

Timberland & Farmland

Our timberland and farmland assets are managed by a proprietary entity, Hancock Natural Resources Group (“HNRG”). In addition to being the world’s largest timberland investment manager for institutional investors,1 with timberland properties in the U.S., New Zealand, Australia, Chile and Canada, HNRG also manages farmland properties in the U.S., Australia and Canada. The General Fund’s timberland portfolio comprised 23% of HNRG’s total timberland assets under management (“AUM”) (2019 – 22%). The farmland portfolio includes annual (row) crops, fruit crops, wine grapes, and nut crops. The General Fund’s holdings comprised 42% of HNRG’s total farmland AUM (2019 – 40%).

Private Equities

Our private equity portfolio of $8.0 billion (2019 – $6.4 billion) includes both directly held private equity and private equity funds. Both are diversified across vintage years and industry sectors.

 

1 

Based on the global timber investment management organization ranking in the RISI International Timberland Ownership and Investment Database.

 

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Oil & Gas

This category is comprised of $0.6 billion (2019 – $1.0 billion) in our conventional Canadian oil and gas properties managed by our subsidiary, NAL Resources, and various other oil and gas private equity interests of $1.7 billion (2019 – $2.2 billion). The sale of NAL Resources to Whitecap Resources Inc. closed on January 4, 2021, in exchange for publicly traded shares in Whitecap Resources Inc. Production mix for conventional oil and gas assets in 2020 was approximately 35% crude oil, 45% natural gas, and 20% natural gas liquids (2019 – 36%, 47%, and 17%, respectively). Private equity interests are a combination of both producing and mid-streaming assets.

In 2020, the carrying value of our oil and gas holdings decreased by $1.0 billion and the fair value decreased by $1.0 billion.

Investment Income

 

For the years ended December 31,

($ millions, unless otherwise stated)

  2020            2019  

Interest income

  $   11,813       $   11,488  

Dividend, rental and other income(1)

    2,458         2,988  

Impairments

    (703       56  

Other, including gains and losses on sale of AFS debt securities

    2,865               861  

Investment income before realized and unrealized gains on assets supporting
insurance and investment contract liabilities and on macro equity hedges

    16,433               15,393  

Realized and unrealized gains and losses on assets supporting
insurance and investment contract liabilities and on macro equity hedges

     

Debt securities

    10,748         11,528  

Public equities

    1,917         2,870  

Mortgages and private placements

    39         (36

Alternative long-duration assets and other investments

    (214       1,262  

Derivatives, including macro equity hedging program

    6,477               2,576  
      18,967               18,200  

Total investment income

  $ 35,400             $ 33,593  

 

(1)

Rental income from investment properties is net of direct operating expenses.

In 2020, the $35.4 billion of investment income (2019 – $33.6 billion) consisted of:

 

 

$16.4 billion of investment income before net realized and unrealized gains on assets supporting insurance and investment contract liabilities and on macro equity hedges (2019 – $15.4 billion); and

 

$19.0 billion of net realized and unrealized gains on assets supporting insurance and investment contract liabilities and on macro equity hedges (2019 – gains of $18.2 billion).

The $1.0 billion increase in net investment income before unrealized and realized gains was due to gains of $2.9 billion on surplus assets mainly from the sale of government bonds (compared to $0.9 billion gains in 2019); partially offset by an increase of $0.8 billion in impairments mainly due to investments in oil and gas.

Net realized and unrealized gains on assets supporting insurance and investment contract liabilities and on the macro hedge program was a gain of $19.0 billion for full year 2020 compared with a gain of $18.2 billion for full year 2019. The full year 2020 gain largely resulted from interest rate decreases in U.S., Canada and Asia. The 10 year government bonds for the U.S., Canada, and Hong Kong decreased 100 bps, 103 bps and 104 bps, respectively. Additional gains were driven by positive equity market performance as all major indices were up during the year. The S&P 500 increased 16.3% and S&P/TSX 2.2%.    

Fair value accounting policies affect the measurement of both our assets and our liabilities. Refer to “Financial Performance” above.

 

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8. Fourth Quarter Financial Highlights

Profitability

 

As at and for the quarters ended December 31,

($ millions, unless otherwise stated)

  2020     2019     2018  

Profitability:

     

Net income attributed to shareholders

  $     1,780     $    1,228     $ 593  

Core earnings(1),(2)

  $ 1,474     $ 1,477     $     1,337  

Diluted earnings per common share ($)

  $ 0.89     $ 0.61     $ 0.28  

Diluted core earnings per common share ($)(1)

  $ 0.74     $ 0.73     $ 0.65  

Return on common shareholders’ equity (“ROE”)

    14.1%       10.3%       5.3%  

Core ROE(1)

    11.6%       12.5%       12.5%  

 

(1)

This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” above.

(2)

Impact of currency movement on the fourth quarter of 2020 (“4Q20”) core earnings compared with the fourth quarter of 2019 (“4Q19”) was a $10 million unfavourable variance.

Manulife’s 4Q20 net income attributed to shareholders was $1,780 million compared with $1,228 million in 4Q19. Net income attributed to shareholders is comprised of core earnings (consisting of items we believe reflect the underlying earnings capacity of the business), which amounted to $1,474 million in 4Q20 compared with $1,477 million in 4Q19, and items excluded from core earnings, which amounted to a net gain of $306 million in 4Q20 compared with charges of $249 million in 4Q19. Net income attributed to shareholders in 4Q20 increased compared with 4Q19 primarily driven by higher investment-related experience gains, gains from reinsurance transactions compared with losses in 4Q19, and a lower charge from the direct impact of markets.

The $3 million decrease in core earnings compared with 4Q19 reflects the absence of core investment gains in the quarter (compared with gains in 4Q19) and lower investment income in Corporate and Other offset by the favourable impact of in-force business growth in Asia and the U.S., higher average AUMA in Global Wealth and Asset Management, favourable experience in our P&C Reinsurance business, and lower general expenses. Core earnings in 4Q20 included net policyholder experience losses of $27 million post-tax ($40 million pre-tax) compared with losses of $22 million post-tax ($38 million pre-tax) in 4Q19.1 Actions to improve the capital efficiency of our legacy businesses resulted in $5 million of lower core earnings in 4Q20 compared with 4Q19.

Core earnings by segment is presented in the table below for the periods presented.

 

For the quarters ended December 31,

($ millions)

  2020     2019  

Core earnings(1)

   

Asia

  $ 571     $ 494  

Canada

    316       288  

U.S.

    479       489  

Global Wealth and Asset Management

    304       265  

Corporate and Other (excluding core investment gains)

    (196     (159

Core investment gains(1)

          100  

Core earnings

  $   1,474     $   1,477  

 

(1)

This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” above.

In Asia, core earnings were $571 million in 4Q20 compared with $494 million in 4Q19, an increase of 16%, after adjusting for the impact of changes in foreign currency exchange rates. The increase in core earnings was driven by in-force business growth across Asia, favourable new business primarily from product mix in Hong Kong and Vietnam and disciplined expense management, partially offset by lower new business volumes in Hong Kong.

In Canada, core earnings were $316 million in 4Q20 compared with $288 million in 4Q19. The 10% increase primarily reflected favourable policyholder experience in our insurance businesses, partially offset by a number of smaller experience-related items.

In the U.S., core earnings were $479 million in 4Q20 compared with $489 million in 4Q19. The 1% decrease was driven by unfavourable life insurance policyholder experience, which included modest COVID-19 related claim losses and the non-recurrence of tax benefits in 4Q19 from the closure of prior year tax audits. These items were largely offset by favourable long-term care policyholder experience, resulting from claim terminations due to the impact of COVID-19, higher in-force earnings, and a focus on reduced spending in the current economic environment.

Global Wealth and Asset Management core earnings were $304 million in 4Q20 compared with $265 million in 4Q19. The 15% increase was driven primarily by higher average assets under management and administration and lower general expenses from ongoing efficiency initiatives, partially offset by unfavourable impacts from changes in product mix, lower fee spread in the U.S. Retirement business, and lower tax benefits.

 

1 

Policyholder experience includes gains of $13 million in 2020 from customers who have opted to change their existing medical coverage to the VHIS products in Hong Kong (4Q19 – gains of $20 million). These gains did not have a material impact on core earnings as they were offset by new business strain.

 

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Corporate and Other core loss excluding core investment gains was $196 million in 4Q20 compared with $159 million in 4Q19. The $37 million increase in core loss was primarily driven by lower investment income and higher Corporate expenses due to impairment of capitalized IT assets, primarily software, partially offset by the favourable impact of markets on seed money investments in segregated funds and mutual funds and favourable experience in our P&C Reinsurance business in 4Q20.

The table below reconciles net income attributed to shareholders to core earnings for the periods presented and provides further details for each of the items excluded from core earnings.

 

For the quarters ended December 31,

($ millions)

  2020     2019  

Core earnings(1)

  $    1,474     $    1,477  

Items excluded from core earnings

   

Investment-related experience outside of core earnings(2)

    585       182  

Direct impact of equity markets and interest rates and variable annuity guarantee liabilities (see table below)

    (323     (389

Direct impact of equity markets and variable annuity guarantee liabilities(3)

    351       125  

Fixed income reinvestment rates assumed in the valuation of policy liabilities(4)

    (846     (583

Sale of AFS bonds and derivative positions in the Corporate and Other segment

    172       69  

Reinsurance transactions(5)

    44       (34

Tax-related items and other(6)

          (8

Total items excluded from core earnings

    306       (249

Net income (loss) attributed to shareholders

  $ 1,780     $ 1,228  

 

(1)

This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” above.

(2)

Total investment-related experience in 4Q20 was a net gain of $585 million, compared with a net gain of $282 million in 4Q19, and in accordance with our definition of core earnings, we included no investment-related experience gains in core earnings and a $585 million gain in items excluded from core earnings in 4Q20 (gains of $100 million and $182 million, respectively, in 4Q19). Investment-related experience gains in 4Q20 reflected the favourable impact of fixed income reinvestment activities, higher-than-expected returns (including fair value changes) on ALDA primarily driven by fair value gains on private equity and the estimated impact of the sale of NAL and strong credit experience, partially offset by lower-than-expected returns on real estate. The sale of NAL to Whitecap Resources Inc. closed on January 4, 2021, in exchange for publicly traded shares in Whitecap Resources Inc. Investment-related experience gains in 4Q19 reflected favourable impact of fixed income reinvestment activities and higher-than-expected returns (including fair value changes) on ALDA.

(3)

In 4Q20, the net gains related to equity markets of $351 million included a gain of $1,613 million from gross equity exposure partially offset by a charge of $1,253 million from dynamic hedging experience and a modest charge of $9 million from macro hedge experience. In 4Q19, the net gains of $125 million included a gain of $1,354 million from gross equity exposure partially offset by a charge of $1,226 million from dynamic hedging experience and a modest charge of $3 million from macro hedge experience.

(4)

The $846 million charge in 4Q20 was driven by narrowing corporate spreads, primarily in the U.S. The $583 million charge in 4Q19 primarily relates to lower corporate spreads and a decrease in the fair value of interest rate derivatives which more than offset the decrease in liabilities arising from a steepening of the yield curve in the U.S. and Canada.

(5)

In 4Q20, reinsurance transactions in Asia and Canada contributed gains of $29 million and $15 million, respectively. In 4Q19, the reinsurance transactions in Canada was a charge of $34 million.

(6)

Tax-related items and other charges in 4Q19 related to legacy transaction fees.

Business Performance

 

As at and for the quarters ended December 31,

($ millions, unless otherwise stated)

  2020     2019     2018  

Asia APE sales

  $ 996     $ 975     $ 1,040  

Canada APE sales

    245       271       277  

U.S. APE sales

    178       249       152  

Total APE sales(1)

      1,419         1,495         1,469  

Asia new business value

    368       390       402  

Canada new business value

    65       59       51  

U.S. new business value

    56       77       48  

Total new business value(1)

    489       526       501  

Global Wealth and Asset Management gross flows ($ billions)(1)

    31.5       32.9       26.3  

Global Wealth and Asset Management net flows ($ billions)(1)

    2.8       4.9       (9.0

Global Wealth and Asset Management assets under management and administration ($ billions)(1)

    753.6       681.2       608.8  

 

(1)

This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” above.

Sales

APE sales were $1.4 billion in 4Q20, a decrease of 5% compared with 4Q19. In Asia, APE sales increased 2% compared with 4Q19 as growth in sales in Japan from COLI and higher Asia Other sales from Vietnam and Singapore, were partially offset by lower sales in Hong Kong, due to the tightening of COVID-19 containment measures. In Canada, APE sales decreased 10% compared with 4Q19 primarily driven by lower small and mid-size group insurance and individual insurance sales due to the adverse impact of COVID-19, partially offset by higher sales in our lower risk segregated funds. In the U.S., APE sales decreased 28% compared with 4Q19, as international universal life sales were unfavourably impacted by COVID-19 and domestic universal life sales decreased compared with a strong 4Q19, which benefited from higher sales in advance of anticipated regulatory changes.

 

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New Business Value was $489 million in 4Q20, a decrease of 7% compared with 4Q19. In Asia, NBV of $368 million was down 5% compared with 4Q19, due to lower sales volumes in Hong Kong and less favourable product mix in Japan, partially offset by higher sales and more favourable product mix in Asia Other. In Canada, NBV of $65 million increased 10% compared with 4Q19, primarily driven by higher margins across all business lines, partially offset by lower volumes in small and mid-size group insurance and individual insurance. In the U.S., NBV of $56 million was down 26% compared with 4Q19, driven primarily by lower international universal life sales volumes.

Global Wealth and Asset Management net inflows were $2.8 billion in 4Q20 compared with net inflows of $4.9 billion in 4Q19. Net inflows in Asia were $2.2 billion in 4Q20 compared with net inflows of $0.2 billion in 4Q19, driven by lower redemptions in Institutional Asset Management and higher gross flows of retail money market funds in Indonesia. Net inflows in Canada were $2.2 billion in 4Q20 compared with net inflows of $1.0 billion in 4Q19, driven by lower plan redemptions in Retirement and higher gross flows across the product line-up in Retail. Net outflows in the U.S. were $1.6 billion in 4Q20 compared with net inflows of $3.7 billion in 4Q19, driven by higher redemptions across all business lines and lower new plan sales in Retirement and the non-recurrence of several large sales in Institutional Asset Management in 4Q19, partially offset by higher net inflows in Retail from strong intermediary sales.

Global Wealth and Asset Management gross flows were $31.5 billion in 4Q20 compared with $32.9 billion in 4Q19. In Asia, gross flows were 15% higher compared with 4Q19, driven by higher gross flows of retail money market funds in Indonesia and higher retirement gross flows in Hong Kong. In Canada, gross flows were in line with 4Q19 as higher gross flows across the product line-up in Retail offset the non-recurrence of several large fixed income sales in Institutional Asset Management in 4Q19. In the U.S., gross flows were 11% lower compared with 4Q19, driven by lower new plan sales in Retirement and the non-recurrence of several large sales in Institutional Asset Management in 4Q19, partially offset by strong intermediary sales in Retail.

 

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9. Risk Factors and Risk Management

This section provides an overview of our overall risk management approach along with detailed description of specific risks which may affect our results of operations or financial condition and the strategies used to manage those risks.

Enterprise Risk Management Framework

Delivering on our mission “Decisions made easier. Lives made better”, our ambition is to transform into the most digital, customer-centric global company in our industry, while delighting our customers, engaging our employees, and delivering superior returns for our shareholders. The activities required to achieve these results involve elements of risk taking.

Our approach to risk management is governed by our Enterprise Risk Management (“ERM”) Framework.

 

LOGO

Our ERM Framework provides a structured approach to risk taking and risk management activities across the enterprise, supporting our long-term revenue, earnings and capital growth strategy. It is communicated through risk policies and standards, which are intended to enable consistent design and execution of strategies across the organization. We have a common approach to managing all risks to which we are exposed, and to evaluating potential directly comparable risk-adjusted returns on contemplated business activities. Our risk policies and standards cover:

 

 

Risk roles and authorities – Assignment of accountability and delegation of authority for risk oversight and risk management at various levels within the Company, as well as accountability principles;

 

Governance and strategy – The types and levels of risk the Company seeks given its strategic plan, the internal and external environment, and risk appetite which drives risk limits and policies;

 

Execution – Risk identification, measurement, assessment and mitigation which enable those accountable for risks to manage and monitor their risk profile; and

 

Evaluation – Validation, back testing and independent oversight to confirm that the Company generated the risk profile it intended, root cause analysis of any notable variation, and any action required to re-establish desired levels when exposures materially increase to bring exposures back to desired levels and achieve higher levels of operational excellence.

Our risk management practices are influenced and impacted by external and internal factors (such as economic conditions, political environments, technology and risk culture), which can significantly impact the levels and types of risks we might face in pursuit of strategically optimized risk taking and risk management. Our ERM Framework incorporates relevant impacts and mitigating actions as appropriate.

Three Lines of Defense Model

A strong risk culture and a common approach to risk management are integral to Manulife’s risk management practices. Management is responsible for managing risk within risk appetite and has established risk management strategies and monitoring practices. Our approach to risk management includes a “three lines of defense” governance model that segregates duties among risk taking activities, risk monitoring and risk oversight, and establishes appropriate accountability for those who assume risk versus those who oversee risk.

Our first line of defense includes the Chief Executive Officer (“CEO”), Segment and Business Unit General Managers and Global Function Heads. In our matrix reporting model, the Segment General Managers are ultimately accountable for their business results, the risks they assume to achieve those results, and for the day-to-day management of the risks and related controls, and the Global Function Heads are accountable for the management of the risks and related controls for their function.

 

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The second line of defense is comprised of the Company’s Chief Risk Officer (“CRO”), the Global Risk Management (“GRM”) function, the Company’s Chief Compliance Officer and the Global Compliance Office, and other global oversight functions. Collectively, this group provides independent oversight of risk taking and risk management activities across the enterprise. Risk oversight committees, through broad-based membership, also provide oversight of risk taking and risk management activities.

The third line of defense is Audit Services, which provides independent, objective assurance that controls are effective and appropriate relative to the risk inherent in the business and that risk mitigation programs and risk oversight functions are effective in managing risks.

Culture

To enable the achievement of our mission and strategic priorities, we are committed to a set of shared values, which reflect our culture, inform our behaviours, and help define how we work together:

 

 

Obsess about customers – Predict their needs and do everything in our power to satisfy them.

 

Do the right thing – Act with integrity and do what we say.

 

Think big – Anything is possible. We can always find a better way.

 

Get it done together – We’re surrounded by an amazing team. Do it better by working together.

 

Own it – Feel empowered to make decisions and take action to deliver our mission.

 

Share your humanity – Build a supportive, diverse and thriving workplace.

Risk Culture Vision – Within this context, we strive for a risk aware culture, where individuals and groups are encouraged, feel comfortable and are proactive in making transparent, balanced risk-return decisions that are in the long-term interests of the Company.

Risk Culture Framework – We have set a framework of desired behaviours to foster a strong risk aware culture. The framework is assessed against a set of qualitative and quantitative indicators and regularly reported to the Board and executive leadership, with the intent to continuously identify opportunities to increase risk awareness across all geographies, businesses and layers of management and staff.

We believe that risk culture is strengthened once desired organizational behaviours and attitudes are reinforced through effective application of our corporate values. As such, we communicate key elements of our values through a risk lens to build a strong risk aware culture, including:

 

 

Transparency – Encourage an environment where we can get it done together by openly discussing the strengths, weaknesses and potential range of outcomes of an issue, proposal or initiative and making informed decisions. Escalate issues before they become significant problems.

 

Risk appetite – Once we have identified a risk or situation, we establish a risk appetite and own that decision. We establish appropriate limits and associated delegated authority so we can confidently execute our strategy within our risk appetite.

 

Learn – Use mistakes and failures as learning moments and share what was learned; think big by sharing beyond teams and business units. Seek out lessons learned from throughout the organization in order to continuously improve and grow our business the right way.

 

Incentives – Align personal incentives with our goals and how we want to execute our plan. When things go wrong, share our humanity by planning our reaction and maintaining a supportive environment to ensure appropriate incentives for continued transparency and lessons learned.

Risk Governance

The Board of Directors oversees our culture of integrity and ethics, strategic planning, risk management, and corporate governance, among other things. The Board of Directors carries out its responsibilities directly and through its four standing committees:

 

 

Risk Committee – Oversees the management of our principal risks, and our programs, policies and procedures to manage those risks.

 

Audit Committee – Oversees internal control over financial reporting and our finance, actuarial, internal audit and global compliance functions, serves as the conduct review committee, reviews our compliance with legal and regulatory requirements and oversees the performance, qualifications and independence of our external auditors.

 

Management Resources and Compensation Committee – Oversees our global human resources strategy, policies, programs, management succession, executive compensation, and pension plan governance.

 

Corporate Governance and Nominating Committee – Develops our governance policies, practices and procedures, among other activities.

The CEO is directly accountable to the Board of Directors for our results and operations and all risk taking activities and risk management practices required to achieve those results. The CEO is supported by the CRO as well as by the Executive Risk Committee (“ERC”). Together, they shape and promote our risk culture, guide risk taking throughout our global operations and strategically manage our overall risk profile. The ERC, along with other executive-level risk oversight committees, establishes risk policies, guides risk taking activity, monitors significant risk exposures and sponsors strategic risk management priorities throughout the organization.

Global Risk Management, under the direction of the CRO, establishes and maintains our ERM Framework and oversees the execution of individual risk management programs across the enterprise. Global Risk Management seeks to ensure a consistent enterprise-wide assessment of risk, risk based capital and risk-adjusted returns across all operations.

 

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The ERC approves and oversees the execution of the Company’s enterprise risk management program. It establishes and presents for approval to the Board of Directors the Company’s risk appetite and enterprise-wide risk limits and monitors our overall risk profile, including key and emerging risks and risk management activities. As part of these activities, the ERC monitors material risk exposures, endorses and reviews strategic risk management priorities, and reviews and assesses the impact of business strategies, opportunities and initiatives on our overall risk position. The ERC is supported by a number of oversight sub-committees including:

 

 

Credit Committee – Establishes credit risk policies and risk management standards of practice and oversees the credit risk management program. Also monitors the Company’s overall credit risk profile and approves large individual credits and investments.

 

Product Oversight Committee – Oversees insurance risk and reviews risks in new product and new business reinsurance initiatives. Also monitors product design, new product pricing, and insurance risk exposures and trends.

 

Global Asset Liability Committee – Oversees market and liquidity risk for insurance products, hedging, and asset liability management programs and strategies. Also monitors market risk profile, risk exposures, risk mitigation activities and compliance with related policies.

 

Operational Risk Committee – Oversees operational risk appetite, exposures and associated governance, risk processes, risk management activities and compliance with related policies.

We also have segment risk committees, each with mandates similar to the ERC except with a focus at the segment as applicable.

Risk Appetite

The Company’s strategic direction drives overall risk appetite. All risk taking activities are managed within the Company’s overall risk appetite, which defines the amount and types of risks the Company is willing to assume in pursuit of its objectives. It is comprised of three components: overall risk taking philosophy, risk appetite statements, and risk limits and tolerances.

Risk Philosophy – Manulife is a global financial institution offering insurance, wealth and asset management products and other financial services. The activities required to achieve our mission of “Decisions made easier. Lives made better” are guided by our values and involve elements of risk taking. As such, when making decisions about risk taking and risk management, the Company places a priority on the following risk management objectives:

 

 

To safeguard the commitments and expectations established with our customers, creditors, shareholders and employees;

 

To support the successful design and delivery of customer solutions;

 

To prudently and effectively deploy the capital invested in the Company by shareholders with appropriate risk/return profiles;

 

To invest wealth and asset management’s customer assets consistent with their objectives;

 

To achieve and maintain a high level of operational resilience, while safeguarding the wellbeing of our employees;

 

To protect and/or enhance the Company’s reputation and brand; and

 

To maintain the Company’s targeted financial strength rating.

While we only pursue risks we can appropriately analyze and monitor, we also manage risks which arise outside of our direct influence. We recognize that risk exposures change over time. If exposures materially increase, we will activate management actions designed to bring exposures back to desired levels. As an integrated component of our business model, risk management assists the Company in achieving our objectives and in reaching higher levels of operational excellence, while encouraging transparency and organizational learning.

Risk Appetite Statements – At least annually, we establish and/or reaffirm that our risk appetite and the Company’s strategy are aligned. The risk appetite statements provide ‘guideposts’ on our appetite for identified risks, any conditions placed on associated risk taking and direction for where quantitative risk limits should be established. The Company’s risk appetite statements are as follows:

 

 

Manulife accepts a total level of risk that provides a very high level of confidence to meeting customer obligations while targeting an appropriate overall return to shareholders over time;

 

Manulife targets a credit rating aligned with our growth aspirations and our objective of honoring all commitments to policyholders and other stakeholders with a high degree of confidence;

 

Manulife values innovation and encourages initiatives intended to advance the Company’s ambition to be a digital, customer-centric market leader;

 

Capital market risks are acceptable when they are managed within specific risk limits and tolerances;

 

Manulife believes a diversified investment portfolio reduces overall risk and enhances returns; therefore, it accepts credit and alternative long-duration asset related risks;

 

Manulife pursues product risks that add customer and shareholder value where there is competence to assess and monitor them, and for which appropriate compensation is received;

 

Manulife accepts that operational risks are an inherent part of the business when managed within thresholds and tolerances of key risk indicators and will protect its business and customers’ assets through cost-effective operational risk mitigation; and

 

Manulife expects its officers and employees to act in accordance with the Company’s values, ethics and standards; and to protect its brand and reputation.

 

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Risk Limits and Tolerances – Risk limits and tolerances are established for risks within our risk classification framework that are inherent in our strategies in order to define the types and amount of risk the Company will assume. Risk tolerance levels are set for risks deemed to be most significant to the Company and are established in relation to economic capital, earnings-at-risk and regulatory capital required. The purpose of risk limits is to cascade the total Company risk appetite to a level that can be effectively managed. Manulife establishes standalone risk limits for risk categories to avoid excessive concentration in any individual risk category and to manage the overall risk profile of the organization.

Risk Identification, Measurement and Assessment

We have a common approach and process to identify, measure, and assess the risks we assume. We evaluate all potential new business initiatives, acquisitions, product offerings, reinsurance arrangements, and investment and financing transactions on a comparable risk-adjusted basis. Segments and functional groups are responsible for identifying and assessing key and emerging risks on an ongoing basis. A standard inventory of risks is used in all aspects of risk identification, measurement and assessment, and monitoring and reporting.

Risk exposures are evaluated using a variety of measures focused on both short-term net income attributed to shareholders and long-term economic value, with certain measures used across all risk categories, while others are applied only to some risks or a single risk type. Measures include stress tests such as sensitivity tests, scenario impact analyses and stochastic scenario modeling. In addition, qualitative risk assessments are performed, including for those risk types that cannot be reliably quantified.

We perform a variety of stress tests on earnings, regulatory capital ratios, economic capital, earnings-at-risk and liquidity that consider significant, but plausible events. We also perform other integrated, complex scenario tests to assess key risks and the interaction of these risks.

Economic capital and earnings-at-risk provide measures of enterprise-wide risk that can be aggregated and compared across business activities and risk types. Economic capital measures the amount of capital required to meet obligations with a high and pre-defined confidence level. Our earnings-at-risk metric measures the potential variance from quarterly expected earnings at a particular confidence level. Economic capital and earnings-at-risk are both determined using internal models.

Risk Monitoring and Reporting

Under the direction of the CRO, GRM oversees a formal process for monitoring and reporting on all significant risks at the Company-wide level. Risk exposures are also discussed at various risk oversight committees, along with any exceptions or proposed remedial actions, as required.

On at least a quarterly basis, the ERC and the Board’s Risk Committee reviews risk reports that present an overview of our overall risk profile and exposures across our principal risks. The reports incorporate both quantitative risk exposure measures and sensitivities, and qualitative assessments. The reports also highlight key risk management activities and facilitate monitoring compliance with key risk policy limits.

Our Chief Actuary presents the results of the Financial Condition Test (formerly: Dynamic Capital Adequacy Test) to the Board of Directors annually. Our Chief Auditor reports the results of internal audits of risk controls and risk management programs to the Audit Committee and the Board Risk Committee annually. Management reviews the implementation of key risk management strategies, and their effectiveness, with the Board Risk Committee annually.

Risk Control and Mitigation

Risk control activities are in place throughout the Company to seek to mitigate risks within established risk limits. We believe our controls, which include policies, procedures, systems and processes, are appropriate and commensurate with the key risks faced at all levels across the Company. Such controls are an integral part of day-to-day activity, business management and decision making.

GRM establishes and oversees formal review and approval processes for product offerings, insurance underwriting, reinsurance, investment activities and other material business activities, based on the nature, size and complexity of the risk taking activity involved. Authorities for assuming risk at the transaction level are delegated to specific individuals based on their skill, knowledge and experience.

Principal Risk Categories

Our insurance, wealth and asset management and other financial services businesses subject Manulife to a broad range of risks. Management has identified the following risks and uncertainties to which our businesses, operations and financial condition are subject grouped under five principal risk categories: strategic risk, market risk, credit risk, product risk and operational risk. The following sections also describe the risk management strategies for each of these risk categories. The risks and uncertainties described below are not the only ones facing us. Additional risks not presently known to us or that are currently immaterial could also impair our businesses, operations and financial condition. If any of such risks should occur, the trading price of our securities, including common shares, preferred shares and debt securities, could decline, and you may lose all or part of your investment.

 

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Strategic Risk

Strategic risk is the risk of loss resulting from the inability to adequately plan or implement an appropriate business strategy that allows us to effectively compete in the markets in which we operate, or to adapt to change in the external business, political or regulatory environment.

We operate in highly competitive markets and compete for customers with both insurance and non-insurance financial services companies. Customer loyalty and retention, and access to distributors, are important to the Company’s success and are influenced by many factors, including our distribution practices and regulations, product features, service levels including digital capabilities, prices, investment performance, and our financial strength ratings and reputation. Our ability to effectively compete is highly dependent upon being quick to react and adapt to changes from the external environment while continuing to proactively drive internal innovation.

The following section describes strategies to manage strategic risk, as well as details on strategic risk factors:

Strategic Risk Management Strategy

The CEO and Executive Leadership Team establish and oversee execution of business strategies and have accountability to identify and manage the risks embedded in these strategies. They are supported by a number of processes:

 

 

Strategic business, risk and capital planning that is reviewed with the Board of Directors, Executive Leadership Team, and the ERC;

 

Performance and risk reviews of all key businesses with the CEO and annual reviews with the Board of Directors;

 

Risk based capital attribution and allocation designed to encourage a consistent decision-making framework across the organization; and

 

Review and approval of significant acquisitions and divestitures by the CEO and, where appropriate, the Board of Directors.

Reputation risk is the risk that the Company’s corporate image may be eroded by adverse publicity, about real or perceived issues, as a result of business practices of Manulife or its representatives potentially causing long-term or even irreparable damage to the Company’s franchise value. Reputation risk arises from both internal and external environmental factors, and cannot be managed in isolation from other risks, but only as an integral part of the Company’s integrated risk management approach.

The Company’s Reputation Risk Policy requires that internal processes and controls, management decisions, and business decisions, include considerations for how the Company’s reputation and brand could be impacted. Any incident with the potential to harm our reputation is of high priority and senior management is to be alerted. An essential component of the Policy requires that all employees should conduct themselves in accordance with our values, as well as the Company’s Code of Conduct and Business Ethics.

Environmental, Social and Governance Risks

Environmental, social and governance (“ESG”) risks may impact our investments, underwriting, or operations, and may create financial, operational, legal, reputational, or brand value risks for Manulife.

The Board’s Corporate Governance and Nominating Committee (“CGNC”) oversees Manulife’s ESG framework. Manulife’s Executive Sustainability Council, which consists of members of the Executive Leadership Team and the Chief Sustainability Officer, is responsible for ESG-related strategy and disclosures. It meets monthly and provides quarterly updates to the CGNC. The Council is supported by a Sustainability Centre of Expertise that consists of representatives from multiple businesses and functional areas and includes a Climate Change Taskforce.

Please refer to our annual “Sustainability Report and Public Accountability Statement”, typically published in the second quarter, of the following year, for information on our ESG priorities and performance.

Climate Risk

Matters related to climate change are a key component of the Environmental pillar of Manulife’s ESG framework. Manulife supports the recommendations of the Financial Stability Board’s Taskforce on Climate-Related Financial Disclosures (“TCFD”). The application of these recommendations is articulated below and is expected to be further refined over the coming years.

Consistent with TCFD, Manulife defines climate-related risk as the risk of loss, either directly through financial loss or indirectly through reputational damage, resulting from the inability or failure to adequately prepare for the impacts from climate change or the transition to a lower-carbon economy.

Climate-related risks can manifest through two dimensions – physical and transition risks. Physical risks include acute risks that are event-driven, such as extreme heat or cold, catastrophic storms, and floods. It also includes chronic risks which are longer-term shifts in climate patterns, such as rising global temperatures and sea levels. Transition risks include risks associated with transitioning to a lower-carbon economy and may entail extensive changes in policies, regulations, technologies, markets or consumer preferences to address mitigation and adaptation efforts.

We view climate-related risk as a transverse risk, since the broad range of actual or potential risks can impact any of our key risks (e.g. market, credit, product, operational, legal, and reputational) through the manifestation of physical and transition climate-related risks.

 

 

Governance – The Board’s CGNC oversees matters related to climate change as part of the oversight of the Manulife ESG framework. The Board Risk Committee also considers climate-related risks and opportunities through the ongoing monitoring and reporting of emerging risks.

 

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Manulife’s Executive Sustainability Council is responsible for the climate strategy, risk management, and disclosures. The Manulife Climate Change Taskforce which consists of representatives from multiple businesses and functional areas and is led by the Chief Sustainability Officer, drives the development of the climate strategy, risk management activities on climate-related matters, performance tracking, and disclosures.

 

 

Strategy – Manulife is a long-term oriented underwriter and investor. Therefore, long-term climate-related risks and opportunities, including changes in the physical environment and policy and technological changes associated with the transition to a lower-carbon economy, are strategically relevant.

In 2020, we continued the climate-related risk identification process across businesses, geographies, and time horizons.

We performed a series of climate change stress tests to gain insight into the impact of climate-related risks on our investment portfolios and to inform capital management. In 2020, this included the Prudential Regulation Authority Scenario A climate stress test that models the immediate and sudden impact of disorderly economic transition to constraining the rise in temperature to less than +2°Celsius. Having stressed the general account assets with market value shocks ranging from +15% to -65% for various industrial sub-sectors, our capital levels remained well above the minimum regulatory capital requirements.

As of November 2020, Manulife is a founding participant in the joint Bank of Canada / Office of the Superintendent of Financial Institutions’ pilot project that deploys climate-change scenarios to understand the risks to the financial system that stem from the transition to a low-carbon economy.

As part of Manulife’s support for the transition to a lower carbon economy, as at December 31, 2019, $14 billion, or 3.7% of General Account assets were invested into renewable energy and energy efficiency projects; 25.7 million square feet, or greater than 70% of our $14.3 billion real estate portfolio was certified to sustainable building standards such as LEED, BOMA, and Energy Star; and the entire $3.4 billion timberland portfolio was managed to third-party sustainability standards, including Forest Stewardship Council (“FSC”) and Programme for the Endorsement of Forest Certification (“PEFC”).

During 2020, our product and insurance risk management teams laid the foundational framework for research and analysis of the impacts of climate change, such as on vector-borne diseases (such as malaria), extreme weather events, and increased temperatures, on morbidity and/or mortality. The research along with experience data will help to inform decisions related to underwriting assumptions over the long-term.

The Property and Casualty Reinsurance business is annually priced and forms a smaller part of our underwriting portfolio. It may experience business risks associated with the increased frequency and severity of catastrophic weather events.

Finally, for our third-party asset management business, MIM tested a climate scenario risk tool jointly with industry peers convened by the United Nations’ Environment Programme – Finance Initiative. We have identified this as a business opportunity in enabling clients to invest in decarbonization and we offer diversified investment funds with exposure to low-carbon opportunities.

 

 

Risk Management – The identification and assessment of climate-related risks is communicated through an Environmental Risk Policy updated in 2020, which sets out an enterprise-wide framework for the management of environmental risks within our business activities. ESG Guidelines for the General Account assets and MIM’s ESG Engagement Policy cover climate change risk factors in investment decision-making. For example, MIM’s public markets team directly engages some of the world’s largest emitters on climate-related risks and opportunities, as well as through the collaborative industry program Climate Action 100+.

We continue to enhance the integration of climate-related risk into our ERM framework to ensure that they are managed in a manner consistent with our common approach to risk management (refer to “Risk Identification, Measurement and Assessment” above).

 

 

Metrics – Manulife reports its greenhouse gas emissions in our Annual Sustainability Report and to Carbon Disclosure Project (“CDP” – a global database of corporate carbon emissions). Disclosures include scope 1 and 2 emissions from businesses where Manulife has operational control, scope 3 emissions from business travel, cloud services, and landfill waste, and carbon removals from timberland and agriculture business. Emissions are calculated according to the Greenhouse Gas Protocol and are reviewed by a third-party using a limited assurance procedure.

In 2020, Manulife assessed the carbon emission profile of public equities, public corporate bonds, and sovereign bonds within the General Account investment portfolio. Using the carbon data and estimations available for 2019 and 2018 for individual equity securities from the third-party provider Trucost, the weighted average carbon intensity of the public equity portfolio was 216 tons of carbon dioxide equivalent per million Canadian dollars revenue.

As part of the ongoing refinements of Manulife’s ESG framework, we are assessing other relevant climate risk-related metrics and targets.

Strategic Risk Factors

We may not be successful in executing our business strategies or these strategies may not achieve our objectives.

The global macro-economic environment has a significant impact on our financial plans and ability to implement our business strategy. The macro-economic environment can be significantly impacted by the actions of both the government sector (including central banks) and the private sector. The macro-economic environment may also be affected by natural and human-made catastrophes.

 

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Our business strategy and associated financial plans are developed by considering forecasts of economic growth, both globally and in the specific countries we operate. Actual economic growth can be significantly impacted by the macro-economic environment and can deviate significantly from forecast, thus impacting our financial results and the ability to implement our business strategy.

Changes in the macro-economic environment can also have a significant impact on financial markets, including movements in interest rates, spreads on fixed income assets and returns on public equity and ALDA assets. Our financial plan, including income projections, capital projections, and valuation of liabilities are based on certain assumptions with respect to future movements in interest rates and spreads on fixed income assets, and expected future returns from our public equity and ALDA investments. Actual experience is highly variable and can deviate significantly from our assumptions, thus impacting our financial results. In addition, actual experience that is significantly different from our assumptions and/or changes in the macro-economic environment may result in changes to the assumptions themselves which would also impact our financial results.

Specific changes in the macro-economic environment can have very different impacts across different parts of the business. For example, a rise in interest rates is generally beneficial to us in the long-term but can adversely affect valuations of some ALDA assets, especially those that have returns dependent on contractual cash flows, such as real estate.

The spending and savings patterns of our customers could be significantly influenced by the macro-economic environment and could have an impact on the products and services we offer to our customers.

Customer behaviour and emergence of claims on our liabilities can be significantly impacted by the macro-economic environment. For example, a prolonged period of economic weakness could impact the health and well-being of our customers and that could result in increased claims for certain insurance risks.

Adverse publicity, litigation or regulatory action resulting from our business practices or actions by our employees, representatives and/or business partners, could erode our corporate image and damage our franchise value and/or create losses.

 

 

Manulife’s reputation is one of its most valuable assets. Harm to a company’s reputation is often a consequence of risk control failure, whether associated with complex financial transactions or relatively routine operational activities. Manulife’s reputation could also be harmed by the actions of third parties with whom we do business. Our representatives include affiliated broker-dealers, agents, wholesalers and independent distributors, such as broker-dealers and banks, whose services and representations our customers rely on. Business partners include, among others, joint venture partners and third parties to whom we outsource certain functions and that we rely on to fulfill various obligations.

 

If any of these representatives or business partners fail to adequately perform their responsibilities, or monitor their own risks, these failures could affect our business reputation and operations. While we seek to maintain adequate internal risk management policies and procedures and protect against performance failures, events may occur involving our representatives or our business partners that could cause us to lose customers or cause us or our representatives or business partners to become subject to legal, regulatory, economic or trade sanctions, which could have a material adverse effect on our reputation, our business, and our results of operations. For further discussion of government regulation and legal proceedings refer to “Government Regulation” in MFC’s Annual Information Form dated February 10, 2021 and note 18 of the Consolidated Financial Statements.

Our businesses are heavily regulated, and changes in regulation or laws, or in the interpretation or enforcement of regulation and laws, may reduce our profitability and limit our growth.

 

 

Our operations are subject to a wide variety of insurance and other laws and regulations including with respect to financial crimes (which include, but are not limited to, money laundering, bribery and economic or trade sanctions), privacy, market conduct, consumer protection, business conduct, prudential and other generally applicable non-financial requirements. Insurance and securities regulators in Canada, the United States, Asia and other jurisdictions regularly re-examine existing laws and regulations applicable to insurance companies, investment advisors, brokers-dealers and their products. Compliance with applicable laws and regulations is time consuming and personnel-intensive, and changes in these laws and regulations or in the interpretation or enforcement thereof, may materially increase our direct and indirect compliance costs and other expenses of doing business, thus having a material adverse effect on our results of operations and financial condition.

 

Regulators review their capital requirements and implement changes aimed at strengthening risk management and capitalization of financial institutions. Future regulatory capital, actuarial and accounting changes, including changes with a retroactive impact, could have a material adverse effect on the Company’s consolidated financial condition, results of operations and regulatory capital both on transition and going forward. In addition, such changes could have a material adverse effect on the Company’s position relative to that of other Canadian and international financial institutions with which Manulife competes for business and capital.

 

In Canada, MFC and its principal operating subsidiary, MLI, are governed by the Insurance Companies Act (Canada) (“ICA”). The ICA is administered, and the activities of the Company are supervised, by the Office of the Superintendent of Financial Institutions (“OSFI”). MLI is also subject to regulation and supervision under the insurance laws of each of the provinces and territories of Canada. Regulatory oversight is vested in various governmental agencies having broad administrative power with respect to, among other things, dividend payments, capital adequacy and risk based capital requirements, asset and reserve valuation requirements, permitted investments and the sale and marketing of insurance contracts. These regulations are intended to protect policyholders and beneficiaries rather than investors and may adversely impact shareholder value.

 

Some recent examples of regulatory and professional standard developments, in addition to the developments outlined in the “Risk Factors and Risk Management – Regulatory Updates” section below, which could impact our net income attributed to shareholders and/or capital position are provided below.

 

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At its annual meeting in November 2019, the International Association of Insurance Supervisors (“IAIS”) adopted its first global frameworks for supervision of internationally active insurance groups (“IAIGs”) and mitigation of systemic risk in the insurance sector. The frameworks was composed of three elements:

 

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A Common Framework (“ComFrame”) provides supervisory standards and guidance focusing on the effective group-wide supervision of IAIGs. ComFrame builds on the revised set of Insurance Core Principles, that are applicable to the supervision of all insurers, and which were adopted after extensive review.

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A risk based global Insurance Capital Standard (“ICS”) is being further developed over a five-year monitoring period which began in 2020. While broadly supportive of the goals of ICS, OSFI stated that they did not support the ICS design for the monitoring period, citing that it was ‘not fit for purpose for the Canadian market’. The adoption of the international rules in specific markets or on a group-based basis will depend on the decision of each applicable regulator.

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The Holistic Framework for the assessment and mitigation of systemic risk in the insurance sector, which includes reviewing activities of insurers, was used beginning January 2020. At the same time, the Financial Standards Board announced it would be suspending designations of any IAIGs as Globally Systemically Important Insurers (G-SIIs) until at least November 2022 when it will re-assess whether designations are necessary.

Manulife is an IAIG but is not designated as a G-SII. Though the overall frameworks were adopted by the IAIS in 2019, much of the necessary details were expected to be developed in 2020 and beyond. In 2020, COVID-19 resulted in reprioritization of activities by regulators. This included pivoting review and data collection exercises under the Holistic Framework with IAIGs to focus on targeted assessment of COVID-19 impacts to the insurance sector and delayed other regulatory developments. The impact of the frameworks on capital and other regulatory requirements and Manulife’s competitive position remains unknown and is being monitored.

 

   

The National Association of Insurance Commissioners (“NAIC”) has been reviewing reserving and capital methodologies as well as the overall risk management framework. These reviews will affect U.S. life insurers, including John Hancock, and could lead to increased reserving and/or capital requirements for our business in the U.S. In addition, in December 2020 the NAIC adopted a group capital calculation (“GCC”) and amendments to the NAIC Insurance Holding Company System Regulatory Act which exempt certain insurance holding groups, including John Hancock and Manulife, from the requirements relating to the GCC. Though the NAIC has adopted model laws and regulations, it remains up to individual states to enact their own specific laws and regulations.

 

 

The Actuarial Standards Board (“ASB”) promulgates certain assumptions referenced in the CIA Standards of Practice for the valuation of insurance contract liabilities. These promulgations are updated periodically and, in the event that new promulgations are published, they will apply to the determination of actuarial liabilities and may lead to an increase in actuarial liabilities and a reduction in net income attributed to shareholders.

 

In the United States, state insurance laws regulate most aspects of our business, and our U.S. insurance subsidiaries are regulated by the insurance departments of the states in which they are domiciled and the states in which they are licensed. State laws grant insurance regulatory authorities broad administrative powers with respect to, among other things: licensing companies and agents to transact business; calculating the value of assets to determine compliance with statutory requirements; mandating certain insurance benefits; regulating certain premium rates; reviewing and approving policy forms; regulating unfair trade and claims practices, including through the imposition of restrictions on marketing and sales practices, distribution arrangements and payment of inducements; regulating advertising; protecting privacy; establishing statutory capital and reserve requirements and solvency standards; fixing maximum interest rates on insurance policy loans and minimum rates for guaranteed crediting rates on life insurance policies and annuity contracts; approving changes in control of insurance companies; restricting the payment of dividends and other transactions between affiliates; and regulating the types, amounts and valuation of investments. Changes in any such laws and regulations, or in the interpretation or enforcement thereof by regulators, could significantly affect our business, results of operations and financial condition.

 

Currently, the U.S. federal government does not directly regulate the business of insurance. However, federal legislation and administrative policies in several areas can significantly and adversely affect state regulated insurance companies. These areas include financial services regulation, securities regulation, pension regulation, privacy, tort reform legislation and taxation. In addition, under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), the U.S. Board of Governors of the Federal Reserve has supervisory powers over non-bank financial companies that are determined to be systemically important.

 

Insurance guaranty associations in Canada and the United States have the right to assess insurance companies doing business in their jurisdiction for funds to help pay the obligations of insolvent insurance companies to policyholders and claimants. Typically, an insurer is assessed an amount related to its proportionate share of the line of business written by all insurers in the relevant jurisdiction. Because the amount and timing of an assessment is beyond our control, the liabilities that we have currently established for these potential liabilities may not be adequate, particularly if there is an increase in the number of insolvent insurers or if the insolvent insurers operated in the same lines of business and in the same jurisdictions in which we operate.

 

While many of the laws and regulations to which we are subject are intended to protect policyholders, beneficiaries, depositors and investors in our products and services, others also set standards and requirements for the governance of our operations. Failure to comply with applicable laws or regulations could result in financial penalties or sanctions, and damage our reputation.

 

All aspects of Manulife’s Global Wealth and Asset Management businesses are subject to various laws and regulations around the world. These laws and regulations are primarily intended to protect investment advisory clients, investors in registered and unregistered funds, and clients of Manulife’s global retirement businesses. Agencies that regulate investment advisors, investment funds and retirement

 

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plan products and services have broad administrative powers, including the power to limit, restrict or prohibit the regulated entity or person from carrying on business if it fails to comply with such laws and regulations. Possible sanctions for significant compliance failures include the suspension of individual employees, limitations on engaging in certain lines of business for specified periods of time, revocation of investment advisor and other registrations and censures and fines both for individuals and Manulife.

 

From time to time, regulators raise issues during examinations or audits of Manulife that could have a material adverse impact on us. We cannot predict whether or when regulatory actions may be taken that could adversely affect our operations. Our failure to comply with existing and evolving regulatory requirements could also result in regulatory sanctions and could affect our relationships with regulatory authorities and our ability to execute our business strategies and plans. For further discussion of government regulation and legal proceedings refer to “Government Regulation” in MFC’s Annual Information Form dated February 10, 2021 and note 18 of the 2020 Annual Consolidated Financial Statements. Refer to the risk factor “Our operations face political, legal, operational and other risks that could negatively affect those operations or our results of operations and financial condition” for further discussion on the impact to our operations.

Changes to International Financial Reporting Standards could have a material impact on our financial results.

 

 

New standards or modifications to existing standards could have a material adverse impact on our financial results and regulatory capital position (the regulatory capital framework in Canada uses IFRS as a base). Additionally, any mismatch between the underlying economics of our business and new accounting standards could have significant unintended negative consequences on our business model; and potentially affect our customers, shareholders and our access to capital markets. Please refer to “Emerging Risks – IFRS 17 and IFRS 9” below.

Changes in tax laws, tax regulations, or interpretations of such laws or regulations could make some of our products less attractive to consumers, could increase our corporate taxes or cause us to change the value of our deferred tax assets and liabilities as well as our tax assumptions included in the valuation of our policy liabilities. This could have a material adverse effect on our business, results of operations and financial condition.

 

 

Many of the products that the Company sells benefit from one or more forms of preferred tax treatment under current income tax regimes. For example, the Company sells life insurance policies that benefit from the deferral or elimination of taxation on earnings accrued under the policy, as well as permanent exclusion of certain death benefits that may be paid to policyholders’ beneficiaries. We also sell annuity contracts that allow the policyholders to defer the recognition of taxable income earned within the contract. Other products that the Company sells, such as certain employer-paid health and dental plans, also enjoy similar, as well as other, types of tax advantages. The Company also benefits from certain tax benefits, including tax-exempt interest, dividends-received deductions, tax credits (such as foreign tax credits), and favourable tax rates and/or income measurement rules for tax purposes.

 

There is risk that tax legislation could be enacted that would lessen or eliminate some or all of the tax advantages currently benefiting the Company or its policyholders or its other clients. This could occur in the context of deficit reduction or other tax reforms. The effects of any such changes could result in materially lower product sales, lapses of policies currently held, and/or our incurrence of materially higher corporate taxes, any of which could have a material adverse effect on our business, results of operations and financial condition.

 

Additionally, the Company may be required to change its provision for income taxes or carrying amount of deferred tax assets or liabilities if the characterization of certain items is successfully challenged by taxing authorities or if future transactions or events, which could include changes in tax laws, tax regulations or interpretations of such laws or regulations, occur. Any such changes could significantly affect the amounts reported in the Consolidated Financial Statements in the year these changes occur.

 

The U.S. government enacted the Tax Cuts and Jobs Act effective January 1, 2018 (“U.S. Tax Reform”). The legislation makes broad and complex changes to the U.S. tax code including reducing individual and corporate tax rates and permitting expensing of many capital expenditures, increasing and extending the amortization period on policy acquisition costs, and further limiting the deductibility of policy reserves for U.S. federal income tax purposes. Regulations and further guidance from the Internal Revenue Service and other bodies continue to be developed and released, implementing and/or clarifying the legislation. Any further changes or amendments to the law or its interpretation could result in material change to our tax balances.

 

In the long run, U.S. Tax Reform, all else being equal, could lead to a reduction in corporate borrowings and lower borrowings could lead to tighter spreads.

Access to capital may be negatively impacted by market conditions.

 

 

Disruptions, uncertainty or volatility in the financial markets may limit our access to the capital markets to raise capital required to operate our business. Such market conditions may limit our ability to access the capital necessary to satisfy regulatory capital requirements to grow our business and meet our refinancing requirements. Under extreme conditions, we may be forced, among other things, to delay raising capital, issue different types of capital than we would otherwise under normal conditions, less effectively deploy such capital, issue shorter term securities than we prefer, or issue securities that bear an unattractive cost of capital which could decrease our financial flexibility, profitability, and/or dilute our existing shareholders.

As a holding company, MFC depends on the ability of its subsidiaries to transfer funds to it to meet MFC’s obligations and pay dividends. Subsidiaries’ remittance of capital depends on subsidiaries’ earnings, regulatory requirements and restrictions, and macroeconomic conditions.

 

 

MFC is a holding company and relies on dividends and interest payments from our insurance and other subsidiaries as the principal source of cash flow to meet MFC’s obligations and pay dividends. As a result, MFC’s cash flows and ability to service its obligations are

 

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dependent upon the earnings of its subsidiaries and the distribution of those earnings and other funds by its subsidiaries to MFC. Substantially all of MFC’s business is currently conducted through its subsidiaries.

 

The ability of our holding company to fund its cash requirements depends upon it receiving dividends, distributions and other payments from our operating subsidiaries. The ability of MFC’s insurance subsidiaries to pay dividends to MFC in the future will depend on their earnings, macroeconomic conditions, and their respective local regulatory requirements and restrictions, including capital adequacy and requirements, exchange controls and economic or trade sanctions.

 

MFC’s insurance subsidiaries are subject to a variety of insurance and other laws and regulations that vary by jurisdiction and are intended to protect policyholders and beneficiaries in that jurisdiction first and foremost, rather than investors. These subsidiaries are generally required to maintain solvency and capital standards as set by their local regulators and may also be subject to other regulatory restrictions, all of which may limit the ability of subsidiary companies to pay dividends or make distributions to MFC.

 

Potential changes to regulatory capital and actuarial and accounting standards could also limit the ability of the insurance subsidiaries to pay dividends or make distributions and could have a material adverse effect on internal capital mobility. We may be required to raise additional capital, which could be dilutive to existing shareholders, or to limit the new business we write, or to pursue actions that would support capital needs but adversely impact our subsequent earnings potential. In addition, the timing and outcome of these initiatives could have a significantly adverse impact on our competitive position relative to that of other Canadian and international financial institutions with which we compete for business and capital.

 

The Company seeks to maintain capital in its regulated subsidiaries in excess of the minimum required in all jurisdictions in which the Company does business. The minimum requirements in each jurisdiction may increase due to regulatory changes and we may decide to maintain additional capital in our operating subsidiaries to fund expected growth of the business or to deal with changes in the risk profile of such subsidiaries. Any such increases in the level of capital may reduce the ability of the operating companies to pay dividends.

 

The payment of dividends to MFC by MLI is subject to restrictions set out in the ICA. The ICA prohibits the declaration or payment of any dividend on shares of an insurance company if there are reasonable grounds for believing: (i) the company does not have adequate capital and adequate and appropriate forms of liquidity; or (ii) the declaration or the payment of the dividend would cause the company to be in contravention of any regulation made under the ICA respecting the maintenance of adequate capital and adequate and appropriate forms of liquidity, or of any direction made to the company by the Superintendent. All of our U.S. and Asian operating life insurance companies are subsidiaries of MLI. Accordingly, a restriction on dividends from MLI would restrict MFC’s ability to obtain dividends from its U.S. and Asian businesses.

 

Certain of MFC’s U.S. insurance subsidiaries also are subject to insurance laws in Michigan, New York and Massachusetts, the jurisdictions in which these subsidiaries are domiciled, which impose general limitations on the payment of dividends and other upstream distributions by these subsidiaries to MLI.

 

Our Asian insurance subsidiaries are also subject to restrictions in the jurisdictions in which these subsidiaries are domiciled which could affect their ability to pay dividends to MLI in certain circumstances.

We may experience future downgrades in our financial strength or credit ratings, which may materially adversely impact our financial condition and results of operations.

 

 

Credit rating agencies publish financial strength ratings on life insurance companies that are indicators of an insurance company’s ability to meet contract holder and policyholder obligations. Credit rating agencies also assign credit ratings, which are indicators of an issuer’s ability to meet the terms of its obligations in a timely manner and are important factors in a company’s overall funding profile and ability to access external capital. Ratings reflect the views held by each credit agency, which are subject to change based on various factors that may be within or beyond a company’s control.

 

Ratings are important factors in establishing the competitive position of insurance companies, maintaining public confidence in products being offered, and determining the cost of capital. A ratings downgrade, or the potential for such a downgrade could adversely affect our operations and financial condition. A downgrade could, among other things, increase our cost of capital and limit our access to the capital and loan markets; cause some of our existing liabilities to be subject to acceleration, additional collateral support, changes in terms, or additional financial obligations; result in the termination of our relationships with broker-dealers, banks, agents, wholesalers and other distributors of our products and services; increase our cost of hedging; unfavourably impact our ability to execute on our hedging strategies; materially increase the number of surrenders, for all or a portion of the net cash values, by the owners of policies and contracts we have issued, impact our ability to obtain reinsurance at reasonable prices or at all, and materially increase the number of withdrawals by policyholders of cash values from their policies; and reduce new sales.

Competitive factors may adversely affect our market share and profitability.

 

 

The insurance, wealth and asset management industries are highly competitive. Our competitors include other insurers, securities firms, investment advisors, mutual funds, banks and other financial institutions. The rapid advancement of new technologies, such as blockchain, artificial intelligence and advanced analytics, may enable other non-traditional firms to compete directly in the industry space, or offer services to our traditional competitors to enhance their value propositions. The impact from technological disruption may result in our competitors improving their customer experience, product offerings and business costs. Our competitors compete with us for customers, access to distribution channels such as brokers and independent agents, and for employees. In some cases, competitors may be subject to less onerous regulatory requirements, have lower operating costs or have the ability to absorb greater risk while maintaining their financial strength ratings, thereby allowing them to price their products more competitively or offer features

 

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that make their products more attractive. These competitive pressures could result in lower new business volumes and increased pricing pressures on a number of our products and services that may harm our ability to maintain or increase our profitability. Due to the highly competitive nature of the financial services industry, there can be no assurance that we will continue to effectively compete with our traditional and non-traditional industry rivals, and competitive pressure may have a material adverse effect on our business, results of operations and financial condition.

We may experience difficulty in marketing and distributing products through our current and future distribution channels.

 

 

We distribute our insurance and wealth management products through a variety of distribution channels, including brokers, independent agents, broker-dealers, banks, wholesalers, affinity partners, other third-party organizations and our own sales force in Asia. We generate a significant portion of our business through individual third-party arrangements. We periodically negotiate provisions and renewals of these relationships, and there can be no assurance that such terms will remain acceptable to us or relevant third parties. An interruption in our continuing relationship with certain of these third parties could significantly affect our ability to market our products and could have a material adverse effect on our business, results of operations and financial condition.

Industry trends could adversely affect the profitability of our businesses.

 

 

Our business segments continue to be influenced by a variety of trends that affect our business and the financial services industry in general. The impact of the volatility and instability of the financial markets on our business is difficult to predict and the results of operations and our financial condition may be significantly impacted by general business and economic trends in the geographies in which we operate. These conditions include, but are not limited to, market factors, such as public equity, foreign currency, interest rate and other market risks, demographic shifts, consumer behaviours (e.g. spending habits and debt levels), and governmental policies (e.g. fiscal, monetary, and global trade). The Company’s business plans, results of operations, and financial condition have been negatively impacted in the recent past and may also be negatively affected in the future.

We may face unforeseen liabilities or asset impairments arising from possible acquisitions and dispositions of businesses or difficulties integrating acquired businesses.

 

 

We have engaged in acquisitions and dispositions of businesses in the past and expect to continue to do so in the future as we may deem appropriate. There could be unforeseen liabilities or asset impairments, including goodwill impairments that arise in connection with the businesses that we may sell, have acquired, or may acquire in the future. In addition, there may be liabilities or asset impairments that we fail, or are unable, to discover in the course of performing due diligence investigations on acquisition targets. Furthermore, the use of our own funds as consideration in any acquisition would consume capital resources that would no longer be available for other corporate purposes.

 

Our ability to achieve some or all of the benefits we anticipate from any acquisitions of businesses will depend in large part upon our ability to successfully integrate the businesses in an efficient and effective manner. We may not be able to integrate the businesses smoothly or successfully, and the process may take longer than expected. The integration of operations may require the dedication of significant management resources, which may distract management’s attention from our day-to-day business. Acquisitions of operations outside of North America, especially any acquisition in a jurisdiction in which we do not currently operate, may be particularly challenging or costly to integrate. If we are unable to successfully integrate the operations of any acquired businesses, we may be unable to realize the benefits we expect to achieve as a result of the acquisitions and the results of operations may be less than expected.

If our businesses do not perform well, or if the outlook for our businesses is significantly lower than historical trends, we may be required to recognize an impairment of goodwill or intangible assets or to establish a valuation allowance against our deferred tax assets, which could have a material adverse effect on our results of operations and financial condition.

 

 

Goodwill represents the excess of the amounts we paid to acquire subsidiaries and other businesses over the fair value of their net identifiable assets at the date of acquisition. Intangible assets represent assets that are separately identifiable at the time of an acquisition and provide future benefits such as the John Hancock brand.

 

As outlined below under “Critical Actuarial and Accounting Policies - Goodwill and Intangible Assets”, goodwill and intangible assets with indefinite lives are tested at least annually for impairment at the cash generating unit (“CGU”) or group of CGUs level, representing the smallest group of assets that is capable of generating largely independent cash flows. Going forward, as a result of the impact of economic conditions and changes in product mix and the granular level of goodwill testing under IFRS, additional impairment charges could occur in the future. Any impairment in goodwill would not affect LICAT capital.

 

If market conditions deteriorate in the future and, in particular, if MFC’s common share price is low relative to book value per share, if the Company’s actions to limit risk associated with its products or investments cause a significant change in any one CGU’s recoverable amount, or if the outlook for a CGU’s results deteriorate, the Company may need to reassess the value of goodwill and/or intangible assets which could result in impairments during 2021 or subsequent periods. Such impairments could have a material adverse effect on our results of operations and financial condition.

 

Deferred income tax balances represent the expected future tax effects of the differences between the book and tax basis of assets and liabilities, loss carry forwards and tax credits. Deferred tax assets are recorded when the Company expects to claim deductions on tax returns in the future for expenses that have already been recorded in the financial statements.

 

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The availability of those deductions is dependent on future taxable income against which the deductions can be made. Deferred tax assets are assessed periodically by management to determine if they are realizable. Factors in management’s determination include the performance of the business including the ability to generate gains from a variety of sources and tax planning strategies. If based on information available at the time of the assessment, it is determined that the deferred tax asset will not be realized, then the deferred tax asset is reduced to the extent that it is no longer probable that the tax benefit will be realized.

We may not be able to protect our intellectual property and may be subject to infringement claims.

 

 

We rely on a combination of contractual rights and copyright, trademark, patent and trade secret laws to establish and protect our intellectual property. In particular, we have invested considerable resources in promoting the brand names “Manulife” and “John Hancock” and expect to continue to do so. Although we use a broad range of measures to protect our intellectual property rights, third parties may infringe or misappropriate our intellectual property. We may have to litigate to enforce and protect our copyrights, trademarks, patents, trade secrets and know-how or to determine their scope, validity or enforceability, which represents a diversion of resources that may be significant in amount and may not prove successful. The loss of intellectual property protection or the inability to secure or enforce the protection of our intellectual property assets could have a material adverse effect on our business and our ability to compete.

 

We also may be subject to costly litigation in the event that another party alleges our operations or activities infringe upon its intellectual property rights. Third parties may have, or may eventually be issued, patents that could be infringed by our products, methods, processes or services. Any party that holds such a patent could make a claim of infringement against us. We may also be subject to claims by third parties for breach of copyright, trademark, trade secret or license usage rights. Any such claims and any resulting litigation could result in significant liability for damages. If we were found to have infringed a third-party patent or other intellectual property rights, we could incur substantial liability, and in some circumstances could be enjoined from providing certain products or services to our customers or utilizing and benefiting from certain methods, processes, copyrights, trademarks, trade secrets or licenses, or alternatively could be required to enter into costly licensing arrangements with third parties, all of which could have a material adverse effect on our business, results of operations and financial condition.

Applicable laws may discourage takeovers and business combinations that common shareholders of MFC might consider in their best interests.

 

 

The ICA contains restrictions on the purchase or other acquisition, issue, transfer and voting of the shares of an insurance company. In addition, under applicable U.S. insurance laws and regulations in states where certain of our insurance company subsidiaries are domiciled, no person may acquire control of MFC without obtaining prior approval of those states’ insurance regulatory authorities. These restrictions may delay, defer, prevent, or render more difficult a takeover attempt that common shareholders of MFC might consider in their best interests. For instance, they may prevent shareholders of MFC from receiving the benefit from any premium to the market price of MFC’s common shares offered by a bidder in a takeover context. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of MFC’s common shares if they are viewed as discouraging takeover attempts in the future.

Entities within the MFC group are interconnected which may make separation difficult.

 

 

MFC operates in local markets through subsidiaries and branches of subsidiaries. These local operations are financially and operationally interconnected to lessen expenses, share and reduce risk, and efficiently utilize financial resources. In general, external capital required for companies in the Manulife group has been raised at the MFC level in recent years and then transferred to other entities as equity or debt capital as appropriate. Other linkages include policyholder and other creditor guarantees and other forms of internal support between various entities, loans, capital maintenance agreements, derivatives, shared services and affiliate reinsurance treaties. Accordingly, the risks undertaken by a subsidiary may be transferred to or shared by affiliates through financial and operational linkages. Some of the consequences of this are:

 

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Financial difficulties at a subsidiary may not be isolated and could cause material adverse effects on affiliates and the group as a whole.

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Linkages may make it difficult to dispose of or separate a subsidiary or business within the group by way of a spin-off or similar transaction and the disposition or separation of a subsidiary or business may not fully eliminate the liability of the Company and its remaining subsidiaries for shared risks. Issues raised by such a transaction could include: (i) the Company cannot terminate, without policyholder consent and in certain jurisdictions regulator consent, parental guarantees on in-force policies and therefore would continue to have residual risk under any such non-terminated guarantees; (ii) internal capital mobility and efficiency could be limited; (iii) significant potential tax consequences; (iv) uncertainty about the accounting and regulatory outcomes of such a transaction; (v) obtaining any other required approvals; (vi) there may be a requirement for significant capital injections; and (vii) the transaction may result in increased sensitivity of net income attributed to shareholders and capital of MFC and its remaining subsidiaries to market declines.

 

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Market Risk

Market risk is the risk of loss resulting from market price volatility, interest rate change, credit and swap spread changes, and adverse foreign exchange rate movements. Market price volatility primarily relates to changes in prices of publicly traded equities and alternative long-duration assets. The profitability of our insurance and annuity products, as well as the fees we earn in our investment management business, are subject to market risk.

Please read below for details on factors that could impact our level of market risk and the strategies used to manage this risk:

IFRS 7 Disclosures

Text and tables in this and the following section (“Market Risk Sensitivities and Market Risk Exposure Measures”) include disclosures on market and liquidity risk in accordance with IFRS 7, “Financial Instruments – Disclosures”, and discussions on how we measure risk and our objectives, policies and methodologies for managing them. Disclosures in accordance with IFRS 7 are identified by a vertical line in the left margin of each page. The identified text and tables represent an integral part of our audited annual Consolidated Financial Statements for the years ended December 31, 2020 and December 31, 2019. The fact that certain text and tables are considered an integral part of the Consolidated Financial Statements does not imply that the disclosures are of any greater importance than the sections not part of the disclosure. Accordingly, the “Risk Factors and Risk Management” disclosure should be read in its entirety.

Market Risk Management Strategy

 

   

Market risk management strategy is governed by the Global Asset Liability Committee which oversees the overall market and liquidity risk program. Our overall strategy to manage our market risks incorporates several component strategies, each targeted to manage one or more of the market risks arising from our businesses. At an enterprise level, these strategies are designed to manage our aggregate exposures to market risks against limits associated with earnings and capital volatility.

 

The following table outlines our key market risks and identifies the risk management strategies which contribute to managing these risks.

 

 

 

      Risk Management Strategy   Key Market Risk  
           Publicly
Traded Equity
Performance Risk
    Interest Rate
and Spread Risk
    Alternative
Long-Duration Asset
Performance Risk
    Foreign
Exchange Risk
    Liquidity Risk  
   

Product design and pricing

                             
   

Variable annuity guarantee dynamic hedging

                         
   

Macro equity risk hedging

                     
   

Asset liability management

                             
   

Foreign exchange management

                 
   

Liquidity risk management

                                     

Publicly Traded Equity Performance Risk – To manage publicly traded equity performance risk from our insurance and annuity businesses, we primarily use a variable annuity guarantee dynamic hedging strategy which is complemented by a general macro equity risk hedging strategy, in addition to asset liability management strategies. Our strategies employed for variable annuity guarantee dynamic hedging and macro equity risk hedging expose the Company to additional risks.

Interest Rate and Spread Risk – To manage interest rate and spread risk, we primarily employ asset liability management strategies to manage the duration of our fixed income investments and execute interest rate hedges in our insurance segments and our Corporate and Other segments.

ALDA Performance Risk – We seek to limit concentration risk associated with ALDA performance by investing in a diversified basket of assets including commercial real estate, timber, farmland, private equities, infrastructure, and oil and gas assets. We further diversify risk by managing investments against established investment and risk limits.

Foreign Exchange Risk – Our policy is to generally match the currency of our assets with the currency of the liabilities they support. Where assets and liabilities are not currency matched, we seek to hedge this exposure where appropriate to stabilize our capital positions and remain within our enterprise foreign exchange risk limits.

Liquidity Risk - We are exposed to liquidity risk, which is the risk of not having access to sufficient funds or liquid assets to meet both expected and unexpected cash outflows and collateral demands in our operating and holding companies. In the operating companies, cash and collateral demands arise day-to-day to fund policyholder benefits, withdrawals of customer deposit balances, reinsurance settlements, derivative instrument settlements/collateral pledging, expenses, and investment and hedging activities. Under stressed conditions, additional cash and collateral demands could arise primarily from changes to policyholder termination or policy renewal rates, withdrawals of customer deposit balances, borrowers renewing or extending their loans when they mature, derivative settlements or collateral demands, and reinsurance settlements.

 

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Our liquidity risk management framework is designed to provide adequate liquidity to cover cash and collateral obligations as they come due, and to sustain and grow operations in both normal and stressed conditions. Refer to “Liquidity Risk Management Strategy” below for more information.

Product Design and Pricing Strategy

 

     

Our policies, standards, and guidelines with respect to product design and pricing are designed with the objective of aligning our product offerings with our risk-taking philosophy and risk appetite, and in particular, ensuring that incremental risk generated from new sales aligns with our strategic risk objectives and risk limits. The specific design features of our product offerings, including level of benefit guarantees, policyholder options, fund offerings and availability restrictions as well as our associated investment strategies, help to mitigate the level of underlying risk. We regularly review and modify key features within our product offerings, including premiums and fee charges with a goal of meeting profit targets and staying within risk limits. Certain of our general fund adjustable benefit products have minimum rate guarantees. The rate guarantees for any particular policy are set at the time the policy is issued and governed by insurance regulation in each jurisdiction where the products are sold. The contractual provisions allow crediting rates to be re-set at pre-established intervals subject to the established minimum crediting rate guarantees. The Company may partially mitigate the interest rate exposure by setting new rates on new business and by adjusting rates on in-force business where permitted. In addition, the Company partially mitigates this interest rate risk through its asset liability management process, product design elements, and crediting rate strategies. New product initiatives, new reinsurance arrangements and material insurance underwriting initiatives must be reviewed and approved by the CRO or key individuals within risk management functions.

 

Hedging Strategies for Variable Annuity and Other Equity Risks

     

The Company’s exposure to movement in public equity market values primarily arises from insurance liabilities related to variable annuity guarantees and general account public equity investments.

 

Dynamic hedging is the primary hedging strategy for variable annuity market risks. Dynamic hedging is employed for new variable annuity guarantees business when written or as soon as practical thereafter.

 

We seek to manage public equity risk arising from unhedged exposures in our insurance liabilities through our macro equity risk hedging strategy. We seek to manage interest rate risk arising from variable annuity business not dynamically hedged through our asset liability management strategy.

 

Variable Annuity Dynamic Hedging Strategy

     

The variable annuity dynamic hedging strategy is designed to hedge the sensitivity of variable annuity guarantee policy liabilities to fund performance (both public equity and bond funds) and interest rate movements. The objective of the variable annuity dynamic hedging strategy is to offset, as closely as possible, the change in the economic value of guarantees with the profit and loss from our hedge asset portfolio. The economic value of guarantees moves in close tandem, but not exactly, with our variable annuity guarantee policy liabilities, as it reflects best estimate liabilities and does not include any liability provisions for adverse deviations.

 

Our variable annuity hedging program uses a variety of exchange-traded and over-the-counter (OTC) derivative contracts to offset the change in value of variable annuity guarantees. The main derivative instruments used are equity index futures, government bond futures, currency futures, interest rate swaps, total return swaps, equity options and interest rate swaptions. The hedge instruments’ positions against policy liabilities are continuously monitored as market conditions change. As necessary, the hedge asset positions will be dynamically rebalanced in order to stay within established limits. We may also utilize other derivatives with the objective to improve hedge effectiveness opportunistically.

     

 

 

Our variable annuity guarantee dynamic hedging strategy is not designed to completely offset the sensitivity of policy liabilities to all risks associated with the guarantees embedded in these products. The profit (loss) on the hedge instruments will not completely offset the underlying losses (gains) related to the guarantee liabilities hedged because:

 

•   Policyholder behaviour and mortality experience are not hedged;

•   Provisions for adverse deviation in the policy liabilities are not hedged;

•   A portion of interest rate risk is not hedged;

•   Credit spreads may widen and actions might not be taken to adjust accordingly;

•   Fund performance on a small portion of the underlying funds is not hedged due to lack of availability of effective exchange-traded hedge instruments;

•   Performance of the underlying funds hedged may differ from the performance of the corresponding hedge instruments;

•   Correlations between interest rates and equity markets could lead to unfavourable material impacts;

•   Unfavourable hedge rebalancing costs can be incurred during periods of high volatility from equity markets, bond markets and/or interest rates. The impact is magnified when these impacts occur concurrently; and

•   Not all other risks are hedged.

 

 

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Macro Equity Risk Hedging Strategy

     

The objective of the macro equity risk hedging program is to maintain our overall earnings sensitivity to public equity market movements within our Board approved risk appetite limits. The macro equity risk hedging program is designed to hedge earnings sensitivity due to movements in public equity markets arising from all sources (outside of dynamically hedged exposures). Sources of equity market sensitivity addressed by the macro equity risk hedging program include:

 

•   Residual equity and currency exposure from variable annuity guarantees not dynamically hedged;

•   General fund equity holdings backing guaranteed, adjustable liabilities and variable universal life; and

•   Unhedged provisions for adverse deviation related to variable annuity guarantees dynamically hedged.

 

Asset Liability Management Strategy

     

Our asset liability management strategy is designed to help ensure that the market risks embedded in our assets and liabilities held in the Company’s general fund are effectively managed and that risk exposures arising from these assets and liabilities are maintained within risk limits. The embedded market risks include risks related to the level and movement of interest rates and credit and swap spreads, public equity market performance, ALDA performance and foreign exchange rate movements.

 

General fund product liabilities are categorized into groups with similar characteristics in order to support them with a specific asset strategy. We seek to align the asset strategy for each group to the premium and benefit patterns, policyholder options and guarantees, and crediting rate strategies of the products they support. The strategies are set using portfolio analysis techniques intended to optimize returns, subject to considerations related to regulatory and economic capital requirements, and risk tolerances. They are designed to achieve broad diversification across asset classes and individual investment risks while being suitably aligned with the liabilities they support. The strategies encompass asset mix, quality rating, term profile, liquidity, currency and industry concentration targets.

Products which feature guaranteed liability cash flows (i.e. where the projected net flows are not materially dependent upon economic scenarios) are managed to a target return investment strategy. The products backed by this asset group include:

 

 

Accumulation annuities (other than annuities with pass-through features), which are primarily short-to-medium-term obligations and offer interest rate guarantees for specified terms on single premiums. Withdrawals may or may not have market value adjustments;

 

Payout annuities, which have no surrender options and include predictable and very long-dated obligations; and

 

Insurance products, with recurring premiums extending many years in the future, and which also include a significant component of very long-dated obligations.

We seek to manage the assets backing these long-dated benefits to achieve a target return sufficient to support the obligations over their lifetime, subject to established risk tolerances and the impact of regulatory and economic capital requirements. Fixed income assets are managed to a benchmark developed to minimize interest rate risk against the liability cash flows. Utilizing ALDA and public equity investments provides a suitable match for long-duration liabilities that also enhances long-term investment returns and reduces aggregate risk through diversification.

For insurance and annuity products where significant pass-through features exist, a total return strategy approach is used, generally combining fixed income with ALDA plus public equity investments. ALDA and public equity may be included to enhance long-term investment returns and reduce aggregate risk through diversification. Target investment strategies are established using portfolio analysis techniques that seek to optimize long-term investment returns while considering the risks related to embedded product guarantees and policyholder withdrawal options, the impact of regulatory and economic capital requirements and considering management tolerances with respect to short-term income volatility and long-term tail risk exposure. For these pass-through products such as participating insurance and universal life insurance, the investment performance of assets supporting the liabilities will be largely passed through to policyholders as changes in the amounts of dividends declared or rates of interest credited, subject to embedded minimum guarantees. Shorter duration liabilities such as fixed deferred annuities do not incorporate ALDA plus public equity investments into their target asset mixes. Authority to manage our investment portfolios is delegated to investment professionals who manage to benchmarks derived from the target investment strategies established for each group, including interest rate risk tolerances.

Our asset liability management strategy incorporates a wide variety of risk measurement, risk mitigation and risk management, and hedging processes. The liabilities and risks to which the Company is exposed, however, cannot be completely matched or hedged due to both limitations on instruments available in investment markets and uncertainty of impact on liability cash flows from policyholder experience/behaviour.

 

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Foreign Exchange Risk Management Strategy

     

Our policy is to generally match the currency of our assets with the currency of the liabilities they support. Where assets and liabilities are not currency matched, we seek to hedge this exposure where appropriate to stabilize our capital positions and remain within our enterprise foreign exchange risk limits.

Risk from small balance sheet mismatches is accepted if managed within set risk limits. Risk exposures are measured in terms of potential changes in capital ratios, due to foreign exchange rate movements, determined to represent a specified likelihood of occurrence based on internal models.

Liquidity Risk Management Strategy

     

Global liquidity management policies and procedures are designed to provide adequate liquidity to cover cash and collateral obligations as they come due, and to sustain and grow operations in both normal and stressed conditions. They reflect legal, regulatory, tax, operational or economic impediments to inter-entity funding. The asset mix of our balance sheet takes into account the need to hold adequate unencumbered and appropriate liquid assets to satisfy the requirements arising under stressed scenarios and to allow our liquidity ratios to remain strong. We manage liquidity centrally and closely monitor the liquidity positions of our principal subsidiaries.

 

We seek to mitigate liquidity risk by diversifying our business across different products, markets, geographical regions and policyholders. We design insurance products to encourage policyholders to maintain their policies in-force, to help generate a diversified and stable flow of recurring premium income. We design the policyholder termination features of our wealth management products and related investment strategies with the goal of mitigating the financial exposure and liquidity risk related to unexpected policyholder terminations. We establish and implement investment strategies intended to match the term profile of the assets to the liabilities they support, taking into account the potential for unexpected policyholder terminations and resulting liquidity needs. Liquid assets represent a large portion of our total assets. We aim to reduce liquidity risk in our deposit funded businesses by diversifying our funding sources and appropriately managing the term structure of our funding. We forecast and monitor daily operating liquidity and cash movements in various individual entities and operations as well as centrally, aiming to ensure liquidity is available and cash is employed optimally.

 

We also maintain centralized cash pools and access to other sources of liquidity and contingent liquidity such as repurchase funding agreements. Our centralized cash pool consists of cash or near-cash, high quality short-term investments that are continually monitored for their credit quality and market liquidity.

As at December 31, 2020, the Company held $262.9 billion in cash & cash equivalents, comprised of cash on deposit, Canadian and U.S. Treasury Bills and high quality short-term investments, and marketable assets comprised of investment grade government and agency bonds, investment grade corporate bonds, investment grade securitized instruments, publicly traded common stocks and preferred shares, compared with $236.7 billion as at December 31, 2019 as noted in the table below.

 

As at December 31,

($ millions, unless otherwise stated)

  2020     2019  

Cash and cash equivalents

  $ 26,167     $ 20,300  

Marketable assets

   

Government bonds (investment grade)

    79,511       72,125  

Corporate bonds (investment grade)

    131,930       119,648  

Securitized — ABS, CMBS, RMBS (investment grade)

    2,989       3,437  

Public equities

    22,294       21,190  

Total marketable assets

    236,724       216,400  

Total cash and cash equivalents and marketable assets(1)

  $   262,891     $   236,700  

 

(1)

Including $6.8 billion encumbered cash and cash equivalents and marketable assets as at December 31, 2020 (compared to $5.1 billion as at December 31, 2019).

 

      We have established a variety of contingent liquidity sources. These include a $500 million committed unsecured revolving credit facility with certain Canadian chartered banks available for MFC, a US$500 million committed unsecured revolving credit facility with certain U.S. banks available for MFC and certain of its U.S. subsidiaries, and the Contingent Term Repo Facility with the Bank of Canada. There were no outstanding borrowings under these facilities as of December 31, 2020. In addition, John Hancock Life Insurance Company (U.S.A.) (“JHUSA”) is a member of the Federal Home Loan Bank of Indianapolis (“FHLBI”), which enables the company to obtain loans from FHLBI as an alternative source of liquidity that is collateralizable by qualifying mortgage loans, mortgage-backed securities and U.S. Treasury and Agency securities. As of December 31, 2020, JHUSA had an estimated maximum borrowing capacity of US$4.8 billion based on regulatory limitations with an outstanding balance of US$500 million, under the FHLBI facility.

 

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      The following table outlines the maturity of the Company’s significant financial liabilities.

Maturity of financial liabilities(1)

 

        

As at December 31, 2020

($ millions)

 

Less than

1 year

   

1 to 3

years

   

3 to 5

years

   

Over 5

years

    Total  
     

Long-term debt

  $     $     $     $ 6,164     $     6,164  
     

Capital instruments

    350             584       6,895       7,829  
     

Derivatives

    386       250       555         13,771         14,962  
     

Deposits from bank clients(2)

      16,783         2,591         1,515             20,889  
     

Lease liabilities

    116       115       47       75       353  
     

(1) The amounts shown above are net of the related unamortized deferred issue costs.

(2) Carrying value and fair value of deposits from Bank clients as at December 31, 2020 was $20,889 million and $21,085 million, respectively (2019 – $21,488 million and $21,563 million, respectively). Fair value is determined by discounting contractual cash flows, using market interest rates currently offered for deposits with similar terms and conditions. All deposits from Bank clients were categorized in Level 2 of the fair value hierarchy (2019 – Level 2).

  

  

 

      Through the normal course of business, pledging of assets is required to comply with jurisdictional regulatory and other requirements including collateral pledged to partially mitigate derivative counterparty credit risk, assets pledged to exchanges as initial margin and assets held as collateral for repurchase funding agreements. Total unencumbered assets were $496.8 billion as at December 31, 2020 (2019 – $455.2 billion).  

Market Risk Sensitivities and Market Risk Exposure Measures

Variable Annuity and Segregated Fund Guarantees Sensitivities and Risk Exposure Measures

 

     

Guarantees on variable annuity products and segregated funds may include one or more of death, maturity, income and withdrawal guarantees. Variable annuity and segregated fund guarantees are contingent and only payable upon the occurrence of the relevant event, if fund values at that time are below guaranteed values. Depending on future equity market levels, liabilities on current in-force business would be due primarily in the period from 2021 to 2041.

 

We seek to mitigate a portion of the risks embedded in our retained (i.e. net of reinsurance) variable annuity and segregated fund guarantee business through the combination of our dynamic and macro hedging strategies (see “Publicly Traded Equity Performance Risk” below).

 

The table below shows selected information regarding the Company’s variable annuity and segregated fund investment-related guarantees gross and net of reinsurance.

Variable annuity and segregated fund guarantees, net of reinsurance

 

         As at December 31,
($ millions)
  2020           2019  
         Guarantee
value
    Fund value     Amount at
risk(3),(4)
          Guarantee
value
    Fund value     Amount at
risk(3),(4)
 
     

Guaranteed minimum income benefit

  $ 4,277     $ 3,642     $ 837       $ 4,629     $ 3,696     $ 998  
     

Guaranteed minimum withdrawal benefit

    49,698       44,831       5,962         53,355       48,031       6,030  
     

Guaranteed minimum accumulation benefit

    18,436       18,918       8         17,994       18,362       10  
     

Gross living benefits(1)

    72,411       67,391       6,807         75,978       70,089       7,038  
     

Gross death benefits(2)

    8,968       18,819       689         9,555       17,186       802  
     

Total gross of reinsurance

    81,379       86,210       7,496         85,533       87,275       7,840  
     

Living benefits reinsured

    3,672       3,157       694         3,977       3,199       832  
     

Death benefits reinsured

    677       534       282         718       500       318  
     

Total reinsured

    4,349       3,691       976         4,695       3,699       1,150  
      Total, net of reinsurance   $   77,030     $   82,519     $   6,520       $   80,838     $   83,576     $   6,690  
     

 

(1) Where a policy includes both living and death benefits, the guarantee in excess of the living benefit is included in the death benefit category as outlined in footnote 2.

(2) Death benefits include standalone guarantees and guarantees in excess of living benefit guarantees where both death and living benefits are provided on a policy.

(3) 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 and assumes that all claims are immediately 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. In practice, guaranteed death benefits are contingent and only payable upon the eventual death of policyholders if fund values remain below guarantee values. For guaranteed minimum withdrawal benefit, the amount at risk simplistically assumes that the benefit is paid as a lump sum based on the withdrawal benefit guarantee value and does not recognize that actual claims on this business will instead be paid as a lifetime annuity stream. Adjusting for the time value of money, the net amount at risk will be lower than presented. These benefits are also contingent and only payable at scheduled maturity/income start dates in the future, if the policyholders are still living and have not terminated their policies and fund values remain below guarantee values. For all guarantees, the amount at risk is floored at zero at the single contract level.

(4) The amount at risk net of reinsurance at December 31, 2020 was $6,520 million (2019 – $6,690 million) of which: US$4,182 million (2019 – US$3,995 million) was on our U.S. business, $964 million (2019 – $1,178 million) was on our Canadian business, US$71 million (2019 – US$104 million) was on our Japan business and US$111 million (2019 – US$145 million) was related to Asia (other than Japan) and our run-off reinsurance business.

 

  

  

  

 

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Investment categories for variable contracts with guarantees

 

     

Variable contracts with guarantees, including variable annuities and variable life, are invested, at the policyholder’s discretion subject to contract limitations, in various fund types within the segregated fund accounts and other investments. The account balances by investment category are set out below.

 

        

As at December 31,

($ millions)
Investment category

 

2020

   

2019

 
     

Equity funds

  $ 47,348     $ 47,489  
     

Balanced funds

    42,414       42,448  
     

Bond funds

    11,944       11,967  
     

Money market funds

    2,113       1,732  
     

Other fixed interest rate investments

    1,992       1,975  
     

Total

  $   105,811     $   105,611  

Caution Related to Sensitivities

 

     

In the sections that follow, we provide sensitivities and risk exposure measures for certain risks. These include sensitivities due to specific changes in market prices and interest rate levels projected using internal models as at a specific date and are measured relative to a starting level reflecting the Company’s assets and liabilities at that date and the actuarial factors, investment activity and investment returns assumed in the determination of policy liabilities. The risk exposures measure the impact of changing one factor at a time and assume that all other factors remain unchanged. Actual results can differ significantly from these estimates for a variety of reasons including the interaction among these factors when more than one changes; changes in actuarial and investment return and future investment activity assumptions; actual experience differing from the assumptions, changes in business mix, effective tax rates and other market factors; and the general limitations of our internal models. For these reasons, the sensitivities should only be viewed as directional estimates of the underlying sensitivities for the respective factors based on the assumptions outlined below. Given the nature of these calculations, we cannot provide assurance that the actual impact on net income attributed to shareholders or on MLI’s LICAT total ratio will be as indicated. Market movements affect LICAT capital sensitivities both through income and other components of the regulatory capital framework. For example, LICAT is affected by changes to other comprehensive income.

Publicly Traded Equity Performance Risk Sensitivities and Exposure Measures

As outlined above, we have net exposure to equity risk through asset and liability mismatches; our variable annuity guarantee dynamic hedging strategy is not designed to completely offset the sensitivity of policy liabilities to all risks associated with the guarantees embedded in these products. The macro hedging strategy is designed to mitigate public equity risk arising from variable annuity guarantees not dynamically hedged and from other unhedged exposures in our insurance liabilities.

Changes in public equity prices may impact other items including, but not limited to, asset-based fees earned on assets under management and administration or policyholder account value, and estimated profits and amortization of deferred policy acquisition and other costs. These items are not hedged.

 

 

     

The table below shows the potential impact on net income attributed to shareholders resulting from an immediate 10%, 20% and 30% change in market values of publicly traded equities followed by a return to the expected level of growth assumed in the valuation of policy liabilities. If market values were to remain flat for an entire year, the potential impact would be roughly equivalent to an immediate decline in market values equal to the expected level of annual growth assumed in the valuation of policy liabilities. Further, if after market values dropped 10%, 20% or 30%, they continued to decline, remained flat, or grew more slowly than assumed in the valuation the potential impact on net income attributed to shareholders could be considerably more than shown. Refer to “Sensitivity of Earnings to Changes in Assumptions” for more information on the level of growth assumed and on the net income sensitivity to changes in these long-term assumptions. The potential impact is shown after taking into account the impact of the change in markets on the hedged assets. While we cannot reliably estimate the amount of the change in dynamically hedged variable annuity guarantee liabilities that will not be offset by the profit or loss on the dynamic hedge assets, we make certain assumptions for the purposes of estimating the impact on net income attributed to shareholders.

 

This estimate assumes that the performance of the dynamic hedging program would not completely offset the gain/loss from the dynamically hedged variable annuity guarantee liabilities. It assumes that the hedge assets are based on the actual position at the period end, and that equity hedges in the dynamic program are rebalanced at 5% intervals. In addition, we assume that the macro hedge assets are rebalanced in line with market changes.

     

 

It is also important to note that these estimates are illustrative, and that the dynamic and macro hedging programs may underperform these estimates, particularly during periods of high realized volatility and/or periods where both interest rates and equity market movements are unfavourable.

 

The Standards of Practice for the valuation of insurance contract liabilities and guidance published by the CIA constrain the investment return assumptions for public equities and certain ALDA assets based on historical return benchmarks for public equities. The potential impact on net income attributed to shareholders does not take into account possible changes to investment return assumptions resulting from the impact of declines in public equity market values on these historical return benchmarks.

 

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Potential immediate impact on net income attributed to shareholders arising from changes to public equity returns(1),(2),(3)

 

        

As at December 31, 2020

($ millions)

  -30%     -20%     -10%     +10%     +20%     +30%  
     

Underlying sensitivity to net income attributed to shareholders(4)

           
     

Variable annuity guarantees

  $ (3,150   $ (1,850   $ (800   $ 600     $    1,040     $    1,350  
     

General fund equity investments(5)

    (1,350     (840     (410     380       760       1,130  
     

Total underlying sensitivity before hedging

    (4,500     (2,690     (1,210     980       1,800       2,480  
     

Impact of macro and dynamic hedge assets(6)

    2,420       1,410       600       (620     (1,110     (1,480
     

Net potential impact on net income attributed to shareholders after impact of hedging

  $ (2,080   $ (1,280   $ (610   $ 360     $ 690     $ 1,000  
 
        

As at December 31, 2019

($ millions)

  -30%     -20%     -10%     +10%     +20%     +30%  
     

Underlying sensitivity to net income attributed to shareholders(4)

           
     

Variable annuity guarantees

  $ (3,270   $ (1,930   $ (860   $ 620     $ 1,060     $ 1,360  
     

General fund equity investments(5)

    (1,140     (720     (330     340       680       1,020  
     

Total underlying sensitivity before hedging

    (4,410     (2,650       (1,190     960       1,740       2,380  
     

Impact of macro and dynamic hedge assets(6)

    2,690       1,580       670         (580       (1,020       (1,340
     

Net potential impact on net income attributed to shareholders after impact of hedging

  $   (1,720   $   (1,070   $ (520   $ 380     $ 720     $ 1,040  
     

 

(1) See “Caution Related to Sensitivities” above.

(2) The tables above show the potential impact on net income attributed to shareholders resulting from an immediate 10%, 20% and 30% change in market values of publicly traded equities followed by a return to the expected level of growth assumed in the valuation of policy liabilities, excluding impacts from asset-based fees earned on assets under management and policyholder account value.

(3) Please refer to “Sensitivity of Earnings to Changes in Assumptions” section below for more information on the level of growth assumed and on the net income sensitivity to changes in these long-term assumptions.

(4) Defined as earnings sensitivity to a change in public equity markets including settlements on reinsurance contracts, but before the offset of hedge assets or other risk mitigants.

(5) This impact for general fund equity investments includes general fund investments supporting our policy liabilities, investment in seed money investments (in segregated and mutual funds made by Corporate and Other segment) and the impact on policy liabilities related to the projected future fee income on variable universal life and other unit linked products. The impact does not include: (i) any potential impact on public equity weightings; (ii) any gains or losses on AFS public equities held in the Corporate and Other segment; or (iii) any gains or losses on public equity investments held in Manulife Bank. The participating policy funds are largely self-supporting and generate no material impact on net income attributed to shareholders as a result of changes in equity markets.

(6) Includes the impact of rebalancing equity hedges in the macro and dynamic hedging program. The impact of dynamic hedge rebalancing represents the impact of rebalancing equity hedges for dynamically hedged variable annuity guarantee best estimate liabilities at 5% intervals but does not include any impact in respect of other sources of hedge ineffectiveness (e.g. fund tracking, realized volatility and equity, interest rate correlations different from expected among other factors).

 

  

  

  

  

  

Changes in equity markets impact our available and required components of the LICAT total ratio. The following table shows the potential impact to MLI’s LICAT total ratio resulting from changes in public equity market values.

Potential immediate impact on MLI’s LICAT total ratio arising from public equity returns different than the expected returns assumed in the valuation of policy liabilities (1),(2),(3)

 

    Impact on MLI’s LICAT total ratio  
Percentage points   -30%     -20%     -10%     +10%     +20%     +30%  

December 31, 2020

    (3     (1     (1                 (1

December 31, 2019

    (5     (3     (1     1       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 equity markets, as the impact on the quoted sensitivities is not considered to be material.

(2)

The potential impact is shown assuming that the change in value of the hedge assets does not completely offset the change in the dynamically hedged variable annuity guarantee liabilities. The estimated amount that would not be completely offset relates to our practices of not hedging the provisions for adverse deviation and of rebalancing equity hedges for dynamically hedged variable annuity liabilities at 5% intervals.

(3)

OSFI rules for segregated fund guarantees reflect full capital impacts of shocks over 20 quarters within a prescribed range. As such, the deterioration in equity markets could lead to further increases in capital requirements after the initial shock.

Interest Rate and Spread Risk Sensitivities and Exposure Measures

 

     

At December 31, 2020, we estimated the sensitivity of our net income attributed to shareholders to a 50 basis point parallel decline in interest rates to be neutral, and to a 50 basis point parallel increase in interest rates to be a charge of $100 million.

 

The table below shows the potential impact on net income attributed to shareholders from a 50 basis point parallel move in interest rates. This includes a change of 50 basis points in current government, swap and corporate rates for all maturities across all markets with no change in credit spreads between government, swap and corporate rates, and with a floor of zero on government rates where government rates are not currently negative, relative to the rates assumed in the valuation of policy liabilities, including embedded derivatives. For variable annuity guarantee liabilities that are dynamically hedged, it is assumed that interest rate hedges are rebalanced at 20 basis point intervals.

 

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As the sensitivity to a 50 basis point change in interest rates includes any associated change in the applicable reinvestment scenarios, the impact of changes to interest rates for less than, or more than 50 basis points is unlikely to be linear. Furthermore, our sensitivities are not consistent across all regions in which we operate, and the impact of yield curve changes will vary depending upon the geography where the change occurs. Reinvestment assumptions used in the valuation of policy liabilities tend to amplify the negative effects of a decrease in interest rates and dampen the positive effects of interest rate increases. This is because the reinvestment assumptions used in the valuation of our insurance liabilities are based on interest rate scenarios and calibration criteria set by the Canadian Actuarial Standards Board. Therefore, in any particular quarter, changes to the reinvestment assumptions are not fully aligned to changes in current market interest rates especially when there is a significant change in the shape of the interest rate curve. As a result, the impact from non-parallel movements may be materially different from the estimated impact of parallel movements. For example, if long-term interest rates increase more than short-term interest rates (sometimes referred to as a steepening of the yield curve) in North America, the decrease in the value of our swaps may be greater than the decrease in the value of our insurance liabilities. This could result in a charge to net income attributed to shareholders in the short-term even though the rising and steepening of the yield curve, if sustained, may have a positive long-term economic impact.

 

The interest rate and spread risk sensitivities are determined in isolation of each other and therefore do not reflect the combined impact of changes in government rates and credit spreads between government, swap and corporate rates occurring simultaneously. As a result, the impact of the summation of each individual sensitivity may be materially different from the impact of sensitivities to simultaneous changes in interest rate and spread risk.

 

The potential impact on net income attributed to shareholders does not take into account any future potential changes to our URR assumptions or calibration criteria for stochastic risk-free rates. At December 31, 2020, we estimated the sensitivity of our net income attributed to shareholders to a 10 basis point reduction in the URR in all geographies, and a corresponding change to stochastic risk-free modeling, to be a charge of $350 million (post-tax); and note that the impact of changes to the URR are not linear. The long-term URR for risk-free rates in Canada is prescribed at 3.05% and we use the same assumption for the U.S. Our assumption for Japan is 1.6%. The ASB is currently conducting another review of the URR with any changes expected to be announced and implemented in 2021.

 

The potential impact on net income attributable to shareholders does not take into account other potential impacts of lower interest rate levels, for example, increased strain on the sale of new business or lower interest earned on our surplus assets. The impact also does not reflect any unrealized gains or losses on AFS fixed income assets held in our Corporate and Other segment. Changes in the market value of these assets may provide a natural economic offset to the interest rate risk arising from our product liabilities. In order for there to also be an accounting offset, the Company would need to realize a portion of the AFS fixed income asset unrealized gains or losses. It is not certain we would realize any of the unrealized gains or losses available.

     

 

The impact does not reflect any potential effect of changing interest rates to the value of our ALDA assets. Rising interest rates could negatively impact the value of our ALDA assets (see “Critical Actuarial and Accounting Policies – Fair Value of Invested Assets”, below). More information on ALDA can be found under the section “Alternative Long-Duration Asset Performance Risk Sensitivities and Exposure Measures”, below.

Under LICAT, changes in unrealized gains or losses in our AFS bond portfolio resulting from interest rate shocks tend to dominate capital sensitivities. As a result, the reduction in interest rates improves LICAT total ratios and vice-versa.

 

      The following table shows the potential impact on net income attributed to shareholders including the change in the market value of AFS fixed income assets held in our Corporate and Other segment, which could be realized through the sale of these assets.

Potential impact on net income attributed to shareholders and MLI’s LICAT total ratio of an immediate parallel change in interest rates relative to rates assumed in the valuation of policy liabilities(1),(2),(3),(4)

 

             2020           2019    

 

 
         As at December 31,   -50bp     +50bp           -50bp     +50bp         
     

Net income attributed to shareholders ($ millions)

           
     

Excluding change in market value of AFS fixed income assets held in the Corporate and Other segment

  $ nil     $ (100     $  (100   $ (100  
     

From fair value changes in AFS fixed income assets held in the  Corporate and Other segment, if realized

      2,100         (1,900         1,700         (1,600  
               
   

MLI’s LICAT total ratio (Percentage points)

           
   

LICAT total ratio change in percentage points(5)

    8       (7             4       (4  
     

(1) See “Caution Related to Sensitivities” above. In addition, estimates exclude changes to the net actuarial gains/losses with respect to the Company’s pension obligations as a result of changes in interest rates, as the impact on the quoted sensitivities is not considered to be material.

(2) Includes guaranteed insurance and annuity products, including variable annuity contracts as well as adjustable benefit products where benefits are generally adjusted as interest rates and investment returns change, a portion of which have minimum credited rate guarantees. For adjustable benefit products subject to minimum rate guarantees, the sensitivities are based on the assumption that credited rates will be floored at the minimum.

(3) The amount of gain or loss that can be realized on AFS fixed income assets held in the Corporate and Other segment will depend on the aggregate amount of unrealized gain or loss.

(4) Sensitivities are based on projected asset and liability cash flows and the impact of realizing fair value changes in AFS fixed income is based on the holdings at the end of the period.

  

 

 

 

 

(5)

LICAT impacts include realized and unrealized fair value changes in AFS fixed income assets. LICAT impacts do not reflect the impact of the scenario switch discussed below.

 

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The following tables show the potential impact on net income attributed to shareholders resulting from a change in corporate spreads and swap spreads over government bond rates for all maturities across all markets with a floor of zero on the total interest rate, relative to the spreads assumed in the valuation of policy liabilities.

Potential impact on net income attributed to shareholders and MLI’s LICAT total ratio arising from changes to corporate spreads and swap spreads relative to spreads assumed in the valuation of policy liabilities(1),(2),(3)

 

         Corporate spreads(4),(5)   2020           2019  
         As at December 31,   -50bp     +50bp           -50bp     +50bp  
     

Net income attributed to shareholders ($ millions)

  $   (1,000   $   900       $   (800   $   800  
   

MLI’s LICAT total ratio (change in percentage points)(6)

    (4     4         (7     5  

 

         Swap spreads   2020           2019  
         As at December 31,   -20bp     +20bp           -20bp     +20bp  
     

Net income attributed to shareholders ($ millions)

  $   nil     $   nil       $   100     $   (100
   

MLI’s LICAT total ratio (change in percentage points)(6)

    nil       nil         nil       nil  

 

 

     

(1) See “Caution Related to Sensitivities” above.

(2) The impact on net income attributed to shareholders assumes no gains or losses are realized on our AFS fixed income assets held in the Corporate and Other segment and excludes the impact of changes in segregated fund bond values due to changes in credit spreads. The participating policy funds are largely self-supporting and generate no material impact on net income attributed to shareholders as a result of changes in corporate and swap spreads.

(3) Sensitivities are based on projected asset and liability cash flows.

(4) Corporate spreads are assumed to grade to the long-term average over five years.

(5) As the sensitivity to a 50 basis point decline in corporate spreads includes the impact of a change in deterministic reinvestment scenarios where applicable, the impact of changes to corporate spreads for less than, or more than, the amounts indicated are unlikely to be linear.

   

(6) LICAT impacts include realized and unrealized fair value change in AFS fixed income assets. Under LICAT, spread movements are determined from a selection of investment grade bond indices with BBB and better bonds for each jurisdiction. For LICAT, we use the following indices: FTSE TMX Canada All Corporate Bond Index, Barclays USD Liquid Investment Grade Corporate Index, and Nomura-BPI (Japan). LICAT impacts presented for corporate spreads do not reflect the impact of the scenario switch discussed below.

Swap spreads remain at low levels, and if they were to rise, this could generate material charges to net income attributed to shareholders.

LICAT Scenario Switch

Typically, a reduction in interest rates improves LICAT capital ratios and vice-versa. However, when interest rates decline past a certain threshold, reflecting the combined movement in risk-free rates and corporate spreads, a different prescribed interest rate stress scenario needs to be taken into account in the LICAT ratio calculation in accordance with OSFI guidelines for LICAT.

The LICAT guideline specifies four stress scenarios for interest rates and prescribes the methodology to determine the most adverse scenario to apply for each LICAT geographic region1 based on current market inputs and the Company’s balance sheet.

We estimate the potential impact of a switch in the scenarios would be approximately a one-time six percentage point decrease in MLI’s total LICAT ratio. Should a scenario switch be triggered in a LICAT geographic region, the full impact would be reflected immediately for non-participating products while the impact for participating products would be reflected over six quarters using a rolling average of interest rate risk capital, in line with the smoothing approach prescribed in the OSFI Advisory effective January 1, 2021.

The potential negative impact of a switch in scenarios is not reflected in the stated risk-free rate and corporate spread sensitivities, as it is a one-time impact. After this one-time event, further decreases in risk-free interest rates would continue to improve the LICAT capital position, similar to the sensitivity above.

The level of interest rates and corporate spreads that would trigger a switch in the scenarios is dependent on market conditions and movements in the Company’s asset and liability position. The scenario switch, if triggered, could reverse in response to subsequent increases in interest rates and/or corporate spreads.

Alternative Long-Duration Asset Performance Risk Sensitivities and Exposure Measures

      The following table shows the potential impact on net income attributed to shareholders resulting from an immediate 10% change in market values of ALDA followed by a return to the expected level of growth assumed in the valuation of policy liabilities. If market values were to remain flat for an entire year, the potential impact would be roughly equivalent to an immediate decline in market values equal to the expected level of annual growth assumed in the valuation of policy liabilities. Further, if after market values dropped 10% they continued to decline, remained flat, or grew more slowly than assumed in the valuation of policy liabilities, the potential impact on net income attributed to shareholders could be considerably more than shown. Refer to “Sensitivity of Earnings to Changes in Assumptions” below, for more information on the level of growth assumed and on the net income sensitivity to changes in these long-term assumptions.
     

 

ALDA includes commercial real estate, timber and farmland real estate, oil and gas direct holdings, and private equities, some of which relate to oil and gas.

 

 

 

1 

LICAT geographic locations include North America, the United Kingdom, Europe, Japan, and Other Region.

 

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Potential impact on net income attributed to shareholders and MLI LICAT arising from changes in ALDA returns relative to returns assumed in the valuation of policy liabilities(1),(2),(3),(4),(5),(6)

 

        

As at December 31,

($ millions)

  2020           2019  
        -10%       +10%         -10%       +10%  
     

Net income attributed to shareholders

         
     

Real estate, agriculture and timber assets

    $  (1,600   $ 1,400         $  (1,300   $ 1,200  
     

Private equities and other ALDA

    (2,000     1,900         (1,800     1,700  
     

Total

    $  (3,600   $   3,300         $  (3,100   $   2,900  
   

MLI’s LICAT total ratio (change in percentage points)

    (5     4         (5     4  

 

     

(1) See “Caution Related to Sensitivities ” above.

(2) This impact is calculated as at a point-in-time impact and does not include: (i) any potential impact on ALDA weightings or (ii) any gains or losses on ALDA held in the Corporate and Other segment.

(3) The participating policy funds are largely self-supporting and generate no material impact on net income attributed to shareholders as a result of changes in ALDA returns. For some classes of ALDA, where there is not an appropriate long-term benchmark available, the return assumptions used in valuation are not permitted by the Standards of Practice and CIA guidance to result in a lower reserve than an assumption based on a historical return benchmark for public equities in the same jurisdiction.

(4) Net income impact does not consider any impact of the market correction on assumed future return assumptions.

(5) Please refer to “Sensitivity of Earnings to Changes in Assumptions” section below for more information on the level of growth assumed and on the net income sensitivity to changes in these long-term assumptions.

(6) The impact of changes to the portfolio asset mix supporting our North American legacy businesses are reflected in the sensitivities when the changes take place.

 

Foreign Exchange Risk Sensitivities and Exposure Measures

     

We generally match the currency of our assets with the currency of the insurance and investment contract liabilities they support, with the objective of mitigating risk of loss arising from foreign exchange rate changes. As at December 31, 2020, we did not have a material unmatched currency exposure.

The following table shows the potential impact on core earnings of a 10% change in the value of the Canadian dollar relative to our other key operating currencies.

Potential impact on core earnings of changes in foreign exchange rates(1),(2)

 

    2020           2019  

As at December 31,

($ millions)

  +10%
strengthening
    -10%
weakening
          +10%
strengthening
    -10%
weakening
 

10% change in the Canadian dollar relative to the U.S. dollar and the Hong Kong dollar

    $  (390   $   390         $  (360   $   360  

10% change in the Canadian dollar relative to the Japanese yen

    (40     40         (50     50  

 

(1)

This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.

(2)

See “Caution Related to Sensitivities” above.

LICAT regulatory capital ratios are also sensitive to the fluctuations in the Canadian dollar relative to our other key operating currencies. The direction and materiality of this sensitivity varies across various capital metrics.

Liquidity Risk Exposure Strategy

     

We manage liquidity levels of the consolidated group and key subsidiaries against established thresholds. These thresholds are based on liquidity stress scenarios over different time horizons.

 

Increased use of derivatives for hedging purposes has necessitated greater emphasis on measurement and management of contingent liquidity risk related to these instruments, in particular the movement of “over-the-counter” derivatives to central clearing in the U.S. and Japan places an emphasis on cash as the primary source of liquidity as opposed to security holdings. The market value of our derivative portfolio is therefore regularly stress tested to assess the potential collateral and cash settlement requirements under various market conditions.

Manulife Bank (the “Bank”) has a standalone liquidity risk management framework. The framework includes stress testing, cash flow modeling, a funding plan and a contingency plan. The Bank has an established securitization infrastructure which enables the Bank to access a range of funding and liquidity sources. The Bank models extreme but plausible stress scenarios that demonstrate that the Bank has a sufficient pool of highly liquid money market securities and holdings of sovereign bonds, near-sovereign bonds and other liquid marketable securities, which when combined with the Bank’s capacity to securitize residential mortgage assets provides sufficient liquidity to meet potential requirements under these stress scenarios.

Similarly, Global Wealth and Asset Management has a standalone liquidity risk management framework for the business managing assets or manufacturing investment products for third-party clients. We maintain fiduciary standards to ensure that client and regulatory expectations are met in relation to the liquidity risks taken within each investment. Additionally, we regularly monitor and review the liquidity of our mutual funds and investment products as part of our ongoing risk management practices.

 

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Market Risk Factors

Our most significant source of publicly traded equity risk arises from equity-linked products with guarantees, where the guarantees are linked to the performance of the underlying funds.

 

 

Publicly traded equity performance risk arises from a variety of sources, including guarantees associated with equity-linked investments such as variable annuity and segregated fund products, general fund investments in publicly traded equities and mutual funds backing general fund product liabilities.

 

Market conditions resulting in reductions in the asset value we manage has an adverse effect on the revenues and profitability of our investment management business, which depends on fees related primarily to the values of assets under management and administration.

 

Guaranteed benefits of Variable Annuity and Segregated Funds are contingent and payable upon death, maturity, permitted withdrawal or annuitization. If equity markets decline or even if they increase by an amount lower than that assumed in our actuarial valuation, additional liabilities may need to be established to cover the contingent liabilities, resulting in a reduction in net income attributed to shareholders and regulatory capital ratios. Further, if equity markets do not recover to the amount of the guarantees, by the dates the liabilities are due, the accrued liabilities will need to be paid out in cash. In addition, sustained flat or declining public equity markets would likely reduce asset-based fee revenues related to variable annuities and segregated funds with guarantees and related to other wealth and insurance products.

 

Where publicly traded equity investments are used to support general fund product liabilities, the policy valuation incorporates projected investment returns on these assets. If actual returns are lower than the expected returns, the investment losses will reduce net income attributed to shareholders.

 

For products where the investment strategy applied to future cash flows in the policy valuation includes investing a specified portion of future cash flows in publicly traded equities, a decline in the value of publicly traded equities relative to other assets could require us to change the investment mix assumed for future cash flows, which may increase policy liabilities and reduce net income attributed to shareholders. A reduction in the outlook for expected future returns for publicly traded equities, which could result from a fundamental change in future expected economic growth, would increase policy liabilities and reduce net income attributed to shareholders. Furthermore, to the extent publicly traded equities are held as AFS, other than temporary impairments that arise will reduce income.

 

Expected long-term annual market growth assumptions for public equities for key markets are based on long-term historical observed experience. See Critical Actuarial and Accounting Policies for the rates used in the stochastic valuation of our segregated fund guarantee business. The calibration of the economic scenario generators that are used to value segregated fund guarantee business complies with current CIA Standards of Practice for the valuation of these products. Implicit margins, determined through stochastic valuation processes, lower net yields used to establish policy liabilities. Assumptions used for public equities backing liabilities are also developed based on historical experience but are constrained by different CIA Standards of Practice and differ slightly from those used in stochastic valuation. Alternative asset return assumptions vary based on asset class but are largely consistent, after application of valuation margins and differences in taxation, with returns assumed for public equities.

We experience interest rate and spread risk within the general fund primarily due to the uncertainty of future returns on investments.

 

 

Interest rate and spread risk arises from general fund guaranteed benefit products, general fund adjustable benefit products with minimum rate guarantees, general fund products with guaranteed surrender values, segregated fund products with minimum benefit guarantees and from surplus fixed income investments. The risk arises within the general fund primarily due to the uncertainty of future returns on investments to be made as assets mature and as recurring premiums are received and invested or reinvested to support longer dated liabilities. Interest rate risk also arises due to minimum rate guarantees and guaranteed surrender values on products where investment returns are generally passed through to policyholders. A rapid rise in interest rates may also result in losses attributable to early liquidation of fixed income instruments supporting contractual surrender benefits, if customers surrender to take advantage of higher interest rates on offer elsewhere. In contrast, in a lower interest rate environment, borrowers may prepay or redeem fixed income securities, mortgages and loans with greater frequency in order to borrow at lower market rates, potentially reducing the returns on our investment portfolio, if there are no make whole conditions. Substantially all our fixed income securities, mortgages and loans portfolio include make whole conditions.

 

The valuation of policy liabilities reflects assumptions for the yield on future investments and the projected cash flows associated with interest rate hedges. A general decline in interest rates, without a change in corporate bond spreads and swap spreads, will reduce the assumed yield on future investments but favourably impact the value of lengthening interest rate hedges. Conversely, a general increase in interest rates, without a change in corporate bond spreads and swap spreads, will increase the assumed yield on future investments, but unfavourably impact the value of lengthening interest rate hedges. The Company’s disclosed estimated impact from interest rate movements reflects a parallel increase and decrease in interest rates of specific amounts. The impact from non-parallel movements may be different from the estimated impact of parallel movements. For further information on interest rate scenarios refer to “Interest Rate and Spread Risk Sensitivities and Exposure Measures”. In addition, decreases in corporate bond spreads or increases in swap spreads should generally result in an increase in policy liabilities and a reduction in net income attributed to shareholders, while an increase in corporate bond spreads or a decrease in swap spreads should generally have the opposite impact. The impact of changes in interest rates and in spreads may be partially offset by changes to credited rates on adjustable products that pass-through investment returns to policyholders.

 

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For segregated fund and variable annuity products that contain investment guarantees in the form of benefit guarantees, a sustained increase in interest rate volatility or a decline in interest rates would increase the costs of hedging the benefit guarantees provided. The impact of changes in interest rates are managed within the Variable Annuity dynamic hedging program.

We experience ALDA performance risk when actual returns are lower than expected returns.

 

 

ALDA performance risk arises from general fund investments in directly-owned real estate, timber properties, farmland properties, infrastructure, oil and gas properties, and private equities.

 

Where these assets are used to support policy liabilities, the policy valuation incorporates projected investment returns on these assets. ALDA assumptions vary by asset class and generally have a similar impact on policy liabilities as public equities would. If actual returns are lower than the expected returns, there will be a negative impact to the net income attributed to shareholders. A reduction in the outlook for expected future returns for ALDA, which could result from a variety of factors such as a fundamental change in future expected economic growth or declining risk premiums due to increased competition for such assets, would increase policy liabilities and reduce net income attributed to shareholders. Further, if returns on certain external asset benchmarks used to determine permissible assumed returns under the CIA Standards of Practice are lower than expected, expected future returns will be adjusted accordingly and the Company’s policy liabilities will increase, reducing net income attributed to shareholders.

 

The value of oil and gas assets could be adversely affected by declines in energy prices as well as by a number of other factors including production declines, uncertainties associated with estimating oil and natural gas reserves, difficult economic conditions, changes in consumer preferences to transition to a lower carbon economy, competition from renewable energy providers and geopolitical events. Changes in government regulation of the oil and gas industry, including environmental regulation, carbon taxes and changes in the royalty rates resulting from provincial royalty reviews, could also adversely affect the value of our oil and gas investments.

 

Difficult economic conditions could result in higher vacancy, lower rental rates and lower demand for real estate investments, all of which would adversely impact the value of our real estate investments. Difficult economic conditions could also prevent companies in which we have made private equity investments from achieving their business plans and could cause the value of these investments to fall, or even cause the companies to fail. Our commercial real estate investments may be negatively impacted by the trends solidified by the COVID-19 pandemic, including the digitization of work and the transformation of physical retail. Declining valuation multiples in the public equity market would also likely cause values to decline in our private equity portfolio. The timing and amount of investment income from private equity investments is difficult to predict, and investment income from these investments can vary from quarter to quarter.

 

Our timberland and farmland holdings are exposed to natural risks, such as prolonged drought, wildfires, insects, windstorms, flooding, and climate change. We are generally not insured for these types of risks but seek to mitigate their impact through portfolio diversification and prudent operating practices.

 

More broadly, a rising interest rate environment could result in the value of some of our ALDA investments declining, particularly those with fixed contractual cash flows such as real estate.

 

The negative impact of changes in these factors can take time to be fully reflected in the valuations of private investments, including ALDA, especially if the change is large and rapid, as market participants adjust their forecasts and better understand the potential medium to long-term impact of such changes. As a result, valuation changes in any given period may reflect the delayed impact of events that occurred in prior periods.

 

We rely on a diversified portfolio of ALDA assets to generate relatively stable investment returns. Diversification benefits may be reduced at times, especially during a period of economic stress, which would adversely affect portfolio returns.

 

The Company determines investment return assumptions for ALDA in accordance with the Standards of Practice for the valuation of insurance contract liabilities and guidance published by the CIA. The guidance requires that the investment return assumption for these assets should not be higher than the historical long-term average returns of an appropriate broad-based index. Where such experience is not available, the investment return assumption for these assets should not result in a lower reserve than an assumption based on a historical-return benchmark for public equities in the same jurisdiction. As a result, the impact of changes in the historical returns for public equity benchmarks may result in an update to our investment return assumptions for ALDA.

Our liabilities are valued based on an assumed asset investment strategy over the long-term.

 

 

We develop an investment strategy for the assets that back our liabilities. The strategy involves making assumptions on the kind of assets in which we will invest and the returns such assets will generate.

 

We may not be able to implement our investment strategy as intended due to a lack of assets available at the returns we assume. This may result in a change in investment strategy and/or assumed future returns, thus adversely impacting our financial results.

 

From time to time we may decide to adjust our portfolio asset mix which may result in adverse impacts to our financial results for one or more periods.

We experience foreign exchange risk as a substantial portion of our business is transacted in currencies other than Canadian dollars.

 

 

Our financial results are reported in Canadian dollars. A substantial portion of our business is transacted in currencies other than Canadian dollars, mainly U.S. dollars, Hong Kong dollars and Japanese yen. If the Canadian dollar strengthens relative to these currencies, net income attributed to shareholders would decline and our reported shareholders’ equity would decline. A weakening of the Canadian dollar against the foreign currencies in which we do business would have the opposite effect and would increase net income attributed to shareholders and shareholders’ equity.

 

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The Company’s hedging strategies will not fully reduce the market risks related to the product guarantees and fees being hedged, hedging costs may increase and the hedging strategies expose the Company to additional risks.

 

 

Our hedging strategies rely on the execution of derivative transactions in a timely manner. Market conditions can limit availability of hedging instruments, requiring us to post additional collateral, and can further increase the costs of executing derivative transactions. Therefore, hedging costs and the effectiveness of the strategy may be negatively impacted if markets for these instruments become illiquid. The Company is subject to the risk of increased funding and collateral demands which may become significant as equity markets increase.

 

The Company is also subject to counterparty risks arising from the derivative instruments and to the risk of increased funding and collateral demands which may become significant as equity markets and interest rates increase. The strategies are highly dependent on complex systems and mathematical models that are subject to error and rely on forward-looking long-term assumptions that may prove inaccurate, and which rely on sophisticated infrastructure and personnel which may fail or be unavailable at critical times. Due to the complexity of the strategies, there may be additional unidentified risks that may negatively impact our business and future financial results. In addition, rising equity markets and interest rates that would otherwise result in profits on variable annuities will be offset by losses from our hedging positions. For further information pertaining to counterparty risks, refer to the risk factor “If a counterparty fails to fulfill its obligations, we may be exposed to risks we had sought to mitigate”.

 

Under certain market conditions, which include a sustained increase in realized equity and interest rate volatilities, a decline in interest rates, or an increase in the correlation between equity returns and interest rate declines, the costs of hedging the benefit guarantees provided in variable annuities may increase or become uneconomic. In addition, there can be no assurance that our dynamic hedging strategy will fully offset the risks arising from the variable annuities being hedged.

 

Policy liabilities for variable annuity guarantees are determined using long-term forward-looking estimates of volatilities. These long-term forward-looking volatilities assumed for policy liabilities meet the CIA calibration standards. To the extent that realized equity or interest rate volatilities in any quarter exceed the assumed long-term volatilities, or correlations between interest rate changes and equity returns are higher, there is a risk that rebalancing will be greater and more frequent, resulting in higher hedging costs.

 

The level of guarantee claims returns or other benefits ultimately paid will be impacted by policyholder longevity and policyholder behaviour including the timing and amount of withdrawals, lapses, fund transfers and contributions. The sensitivity of liability values to equity market and interest rate movements that we hedge are based on long-term expectations for longevity and policyholder behaviour since the impact of actual policyholder longevity and policyholder behaviour variances cannot be hedged using capital markets instruments. The efficiency of our market risk hedging is directly affected by accuracy of the assumptions related to policyholder longevity and policyholder behaviour.

Changes in market interest rates may impact our net income attributed to shareholders and capital ratios.

 

 

A prolonged low or negative interest rate environment may result in charges related to lower fixed income reinvestment assumptions and an increase in new business strain until products are repositioned for the lower rate environment. Other potential consequences of low interest rates include:

 

  ¡   

Low interest rates could negatively impact sales;

  ¡   

Lower risk-free rates tend to increase the cost of hedging, and as a result the offering of guarantees could become uneconomic;

  ¡   

The reinvestment of cash flows into low yielding bonds could result in lower future earnings due to lower returns on surplus and General Account assets supporting in-force liabilities, and due to guarantees embedded in products including minimum guaranteed rates in participating and adjustable products;

  ¡   

A lower interest rate environment could be correlated with other macro-economic factors including unfavourable economic growth and lower returns on other asset classes;

  ¡   

Lower interest rates could contribute to potential impairments of goodwill;

  ¡   

Lower interest rates could lead to lower mean bond parameters used for the stochastic valuation of segregated fund guarantees, resulting in higher policy liabilities;

  ¡   

Lower interest rates would also reduce expected earnings on in-force policies;

  ¡   

A prolonged low or negative interest environment may also result in the ASB lowering the promulgated URR and require us to increase our provisions;

  ¡   

Lower interest rates could also trigger a switch to a more adverse prescribed interest stress scenario, increasing LICAT capital. See “LICAT Scenario Switch” above;

  ¡   

The difference between the current investable returns and the returns used in pricing new business are generally capitalized when new business is written. Lower interest rates result in higher new business strain until products are re-priced or interest rates increase; and

  ¡   

Fixed income reinvestment rates other than the URR are based on current market rates. The net income sensitivity to changes in current rates is outlined in the section “Interest Rate and Spread Risk Sensitivities and Exposure Measures” above.

 

 

A rapid rise in interest rates may also result in losses attributable to early liquidation of fixed income instruments supporting contractual surrender benefits if customers surrender to take advantage of higher interest rates on offer elsewhere.

 

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With the global interest rate benchmark reform where LIBOR / IBORs are expected to be discontinued beyond 2021 to mid- 2023 or reformed, the transition to alternative reference rates may adversely impact the valuation of our IBOR-based financial instruments.

 

 

Manulife holds different types of instruments, including derivatives, bonds, loans and other floating rate instruments that reference LIBOR (London Interbank Offered Rate) or other Interbank Offered Rates (IBORs). A number of IBORs are either being reformed to be more robust and reliable or are being discontinued. As previously announced by the U.K. Financial Conduct Authority (FCA), the FCA will no longer compel panel banks to submit rate information used to determine LIBOR post 2021. Further to that announcement, on November 30, 2020, the ICE Benchmark Administration, the LIBOR’s Administrator, proposed plans to extend the cessation of the most widely used USD LIBOR tenors (overnight, 1-month, 3-month, 6-month, 12-month) to mid-2023 from year end 2021. To address the increased risk that LIBOR may not exist beyond 2021 to mid-2023, regulatory authorities and public and private sector working groups in different jurisdictions have been considering alternative reference rates to replace or be used alongside certain IBORs. For example, the Secured Overnight Financing Rate (SOFR) has been identified to replace USD LIBOR and is being published by the Federal Reserve Bank of New York, while an enhanced Canadian Overnight Repo Rate Average (CORRA) published by the Bank of Canada has been chosen to exist alongside certain tenors of the Canadian Dollar Offered Rate (CDOR).

 

At this time, we cannot predict how markets will respond to these new rates, and we cannot predict the effect of any changes to or discontinuation of LIBOR / IBORs on new or existing financial instruments to which we have exposure.

 

To ensure a timely transition to alternative reference rates, Manulife has established an enterprise-wide program and governance structure across functions to identify, measure, monitor and manage financial and non-financial risks of transition. We monitor regulatory guidance and keep pace with developments such as the transition to SOFR discounting by clearing houses in early 4Q20. The extension of specific USD LIBOR tenors to mid-2023 allows more time for Manulife to address LIBOR legacy contracts with inadequate fallback language. In addition, the deferral provides an opportunity to ensure required updates to key items such as IT systems and business processes are addressed before the end of 2021 for certain IBOR transition initiatives.

 

Any changes to or discontinuation of LIBOR / IBOR or change to an alternative reference rate may adversely affect the valuation of our existing interest-rate linked and derivatives securities we hold, the effectiveness of those derivatives in mitigating our risks, securities we have issued, or other assets, liabilities and other contractual rights and obligations whose value is tied to LIBOR / IBOR or to a LIBOR / IBOR alternative. Furthermore, depending on the nature of the alternative reference rate, we may become exposed to additional risks from other aspects of the business, including product design, pricing and models. Any change to or discontinuation of similar benchmark rates could have similar effects.

Liquidity risk is impacted by various factors, including but not limited to, capital and credit market conditions, re-pricing risk on letters of credit, collateral pledging obligations, and reliance on confidence sensitive deposits.

 

 

Adverse market conditions may significantly affect our liquidity risk.

 

  ¡   

Reduced asset liquidity may restrict our ability to sell certain types of assets for cash without taking significant losses. If providers of credit preserve their capital, our access to borrowing from banks and others or access to other types of credit such as letters of credit, may be reduced. If investors have a negative perception of our creditworthiness, this may reduce access to wholesale borrowing in the debt capital markets or increase borrowing costs.

  ¡   

Liquid assets are required to pledge as collateral to support activities such as the use of derivatives for hedging purposes and to cover cash settlement associated with such derivatives.

  ¡   

The principal sources of our liquidity are cash, insurance and annuity premiums, fee income earned on AUM, cash flow from our investment portfolios, and our assets that are readily convertible into cash, including money market securities. The issuance of long-term debt, common and preferred shares and other capital securities may also increase our available liquid assets or be required to replace certain maturing or callable liabilities. In the event we seek additional financing, the availability and terms of such financing will depend on a variety of factors including market conditions, the availability of credit to the financial services industry, our credit ratings and credit capacity, as well as the possibility that customers, lenders or investors could develop a negative perception of our long-term or short-term financial prospects if we incur large financial losses or if the level of our business activity decreases due to a significant market downturn.

 

 

Increased cleared derivative transactions coupled with margin rules on non-cleared derivatives could adversely impact our liquidity risk.

 

  ¡   

Over time our existing over the counter derivatives will migrate to clearing houses, or the Company and its counterparties may have the right to cancel derivative contracts after specific dates or in certain situations such as a ratings downgrade, which could accelerate the transition to clearing houses. Cleared derivatives are subject to both initial and variation margin requirements, and a more restrictive set of eligible collateral than non-cleared derivatives.

  ¡   

In addition, variation margin rules for non-cleared derivatives (including eligible collateral restrictions) have further increased our liquidity risk. Initial margin rules for non-cleared derivatives taking effect in September 2021 are also expected to increase our collateral pledging requirement.

 

 

We are exposed to re-pricing risk on letters of credit.

 

  ¡   

In the normal course of business, third-party banks issue letters of credit on our behalf. In lieu of posting collateral, our businesses utilize letters of credit for which third parties are the beneficiaries, as well as for affiliate reinsurance transactions between subsidiaries of MFC. Letters of credit and letters of credit facilities must be renewed periodically. At time of renewal, the Company is exposed to re-pricing risk and under adverse conditions increases in costs may be realized. In the most extreme

 

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scenarios, letters of credit capacity could become constrained due to non-renewals which would restrict our flexibility to manage capital. This could negatively impact our ability to meet local capital requirements or our sales of products in jurisdictions in which our operating companies have been affected. As at December 31, 2020, letters of credit for which third parties are beneficiaries, in the amount of $103 million, were outstanding. There were no assets pledged against these outstanding letters of credit as at December 31, 2020.

 

 

Our obligations to pledge collateral or make payments related to declines in value of specified assets may adversely affect our liquidity.

 

  ¡   

In the normal course of business, we are obligated to pledge assets to comply with jurisdictional regulatory and other requirements including collateral pledged in relation to derivative contracts and assets held as collateral for repurchase funding agreements. The amount of collateral we may be required to post under these agreements, and the amount of payments we are required to make to our counterparties, may increase under certain circumstances, including a sustained or continued decline in the value of our derivative contracts. Such additional collateral requirements and payments could have an adverse effect on our liquidity. As at December 31, 2020, total pledged assets were $10,362 million, compared with $5,844 million in 2019.

 

 

Our bank subsidiary relies on confidence sensitive deposits.

 

  ¡   

Manulife Bank is a wholly owned subsidiary of our Canadian life insurance operating company, MLI. The Bank is principally funded by retail deposits. A real or perceived problem with the Bank or its parent companies could result in a loss of confidence in the Bank’s ability to meet its obligations, which in turn may trigger a significant withdrawal of deposit funds. A substantial portion of the Bank’s deposits are demand deposits that can be withdrawn at any time, while the majority of the Bank’s assets are first residential mortgages in the form of home equity lines of credit, which represent long-term funding obligations. If deposit withdrawal speeds exceed our extreme stress test assumptions the Bank may be forced to sell assets at a loss to third parties or call the home equity lines of credit.

The declaration and payment of dividends and the amount thereof is subject to change.

 

 

The holders of common shares are entitled to receive dividends as and when declared by the Board of Directors of MFC, subject to the preference of the holders of Class A Shares, Class 1 Shares, Class B Shares (collectively, the “Preferred Shares”) and any other shares ranking senior to the common shares with respect to priority in payment of dividends. The declaration and payment of dividends and the amount thereof is subject to the discretion of the Board of Directors of MFC and is dependent upon the results of operations, financial condition, cash requirements and future prospects of, and regulatory and contractual restrictions on the payment of dividends by MFC and other factors deemed relevant by the Board of Directors of MFC. Although MFC has historically declared quarterly cash dividends on the common shares, MFC is not required to do so and the Board of Directors of MFC may reduce, defer or eliminate MFC’s common share dividend in the future.

 

The foregoing risk disclosure in respect of the declaration and payment of dividends on the common shares applies equally in respect of the declaration and payment of dividends on the Preferred Shares, notwithstanding that the Preferred Shares have a fixed rate of dividend.

 

See “Government Regulation” and “Dividends” in MFC’s Annual Information Form dated February 10, 2021 for a summary of additional statutory and contractual restrictions concerning the declaration of dividends by MFC.

Credit Risk

Credit risk is the risk of loss due to the inability or unwillingness of a borrower or counterparty to fulfill its payment obligations.

Please read below for details on factors that could impact our level of credit risk and the strategies used to manage this risk:

Credit Risk Management Strategy

Credit risk is governed by the Credit Committee which oversees the overall credit risk management program. The Company has established objectives for overall quality and diversification of our general fund investment portfolio and criteria for the selection of counterparties, including derivative counterparties, reinsurers and insurance providers. Our policies establish exposure limits by borrower, corporate connection, quality rating, industry, and geographic region, and govern the usage of credit derivatives. Corporate connection limits vary according to risk rating. Our general fund fixed income investments are primarily public and private investment grade bonds and commercial mortgages. We have a program for selling Credit Default Swaps (“CDS”) that employs a highly selective, diversified and conservative approach. CDS decisions follow the same underwriting standards as our cash bond portfolio and the addition of this asset class allows us to better diversify our overall credit portfolio.

Our credit granting units follow a defined evaluation process that provides an objective assessment of credit proposals. We assign a risk rating, based on a standardized 22-point scale consistent with those of external rating agencies, following a detailed examination of the borrower that includes a review of business strategy, market competitiveness, industry trends, financial strength, access to funds, and other risks facing the counterparty. We assess and update risk ratings regularly. For additional input to the process, we also assess credit risks using a variety of industry standard market-based tools and metrics. We map our risk ratings to pre-established probabilities of default and loss given defaults, based on historical industry and Company experience, and to resulting default costs.

We establish delegated credit approval authorities and make credit decisions on a case-by-case basis at a management level appropriate to the size and risk level of the transaction, based on the delegated authorities that vary according to risk rating. Major credit decisions are approved by the Credit Committee and the largest decisions are approved by the CEO and, in certain cases, by the Board of Directors.

 

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We limit the types of authorized derivatives and applications and require pre-approval of all derivative application strategies and regular monitoring of the effectiveness of derivative strategies. Derivative counterparty exposure limits are established based on a minimum acceptable counterparty credit rating (generally A- from internationally recognized rating agencies). We measure derivative counterparty exposure as net potential credit exposure, which takes into consideration mark-to-market values of all transactions with each counterparty, net of any collateral held, and an allowance to reflect future potential exposure. Reinsurance counterparty exposure is measured reflecting the level of ceded liabilities net of collateral held. The creditworthiness of all reinsurance counterparties is reviewed internally on a regular basis.

Regular reviews of the credits within the various portfolios are undertaken with the goal of identifying changes to credit quality and, where appropriate, taking corrective action. Prompt identification of problem credits is a key objective.

We establish an allowance for losses on a loan when it becomes impaired as a result of deterioration in credit quality, to the extent there is no longer assurance of timely realization of the carrying value of the loan and related investment income. We reduce the carrying value of an impaired loan to its estimated net realizable value when we establish the allowance. We establish an allowance for losses on reinsurance contracts when a reinsurance counterparty becomes unable or unwilling to fulfill its contractual obligations. We base the allowance for loss on current recoverables and ceded policy liabilities. There is no assurance that the allowance for losses will be adequate to cover future potential losses or that additional allowances or asset write-downs will not be required.

Policy liabilities include general provisions for credit losses from future asset impairments.

Our credit policies, procedures and investment strategies are established under a strong governance framework and are designed to ensure that risks are identified, measured and monitored consistent with our risk appetite. We seek to actively manage credit exposure in our investment portfolio to reduce risk and minimize losses, and derivative counterparty exposure is managed proactively. However, we could experience volatility on a quarterly basis and losses could potentially rise above long-term expected and historical levels.

Credit Risk Exposure Measures

Allowances for losses on loans are established taking into consideration normal historical credit loss levels and future expectations, with an allowance for adverse deviations. Additionally, we make general provisions for credit losses from future asset impairments in the determination of policy liabilities. The amount of the provision for credit losses included in policy liabilities is established through regular monitoring of all credit related exposures, considering such information as general market conditions, industry and borrower specific credit events and any other relevant trends or conditions. To the extent that an asset is written off, or disposed of, any allowance and general provisions for credit losses are released.

Our general provision for credit losses included in policyholder liabilities as at December 31, 2020 was $4,387 million compared to $3,959 million as at December 31, 2019. This provision represents 1.7% of our fixed income assets1 supporting policy liabilities reported on our Consolidated Statements of Financial Position as at December 31, 2020.

As at December 31, 2020 and December 31, 2019, the impact of a 50% increase in fixed income credit default rates over the next year in excess of the rates assumed in policy liabilities, would reduce net income attributed to shareholders by $80 million and $69 million, respectively.

Credit downgrades of fixed income investments would adversely impact our regulatory capital, as required capital levels for these investments are based on the credit quality of each instrument. In addition, credit downgrades could also lead to a higher general provision for credit losses than had been assumed in policy liabilities, resulting in an increase in policy liabilities and a reduction in net income attributed to shareholders. The estimated impact of a one-notch2 ratings downgrade across 25% of fixed income assets would result in an increase to policy liabilities and a decrease to our net income attributed to shareholders of $350 million post-tax. This ratings downgrade would result in a one percentage point reduction to our LICAT ratio.

Approximately 60% of the impact on our policy liabilities and net income attributed to shareholders relates to fixed income assets rated BBB and below.

The table below shows net impaired assets and allowances for loan losses.

Net Impaired Assets and Loan Losses

 

As at December 31,

($ millions, unless otherwise stated)

  2020     2019  

Net impaired fixed income assets

  $ 295     $ 234  

Net impaired fixed income assets as a % of total invested assets

      0.072%         0.062%  

Allowance for loan losses

  $ 107     $ 20  

Credit Risk Factors

Borrower or counterparty defaults or downgrades could adversely impact our earnings.

Worsening regional and global economic conditions could result in borrower or counterparty defaults or downgrades and could lead to increased provisions or impairments related to our general fund invested assets and off-balance sheet derivative financial instruments, and

 

1 

Includes debt securities, private placements and mortgages.

2 

A one-notch downgrade is equivalent to a ratings downgrade from A to A- or BBB- to BB+.

 

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an increase in provisions for future credit impairments to be included in our policy liabilities. Any of our reinsurance providers being unable or unwilling to fulfill their contractual obligations related to the liabilities we cede to them could lead to an increase in policy liabilities.

Our invested assets primarily include investment grade bonds, private placements, commercial mortgages, asset-backed securities, and consumer loans. These assets are generally carried at fair value, but changes in value that arise from a credit-related impairment are recorded as a charge against income. The return assumptions incorporated in actuarial liabilities include an expected level of future asset impairments. There is a risk that actual impairments will exceed the assumed level of impairments in the future and earnings could be adversely impacted.

Volatility may arise from defaults and downgrade charges on our invested assets and as a result, losses could potentially rise above long-term expected levels. Net impaired fixed income assets were $295 million, representing 0.07% of total general fund invested assets as at December 31, 2020, compared with $234 million, representing 0.06% of total general fund invested assets as at December 31, 2019.

If a counterparty fails to fulfill its obligations, we may be exposed to risks we had sought to mitigate.

 

 

The Company uses derivative financial instruments to mitigate exposures to public equity, foreign currency, interest rate and other market risks arising from on-balance sheet financial instruments, guarantees related to variable annuity products, selected anticipated transactions and certain other guarantees. The Company may be exposed to counterparty risk if a counterparty fails to pay amounts owed to us or otherwise perform its obligations to us. Counterparty risk increases during economic downturns because the probability of default increases for most counterparties. If any of these counterparties default, we may not be able to recover the amounts due from that counterparty. As at December 31, 2020, the largest single counterparty exposure, without taking into account the impact of master netting agreements or the benefit of collateral held, was $4,110 million (2019 – $3,047 million). The net exposure to this counterparty, after taking into account master netting agreements and the fair value of collateral held, was nil (2019 – nil). As at December 31, 2020, the total maximum credit exposure related to derivatives across all counterparties, without taking into account the impact of master netting agreements and the benefit of collateral held, was $28,685 million (2019 – $20,144 million) compared with $119 million after taking into account master netting agreements and the benefit of fair value of collateral held (2019 – $67 million). The exposure to any counterparty would grow if, upon the counterparty’s default, markets moved such that our derivatives with that counterparty gain in value. Until we are able to replace that derivative with another counterparty, the gain on the derivatives subsequent to the counterparty’s default would not be backed by collateral.

 

The Company reinsures a portion of the business we enter into; however, we remain legally liable for contracts that we had reinsured. In the event that any of our reinsurance providers were unable or unwilling to fulfill their contractual obligations related to the liabilities we cede to them, we would need to increase actuarial reserves, adversely impacting our net income attributed to shareholders and capital position. In addition, the Company has over time sold certain blocks of business to third-party purchasers using reinsurance. To the extent that the reinsured contracts are not subsequently novated to the purchasers, we remain legally liable to the insureds. Should the purchasers be unable or unwilling to fulfill their contractual obligations under the reinsurance agreement, we would need to increase policy liabilities resulting in a charge to net income attributed to shareholders. To reduce credit risk, the Company may require purchasers to provide collateral for their reinsurance liabilities.

 

We participate in a securities lending program whereby blocks of securities are loaned to third parties, primarily major brokerage firms and commercial banks. Collateral, which exceeds the market value of the loaned securities, is retained by the Company until the underlying security has been returned. If any of our securities lending counterparties default and the value of the collateral is insufficient, we would incur losses. As at December 31, 2020, the Company had loaned securities (which are included in invested assets) valued at approximately $889 million, compared with $558 million as at December 31, 2019.

The determination of allowances and impairments on our investments is subjective and changes could materially impact our results of operations or financial position.

 

 

The determination of allowances and impairments is based upon a periodic evaluation of known and inherent risks associated with the respective security. Management considers a wide range of factors about the security and uses its best judgment in evaluating the cause of the decline, in estimating the appropriate value for the security and in assessing the prospects for near-term recovery. Inherent in management’s evaluation of the security are assumptions and estimates about the operations of the issuer and its future earnings potential. Considerations in the impairment evaluation process include: (i) the severity of the impairment; (ii) the length of time and the extent to which the market value of a security has been below its carrying value; (iii) the financial condition of the issuer; (iv) the potential for impairments in an entire industry sector or sub-sector; (v) the potential for impairments in certain economically depressed geographic locations; (vi) the potential for impairments of securities where the issuer, series of issuers or industry has suffered a catastrophic type of loss or has exhausted natural resources; (vii) our ability and intent to hold the security for a period of time sufficient to allow for the recovery of its value to an amount equal to or greater than cost or amortized cost; (viii) unfavourable changes in forecasted cash flows on mortgage-backed and asset-backed securities; and (ix) other subjective factors, including concentrations and information obtained from regulators and rating agencies.

 

Such evaluations and assessments are revised as conditions change and new information becomes available. We update our evaluations regularly and reflect changes in allowances and impairments as such evaluations warrant. The evaluations are inherently subjective and incorporate only those risk factors known to us at the time the evaluation is made. There can be no assurance that management has accurately assessed the level of impairments that have occurred. Additional impairments will likely need to be taken or allowances provided for in the future as conditions evolve. Historical trends may not be indicative of future impairments or allowances.

 

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Product Risk

We make a variety of assumptions related to the expected future level of claims, policyholder behaviour, expenses, reinsurance costs and sales levels when we design and price products, and when we establish policy liabilities. Product risk is the risk of failure to design, implement and maintain a product or service to achieve these expected outcomes and the risk of loss due to actual experience emerging differently than assumed when a product was designed and priced. Assumptions for future claims are generally based on both Company and industry experience, and assumptions for future policyholder behaviour and expenses are generally based on Company experience. Assumptions for future policyholder behaviour include assumptions related to the retention rates for insurance and wealth products. Assumptions for expenses include assumptions related to future maintenance expense levels and volume of the business.

Please read below for details on factors that could impact our level of product risk and the strategies used to manage this risk:

Product Risk Management Strategy

Product risk is governed by the Product Oversight Committee for the insurance business and by the Global WAM Risk Committee for global WAM business.

Product Oversight Committee

The Product Oversight Committee oversees the overall insurance risk management program. The Product Oversight Committee has established a broad framework for managing insurance risk under a set of policies, standards and guidelines, to ensure that our product offerings align with our risk-taking philosophy and risk limits, and achieve acceptable profit margins. These cover:

 

  product design features
  use of reinsurance
  pricing models and software
  internal risk based capital allocations
  target profit objectives
  pricing methods and assumption setting
  stochastic and stress scenario testing
  required documentation
  review and approval processes
  experience monitoring programs
 

 

In each business unit that sells insurance, we designate individual pricing officers who are accountable for pricing activities, chief underwriters who are accountable for underwriting activities and chief claims risk managers who are accountable for claims activities. Both the pricing officer and the general manager of each business unit approve the design and pricing of each product, including key claims, policyholder behaviour, investment return and expense assumptions, in accordance with global policies and standards. Risk management functions provide additional oversight, review and approval of material product and pricing initiatives, as well as material underwriting initiatives. Actuarial functions provide oversight review and approval of policy liability valuation methods and assumptions. In addition, both risk and actuarial functions review and approve new reinsurance arrangements. We perform annual risk and compliance self-assessments of the product development, pricing, underwriting and claims activities of all insurance businesses. To leverage best practices, we facilitate knowledge transfer between staff working with similar businesses in different geographies.

We utilize a global underwriting manual intended to ensure insurance underwriting practices for direct written life business are consistent across the organization while reflecting local conditions. Each business unit establishes underwriting policies and procedures, including criteria for approval of risks and claims adjudication policies and procedures.

We apply retention limits per insured life that are intended to reduce our exposure to individual large claims which are monitored in each business unit. These retention limits vary by market and jurisdiction. We reinsure exposure in excess of these limits with other companies (see “Risk Factors and Risk Management – Product Risk Factors – External market conditions determine the availability, terms and cost of reinsurance protection”, below). Our current global life retention limit is US$30 million for individual policies (US$35 million for survivorship life policies) and is shared across businesses. We apply lower limits in some markets and jurisdictions. We aim to further reduce exposure to claims concentrations by applying geographical aggregate retention limits for certain covers. Enterprise-wide, we aim to reduce the likelihood of high aggregate claims by operating globally, insuring a wide range of unrelated risk events, and reinsuring some risks. We seek to actively manage the Company’s aggregate exposure to each of policyholder behaviour risk and claims risk against enterprise-wide economic capital limits. Policyholder behaviour risk limits cover the combined risk arising from policy lapses and surrenders, withdrawals and other policyholder driven activity. The claims risk limits cover the combined risk arising from mortality, longevity and morbidity.

Internal experience studies, as well as trends in our experience and that of the industry, are monitored to update current and projected claims and policyholder behaviour assumptions, resulting in updates to policy liabilities as appropriate.

Global Wealth and Asset Management (“Global WAM”) Product Risk Management Committee

Global WAM product risk is governed by the Global WAM Risk Management Committee, which reviews and approves notable new products prior to launch. This committee has established a framework for managing risk under a set of policies, standards and guidelines to ensure that notable product offerings align with Global WAM risk-taking philosophy and risk appetite.

The Global WAM Risk Management Committee also provides oversight of notable changes to existing products/solutions on the various Global WAM platforms.

 

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Product Risk Factors

Losses may result should actual experience be materially different than that assumed in the valuation of policy liabilities.

 

 

Such losses could have a significant adverse effect on our results of operations and financial condition. In addition, we periodically review the assumptions we make in determining our policy liabilities and the review may result in an increase in policy liabilities and a decrease in net income attributed to shareholders. Such assumptions require significant professional judgment, and actual experience may be materially different than the assumptions we make. (See “Critical Actuarial and Accounting Policies” below).

We may be unable to implement necessary price increases on our in-force businesses or may face delays in implementation.

 

 

We continue to seek state regulatory approvals for price increases on existing long-term care business in the United States. We cannot be certain whether or when each approval will be granted. For some in-force business regulatory approval for price increases may not be required. However, regulators or policyholders may nonetheless seek to challenge our authority to implement such increases. Our policy liabilities reflect our estimates of the impact of these price increases, but should we be less successful than anticipated in obtaining them, then policy liabilities could increase accordingly and reduce net income attributed to shareholders.

Evolving legislation related to genetic testing could adversely impact our underwriting abilities.

 

 

Current or future legislation in jurisdictions where Manulife operates may restrict its right to underwrite based on access to genetic test results. Without the obligation of disclosure, the asymmetry of information shared between applicant and insurer could increase anti-selection in both new business and in-force policyholder behaviour. The impact of restricting insurers’ access to this information and the associated problems of anti-selection becomes more acute where genetic technology leads to advancements in diagnosis of life-threatening conditions that are not matched by improvements in treatment. We cannot predict the potential financial impact that this would have on the Company or the industry as a whole. In addition, there may be further unforeseen implications as genetic testing continues to evolve and becomes more established in mainstream medical practice.

Life and health insurance claims may be impacted unexpectedly by changes in the prevalence of diseases or illnesses, medical and technology advances, widespread lifestyle changes, natural disasters, large-scale human-made disasters and acts of terrorism.

 

 

Claims resulting from catastrophic events could cause substantial volatility in our financial results in any period and could materially reduce our profitability or harm our financial condition. Large-scale catastrophic events may also reduce the overall level of economic activity, which could hurt our business and our ability to write new business. It is possible that geographic concentration of insured individuals could increase the severity of claims we receive from future catastrophic events. The effectiveness of external parties, including governmental and nongovernmental organizations, in combating the severity of such an event is outside of our control and could have a material impact on the losses we experience.

 

The cost of health insurance benefits may be impacted by unforeseen trends in the incidence, termination and severity rates of claims. The ultimate level of lifetime benefits paid to policyholders may be increased by an unexpected increase in life expectancy. For example, advances in technology could lead to longer lives through better medical treatment or better disease prevention. Policyholder behaviour including premium payment patterns, policy renewals, lapse rates and withdrawal and surrender activity are influenced by many factors including market and general economic conditions, and the availability and relative attractiveness of other products in the marketplace. For example, a weak or declining economic environment could increase the value of guarantees associated with variable annuities or other embedded guarantees and contribute to adverse policyholder behaviour experience, or a rapid rise in interest rates could increase the attractiveness of alternatives for customers holding products that offer contractual surrender benefits that are not market value adjusted, which could also contribute to adverse policyholder behaviour experience. As well, adverse claims experience could result from systematic anti-selection, which could arise from the development of investor owned and secondary markets for life insurance policies, anti-selective lapse behaviour, underwriting process failures, anti-selective policyholder behaviour due to greater consumer accessibility to home-based medical screening, or other factors.

 

For information on the implications of the COVID-19 pandemic on our product risk, please refer to “Pandemic risk and potential implications of COVID-19” below.

External market conditions determine the availability, terms and cost of reinsurance protection which could impact our financial position and our ability to write new policies.

 

 

As part of our overall risk and capital management strategy, we purchase reinsurance protection on certain risks underwritten or assumed by our various insurance businesses. As the global reinsurance industry continues to review and optimize their business models, certain of our reinsurers have attempted to increase rates on our existing reinsurance contracts. The ability of our reinsurers to increase rates depends upon the terms of each reinsurance contract. Typically, the reinsurer’s ability to raise rates is restricted by a number of terms in our reinsurance contracts, which we seek to enforce. We believe our reinsurance provisions are appropriate; however, there can be no assurance regarding the impact of future rate increase actions taken by our reinsurers. Accordingly, future rate increase actions by our reinsurers could result in accounting charges, an increase in the cost of reinsurance and the assumption of more risk on business already reinsured.

 

In addition, an increase in the cost of reinsurance could also adversely affect our ability to write future business or result in the assumption of more risk with respect to policies we issue. Premium rates charged on new policies we write are based, in part, on the assumption that reinsurance will be available at a certain cost. Certain reinsurers may attempt to increase the rates they charge us for

 

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new policies we write, and for competitive reasons, we may not be able to raise the premium rates we charge for newly written policies to offset the increase in reinsurance rates. If the cost of reinsurance were to increase, if reinsurance were to become unavailable and if alternatives to reinsurance were not available, our ability to write new policies at competitive premium rates could be adversely affected.

Operational Risk

Operational risk is naturally present in all of our business activities and encompasses a broad range of risks, including regulatory compliance failures, legal disputes, technology failures, business interruption, information security and privacy breaches, human resource management failures, processing errors, modelling errors, business integration, theft and fraud, and damage to physical assets. Exposures can take the form of financial losses, regulatory sanctions, loss of competitive positioning, or damage to our reputation. Operational risk is also embedded in all the practices we use to manage other risks; therefore, if not managed effectively, operational risk can impact our ability to manage other key risks such as credit risk, market risk, liquidity risk and insurance risk.

Please read below for details on factors that could impact our level of operational risk and the strategies used to manage this risk:

Operational Risk Management Strategy

Our corporate governance practices, corporate values, and integrated enterprise-wide approach to managing risk set the foundation for mitigating operational risks. This base is further strengthened by internal controls and systems, compensation programs, and seeking to hire and retain trained and competent people throughout the organization. We align compensation programs with business strategy, long-term shareholder value and good governance practices, and we benchmark these compensation practices against peer companies.

We have an enterprise operational risk management framework that sets out the processes we use to identify, assess, manage, mitigate and report on significant operational risk exposures. Execution of our operational risk management strategy supports the drive towards a focus on the effective management of our key global operational risks. We have an Operational Risk Committee, which is the main decision-making committee for all operational risk matters and which has oversight responsibility for operational risk strategy, management and governance. We have enterprise-wide risk management programs for specific operational risks that could materially impact our ability to do business or impact our reputation.

Legal and Regulatory Risk Management Strategy

Global Compliance oversees our regulatory compliance program and function, supported by designated Chief Compliance Officers in every segment. The program is designed to promote compliance with regulatory obligations worldwide and to assist in making the Company’s employees aware of the laws and regulations that affect it, and the risks associated with failing to comply. Segment Compliance groups monitor emerging legal and regulatory issues and changes and prepare us to address new requirements. Global Compliance also independently assesses and monitors the effectiveness of a broad range of regulatory compliance processes and business practices against potential legal, regulatory, fraud and reputation risks, and allows significant issues to be escalated and proactively mitigated. Among these processes and business practices are: privacy (i.e. handling of personal and other confidential information), sales and marketing practices, sales compensation practices, asset management practices, fiduciary responsibilities, employment practices, underwriting and claims processing, product design, the Ethics Hotline, and regulatory filings. In addition, we have policies, processes and controls in place to help protect the Company, our customers and other related third parties from acts of fraud and from risks associated with money laundering and terrorist financing. Audit Services, Global Compliance and Segment Compliance personnel periodically assess the effectiveness of the system of internal controls. For further discussion of government regulation and legal proceedings, refer to “Government Regulation” in MFC’s Annual Information Form dated February 10, 2021 and note 18 of the 2020 Annual Consolidated Financial Statements.

Business Continuity Risk Management Strategy

We have an enterprise-wide business continuity and disaster recovery program. This includes policies, plans and procedures that seek to minimize the impact of natural or human-made disasters, and is designed to ensure that key business functions can continue normal operations in the event of a major disruption. Each business unit is accountable for preparing and maintaining detailed business continuity plans and processes. The global program incorporates periodic scenario analysis designed to validate the assessment of both critical and non-critical units, as well as the establishment and testing of appropriate business continuity plans for all critical functions. The business continuity team establishes and regularly tests crisis management plans and global crisis communications protocols. We maintain off-site backup facilities and failover capability designed to minimize downtime and accelerate system recovery.

Technology & Information Security Risk Management Strategy

Our Technology Risk Management function provides strategy, direction, and oversight and facilitates governance for all technology risk domain activities across the Company. The scope of this function includes: reducing information risk exposures by introducing a robust enterprise information risk management framework and supporting infrastructure for proactively identifying, managing, monitoring and reporting on critical information risk exposures; promoting transparency and informed decision-making by building and maintaining information risk profiles and risk dashboards for Enterprise Technology & Services and segments aligned with enterprise and operational risk reporting; providing advisory services to Global Technology and the segments around current and emerging technology risks and their

 

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impact to the Company’s information risk profile; and reducing vendor information risk exposures by incorporating sound information risk management practices into sourcing, outsourcing and offshoring initiatives and programs.

The enterprise-wide information security program, which is overseen by the Chief Information Risk Officer, seeks to mitigate information security risks. This program establishes the information and cyber security framework for the Company, including governance, policies and standards, and appropriate controls to protect information and computer systems. We also have annual security awareness training sessions for all employees.

Many jurisdictions in which we operate are implementing more stringent privacy legislation. Our global privacy program, overseen by our Chief Privacy Officer, seeks to manage the risk of privacy breaches. It includes policies and standards, ongoing monitoring of emerging privacy legislation, and a network of privacy officers. Processes have been established to provide guidance on handling personal information and for reporting privacy incidents and issues to appropriate management for response and resolution.

In addition, the Chief Information Risk Officer, the Chief Privacy Officer, and their teams work closely on information security and privacy matters.

Human Resource Risk Management Strategy

We have a number of human resource policies, practices and programs in place that seek to manage the risks associated with attracting and retaining top talent. These include recruiting programs at every level of the organization, training and development programs for our individual contributors and people leaders, employee engagement surveys, and competitive compensation programs that are designed to attract, motivate and retain high-performing and high-potential employees.

Model Risk Management Strategy

We have designated model risk management teams working closely with model owners and users that seek to manage model risk. Our model risk oversight program includes processes intended to ensure that our critical business models are conceptually sound and used as intended, and to assess the appropriateness of the calculations and outputs.

Third-Party Risk Management Strategy

 

Our governance framework to address third-party risk includes appropriate policies (such as our Global Outsourcing, Global Risk Management and Vendor Management policies) standards and procedures, and monitoring of ongoing results and contractual compliance of third-party arrangements.

Initiative Risk Management Strategy

 

To seek to ensure that key initiatives are successfully implemented and monitored by management, we have a Global Strategy and Transformation Office, which is responsible for establishing policies and standards for initiative management. Our policies, standards and practices are benchmarked against leading practices.

The following section describes details on potential Operational Risk factors:

Operational Risk Factors

If we are not able to attract, motivate and retain agency leaders and individual agents, our competitive position, growth and profitability will suffer.

 

 

We must attract and retain sales representatives to sell our products. Strong competition exists among financial services companies for efficient and effective sales representatives. We compete with other financial services companies for sales representatives primarily on the basis of our financial position, brand, support services and compensation and product features. Any of these factors could change either because we change the Company or our products, or because our competitors change theirs and we are unable or unwilling to adapt. If we are unable to attract and retain sufficient sales representatives to sell our products, our ability to compete would suffer, which could have a material adverse effect on our business, results of operations and financial condition.

Competition for the best people is intense and an inability to recruit qualified individuals may negatively impact our ability to execute on business strategies or to conduct our operations.

 

 

We compete with other insurance companies and financial institutions for qualified executives, employees and agents. We must attract and retain top talent to maintain our competitive advantage. Failure to attract and retain the best people could adversely impact our business.

If we are unable to complete key projects on time, on budget, and capture planned benefits, our business strategies and plans, and operations may be impaired.

 

 

We must successfully deliver a number of key projects in order to implement our business strategies and plans. If we are unable to complete these projects in accordance with planned schedules, and to capture projected benefits, there could be a material adverse effect on our business and financial condition.

 

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Key business processes may fail, causing material loss events and impacting our customers and reputation.

 

 

A large number of complex transactions are performed by the organization, and there is risk that errors may have significant impact on our customers or result in a loss to the organization. Controls are in place that seek to ensure processing accuracy for our most significant business processes, and escalation and reporting processes have been established for when errors do occur.

The interconnectedness of our operations and risk management strategies could expose us to risk if all factors are not appropriately considered and communicated.

 

 

Our business operations, including strategies and operations related to risk management, asset liability management and liquidity management, are interconnected and complex. Changes in one area may have a secondary impact in another area of our operations. For example, risk management actions, such as the increased use of interest rate swaps, could have implications for the Company’s Global Wealth and Asset Management segment or its Treasury function, as this strategy could result in the need to post additional amounts of collateral. Failure to appropriately consider these inter-relationships, or effectively communicate changes in strategies or activities across our operations, could have a negative impact on the strategic objectives or operations of another group. Further, failure to consider these inter-relationships in our modeling and financial and strategic decision-making processes could have a negative impact on our operations.

Our risk management policies, procedures and strategies may leave us exposed to unidentified or unanticipated risks, which could negatively affect our business, results of operations and financial condition.

 

 

We have devoted significant resources to develop our risk management policies, procedures and strategies and expect to continue to do so in the future. Nonetheless, there is a risk that our policies, procedures and strategies may not be comprehensive. Many of our methods for measuring and managing risk and exposures are based upon the use of observed historical market behaviour or statistics based on historical models. Future behaviour may be very different from past behaviour, especially if there are some fundamental changes that affect future behaviour. As an example, the increased occurrence of negative interest rates can make it difficult to model future interest rates as interest rate models have been generally developed for an environment of positive interest rates. As a result, these methods may not fully predict future exposures, which can be significantly greater than our historical measures indicate. Other risk management methods depend upon the evaluation and/or reporting of information regarding markets, clients, client transactions, catastrophe occurrence or other matters publicly available or otherwise accessible to us. This information may not always be accurate, complete, up-to-date or properly evaluated or reported.

We are subject to tax audits, tax litigation or similar proceedings, and as a result we may owe additional taxes, interest and penalties in amounts that may be material.

 

 

We are subject to income and other taxes in the jurisdictions in which we do business. In determining our provisions for income taxes and our accounting for tax related matters in general, we are required to exercise judgment. We regularly make estimates where the ultimate tax determination is uncertain. There can be no assurance that the final determination of any tax audit, appeal of the decision of a taxing authority, tax litigation or similar proceedings will not be materially different from that reflected in our historical financial statements. The assessment of additional taxes, interest and penalties could be materially adverse to our current and future results of operations and financial condition.

Our operations face political, legal, operational and other risks that could negatively affect those operations or our results of operations and financial condition.

 

 

Our operations face the risk of discriminatory regulation, political and economic instability, the imposition of economic or trade sanctions, civil unrest or disobedience, market volatility and significant inflation, limited protection for, or increased costs to protect intellectual property rights, inability to protect and/or enforce contractual or legal rights, nationalization or expropriation of assets, price controls and exchange controls or other restrictions that prevent us from transferring funds out of the countries in which we operate.

 

A substantial portion of our revenue and net income attributed to shareholders is derived from our operations outside of North America, primarily in key Asian markets. Some of these key geographical markets are developing and are rapidly growing countries and markets where these risks may be heightened. Failure to manage these risks could have a significant negative impact on our operations and profitability globally.

 

Any plans to expand our global operations in markets where we operate and potentially in new markets may require considerable management time, as well as start-up expenses for market development before any significant revenues and earnings are generated. Operations in new foreign markets may achieve low margins or may be unprofitable, and expansion in existing markets may be affected by local economic and market conditions.

We are regularly involved in litigation.

 

 

We are regularly involved in litigation, either as a plaintiff or defendant. These cases could result in an unfavourable resolution and could have a material adverse effect on our results of operations and financial condition. For further discussion of legal proceedings refer to note 18 of the 2020 Annual Consolidated Financial Statements.

 

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We are exposed to investors trying to profit from short positions in our stock.

 

 

Short-sellers seek to profit from a decline in the price of our common shares. Through their actions and public statements, they may encourage the decline in price from which they profit and may encourage others to take short positions in our shares. The existence of such short positions and the related publicity may lead to continued volatility in our common share price.

System failures or events that impact our facilities may disrupt business operations.

 

 

Technology is used in virtually all aspects of our business and operations; in addition, part of our strategy involves the expansion of technology to directly serve our customers. An interruption in the service of our technology resulting from system failure, cyber-attack, human error, natural disaster, human-made disaster, pandemic, or other unpredictable events beyond reasonable control could prevent us from effectively operating our business.

 

While our facilities and operations are distributed across the globe, we can experience extreme weather, natural disasters, civil unrest, human-made disasters, power outages, pandemic, and other events which can prevent access to, and operations within, the facilities for our employees, partners, and other parties that support our business operations.

 

We take measures to plan, structure and protect against routine events that may impact our operations, and maintain plans to recover from unpredictable events. The experience learned through the COVID-19 pandemic has stress tested these plans and has resulted in strengthening our continuity plans. For further information, see “Pandemic risk and potential implications of COVID-19” below. An interruption to our operations may subject us to regulatory sanctions and legal claims, lead to a loss of customers, assets and revenues, result in unauthorized disclosures of personal or confidential information, or otherwise adversely affect us from a financial, operational and reputational perspective.

An information security or privacy breach of our operations or of a related third party could adversely impact our business, results of operations, financial condition, and reputation.

 

 

It is possible that the Company may not be able to anticipate or to implement effective preventive measures against all disruptions or privacy and security breaches, especially because the techniques used change frequently, generally increase in sophistication, often are not recognized until launched, and because cyber-attacks can originate from a wide variety of sources, including organized crime, hackers, terrorists, activists, and other external parties, including parties sponsored by hostile foreign governments. Those parties may also attempt to fraudulently induce employees, customers, and other users of the Company’s systems or third-party service providers to disclose sensitive information in order to gain access to the Company’s data or that of its customers or clients. We, our customers, regulators and other third parties have been subject to, and are likely to continue to be the target of, cyber-attacks, including computer viruses, malicious or destructive code, phishing attacks, denial of service and other security incidents, that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of personal, confidential, proprietary and other information of the Company, our employees, our customers or of third parties, or otherwise materially disrupt our or our customers’ or other third parties’ network access or business operations. These attacks could adversely impact us from a financial, operational and reputational perspective.

 

The Company maintains an Information Risk Management Program, which includes information and cyber security defenses, to protect our networks and systems from attacks; however, there can be no assurance that these counter measures will be successful in every instance in protecting our networks against advanced attacks. In addition to protection, detection and response mechanisms, the Company maintains cyber risk insurance, but this insurance may not cover all costs associated with the financial, operational and reputational consequences of personal, confidential or proprietary information being compromised.

Model risk may arise from the inappropriate use or interpretation of models or their output, or the use of deficient models, data or assumptions.

 

 

We are relying on some highly complex models for pricing, valuation and risk measurement, and for input to decision making. Consequently, the risk of inappropriate use or interpretation of our models or their output, or the use of deficient models, could have a material adverse effect on our business.

Fraud risks may arise from incidents related to identity theft and account takeovers.

 

 

Policies and procedures are in place to prevent and detect fraud incidents; however, our existing system of internal controls may not be able to mitigate all possible incidents, which could adversely impact our business, results of operations, financial condition, and reputation. We continue to enhance our capabilities to better protect against ever-evolving fraud threats, but we may nevertheless not be able to mitigate all possible incidents.

Contracted third parties may fail to deliver against contracted activities.

 

 

We rely on third parties to perform a variety of activities on our behalf, and failure of our most significant third parties to meet their contracted obligations may impact our ability to meet our strategic objectives or may directly impact our customers. Vendor governance processes are in place that seek to ensure that appropriate due diligence is conducted at time of vendor contracting, and ongoing vendor monitoring activities are in place that seek to ensure that the contracted services are being fulfilled to satisfaction, but we may nevertheless not be able to mitigate all possible failures.

 

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Environmental risk may arise related to our commercial mortgage loan portfolio and owned property or from our business operations.

Environmental risk may originate from investment properties that are subject to natural or human-made environmental risk. Real estate assets may be owned, leased and/or managed, as well as mortgaged by Manulife and we might enter into the chain of liability due to foreclosure ownership when in default.

Liability under environmental protection laws resulting from our commercial mortgage loan portfolio and owned property (including commercial real estate, oil and gas, timberland and farmland properties) may adversely impact our reputation, results of operations and financial condition. Under applicable laws, contamination of a property with hazardous materials or substances may give rise to a lien on the property to secure recovery of the costs of cleanup. In some instances, this lien has priority over the lien of an existing mortgage encumbering the property. The environmental risk may result from on-site or off-site (adjacent) due to migration of regulated pollutants or contaminates with financial or reputational environmental risk and liability consequences by virtue of strict liability. Environmental risk could also arise from natural disasters (e.g., climate change, weather, fire, earthquake, floods, and pests) or human activities (use of chemicals, pesticides) conducted within the site or when impacted from adjacent sites.

Additionally, as lender, we may incur environmental liability (including without limitation liability for clean-up, remediation and damages incurred by third parties) similar to that of an owner or operator of the property, if we or our agents exercise sufficient control over the operations at the property. We may also have liability as the owner and/or operator of real estate for environmental conditions or contamination that exist or occur on the property or affecting other property.

In addition, failure to adequately prepare for the potential impacts of climate change may have a negative impact on our financial position or our ability to operate. Potential impacts may be direct or indirect and may include: business losses or disruption resulting from extreme weather conditions; the impact of changes in legal or regulatory framework made to address climate change; the impact to fixed income asset values for portfolio investments in fossil-fuel related industries; or increased mortality or morbidity resulting from environmental damage or climate change. For further information, see “Strategic Risk Management Strategy, Environmental, Social and Governance Risks”.

Pandemic risk and potential implications of COVID-19

In the first quarter of 2020, the viral outbreak known as COVID-19 rapidly developed into a global pandemic and has continued to spread. In response, worldwide emergency measures were taken, and continue to be taken, to combat the spread of the virus, including the imposition of travel restrictions, business closure orders, and regional quarantines and physical distancing requirements. In addition, governments have implemented unprecedented monetary and fiscal policy changes aimed to help stabilize economies and capital markets. We cannot predict future legal and regulatory responses to concerns about the COVID-19 pandemic and related public health issues and how these responses may impact our business. The COVID-19 pandemic, actions taken globally in response to it, and the ensuing economic downturn have caused significant disruption to global supply chains, business activities and economies. The depth, breadth and duration of these disruptions continue to remain highly uncertain. While the pandemic continues, with local or regional resurgences, as well as the outbreak of mutated variations of the initial COVID-19 virus, governments continue to apply a variety of measures to concurrently mitigate further strains on public health systems and help stabilize economies. As a result, it is difficult to predict how significant the longer-term impact of the COVID-19 pandemic, including any responses to it, will be on the global economy and our business. These disruptions, if they continue, could have a significant adverse impact on our global businesses and operations and on our financial results.

We have outlined these risks in more detail in two parts. Those risk factors related specifically to the COVID-19 pandemic are described in this section and those related to the broader economic uncertainty are described below (see “Global outlook and economic uncertainties” below). These risks should be read in conjunction with the other risks and risk mitigation strategies outlined in this “Risk Factors and Risk Management” section.

Implications on strategic risk factors

 

 

The ongoing COVID-19 pandemic could continue to adversely impact our financial results in future periods as a result of reduced new business, reduced asset-based fee revenue, and net unfavourable policyholder experience including claims experience and premium persistency. The uncertainty around the expected duration of the pandemic and the measures put in place by governments to respond to it could further depress business activity and financial markets, which could lead to lower net income attributed to shareholders. While in recent years we have taken significant actions to diversify and bolster the resilience of our Company, further management actions may be required, including, but not limited to, changes to business and product mix, pricing structures on in-force and new business, investment mix, hedging programs, and the use of reinsurance.

 

Collaborative activities required to advance our strategic initiatives could also be impeded as emergency measures to combat the virus significantly restrict direct human interactions and movement. Although we expect that our digital capabilities and tools should enable us to reasonably conduct business while emergency measures are in place, there can be no assurance these or other strategies taken to address adverse impacts related to the COVID-19 pandemic will be successful.

 

We have experienced ongoing disruptions to our underwriting processes as a result of government measures taken to stop the spread of the virus, including the temporary closure of paramedical services in some markets, as well as consumer fears over in-person services which have led to lower sales volumes. To help mitigate the impacts of these disruptions, and to continue to support our

 

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customers with their insurance needs, we took steps to temporarily adjust our underwriting processes to allow us to accept certain low risk applications. We will continue to monitor the situation and adjust underwriting practices where necessary (for example, continued use of digital applications and further potential modifications to underwriting requirements for lower risk applications).

Implications on product risk factors

 

 

Claims and lower lapses on certain products resulting from pandemic-related events could cause substantial volatility in our financial results in any period and could materially reduce our profitability or impair our financial condition. Further, large-scale events such as COVID-19 reduce the overall level of economic activity as well as activity through our distribution channels, which could continue to adversely impact our ability to write new business. It is also possible that geographic concentration of insured individuals could increase the severity of claims experience. The effectiveness of external parties, including governmental and non-governmental organizations, in combating the pandemic is outside of our control but could also have a material and adverse impact on our results of operations.

 

Increased economic uncertainty and increased unemployment resulting from the economic impacts of the spread of COVID-19 may also result in policyholders seeking sources of liquidity and withdrawing at rates greater than we previously expected. If premium persistency is less than anticipated or if policyholder lapse rates significantly exceed our expectations, it could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

We purchase reinsurance protection on certain risks underwritten or assumed by our various insurance businesses. As a result of COVID-19 we may find reinsurance more difficult or costly to obtain. In addition, reinsurers may dispute, or seek to reduce or eliminate, coverage on policies as a result of any changes to policies or practices we make as a result of COVID-19.

Implications on operational risk factors

 

 

The pandemic has resulted in the imposition of government measures to restrict the movement of people, including travel bans and physical distancing requirements and other containment measures. These measures have led to disruptions to business operations across our global offices. While our business continuity plans have been executed across the organization with the vast majority of employees shifting to remote work arrangements and our networks and systems have generally remained stable in supporting this large-scale effort, there can be no assurance that our ability to continue to operate our business will not be adversely impacted if our networks and systems, including those aspects of our operations which rely on services provided by third parties, fail to operate as expected. The successful execution of business continuity strategies by third parties is outside our control. If one or more of the third parties to whom we outsource certain critical business activities fails to perform as a result of the impacts from the spread of COVID-19, it may have a material adverse effect on our business and operations.

 

In the first and second quarters of 2020, our global processing centres’ operational capacity was temporarily impacted due to strict government measures to lock down businesses and limit the movement of people within their jurisdictions, which resulted in slower processing times and lower than expected customer experience. This reduction in operating capacity required us to reallocate capacity to less impacted geographies, expand the use of remote work capabilities, and deprioritize non-essential business activities. While the capacity of our global processing centres has been restored, there can be no assurance that strategies taken to mitigate COVID-19 related pandemic impacts will continue to be successful if operating conditions deteriorate further in the future, either due to additional restrictions imposed by authorities or because of any other adverse development.

 

The implementation of widespread remote work arrangements also increases other operational risks, including, but not limited to, fraud, money-laundering, information security, privacy, and third-party risks. We are relying on our risk management strategies to monitor and mitigate these and other operational risks during this period of heightened uncertainty.

 

We may incur increased administrative expenses as a result of process and other changes we implemented in response to COVID-19. In addition, we may face increased workplace safety costs and risks and employee-relations challenges and claims, when more of our employees begin to return in person to our workplaces.

Global outlook and economic uncertainties

The COVID-19 pandemic and actions taken in response to it have resulted in a significant economic downturn and significant disruptions in supply chains and business activity globally. Updates to specific risk factors are noted below:

Implications on market risk factors

 

 

The pandemic and resulting economic downturn has contributed to significant volatility and declines in financial and commodity markets. Central banks announced emergency interest rate cuts, while governments implemented and continue to assess additional and unprecedented fiscal stimulus packages to support economic stability. The pandemic has resulted in a global recessionary environment with continued market volatility and low or negative interest rates, which may continue to impact our net income attributed to shareholders. Our investment portfolio has been, and may continue to be, adversely affected as a result of market developments from the COVID-19 pandemic and related uncertainty.

 

We have hedging programs, supported by a comprehensive collateral management program in place to help mitigate the risk of interest rate and public equity market volatility. Our interest rate and public equity variable annuity hedging programs have performed with a high level of effectiveness during this period of volatility to date.

 

Extreme market volatility may leave us unable to react to market events in a manner consistent with our historical investment practices in dealing with more orderly markets. Market dislocations, decreases in observable market activity or unavailability of information

 

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arising from the spread of COVID-19, may restrict our access to key inputs used to derive certain estimates and assumptions made in connection with financial reporting or otherwise, including estimates and changes in long-term macro-economic assumptions relating to accounting for future credit losses. Restricted access to such inputs may make our financial statement balances and estimates and assumptions used to run our business subject to greater variability.

 

The global recessionary environment could continue to put downward pressure on asset valuations and increase the risk of potential impairments of investments, in particular, for more exposed sectors such as transportation, services and consumer cyclical industries. The COVID-19 pandemic has contributed to supply and demand shocks that have created historic dislocation in the energy markets and could continue to adversely impact our oil and gas and other energy-related investments. Furthermore, delays in general return-to-office policies and practices and/or reduced demand for office space could continue to have a negative impact on our commercial real estate portfolio.

Implications on liquidity risk and capital management

 

 

Extreme market volatility and stressed conditions resulting from COVID-19 could result in additional cash and collateral demands primarily from changes to policyholder termination or renewal rates, withdrawals of customer deposit balances, borrowers renewing or extending their loans when they mature, derivative settlements or collateral demands, reinsurance settlements or collateral demands and our willingness to support the local solvency position of our subsidiaries. Such an environment could also limit our access to capital markets. We maintain strong financial strength ratings from our credit rating agencies. However, sustained global economic uncertainty could result in adverse credit ratings changes which in turn could result in more costly or limited access to funding sources. In addition, while we currently have a variety of sources of liquidity including cash balances, short-term investments, government and highly rated corporate bonds, and access to contingent liquidity facilities, there can be no assurance that these sources will provide us with sufficient liquidity on commercially reasonable terms in the future.

 

On March 13, 2020, OSFI announced measures to support the resilience of financial institutions including their expectation for all federally regulated financial institutions that dividend increases and share buybacks should be halted for the time being. Accordingly, the Company has not repurchased its shares since March 13, 2020.

Implications on credit risk factors

 

 

A prolonged economic slowdown or recession could continue to impact a wide range of industries to which we are exposed. Further, borrower or counterparty downgrades or defaults would cause increased provisions or impairments related to our general fund invested assets and derivative financial instruments, and an increase in provisions for future credit impairments to be included in our policy liabilities. This could result in losses potentially above our long-term expected levels.

 

We have experienced downgrades across some industries in our portfolio which may continue in subsequent quarters. The general fund portfolio is constructed through credit selection criteria and is diversified with the majority of the portfolio rated investment grade which helps to mitigate risks associated with the current economic downturn. Our approach includes seeking investments which perform more favourably in the longer term, throughout economic and business cycles, but there can be no assurance these or other strategies taken to address adverse impacts related to the COVID-19 pandemic will be successful.

Emerging Risks

The identification and assessment of our external environment for emerging risks is an important aspect of our ERM Framework, as these risks, although yet to materialize, could have the potential to have a material adverse impact on our operations and/or business strategies. We also consider taking advantage of opportunities identified to improve our competitiveness and ultimately our financial results.

Our Emerging Risk Framework facilitates the ongoing identification, assessment and monitoring of emerging risks, and includes: maintaining a process that facilitates the ongoing discussion and evaluation of potential emerging risks with senior business and functional management; reviewing and validating emerging risks with the ERC; creating and executing on responses to each emerging risk based on prioritization; and monitoring and reporting on emerging risks on a regular basis to the Board’s Risk Committee.

Regulatory Capital

OSFI’s LICAT capital regime applies to our business globally on a group consolidated basis. We continue to meet OSFI’s requirements and maintain capital in excess of regulatory expectations.

In November 2020, OSFI released an advisory to the LICAT guideline effective January 2021. These amendments are not expected to have a material impact. No material changes in LICAT requirements are currently anticipated in 2022, as OSFI is focusing its efforts on aligning the regulatory capital framework with the IFRS17 accounting changes effective January 2023, and updating the capital rules for Segregated Fund Guarantees, also expected to be effective in January 2023.

At its annual meeting in November 2019, the International Association of Insurance Supervisors (“IAIS”) adopted a risk based global Insurance Capital Standard (“ICS”), that is expected to be further developed over a five-year monitoring period that commenced in 2020. While broadly supportive of the goals of ICS, OSFI stated that it did not support the current ICS design, citing that it was ‘not fit for purpose for the Canadian market’. Without OSFI’s consent, the IAIS rules will not apply in Canada or to Canadian companies on a group-wide basis, while other regulators may use the ICS framework for calculating capital in their specific markets. Limited changes were made to ICS in 2020. We will continue to monitor developments as the ICS methodology and its applicability evolve.

 

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The IAIS has also been developing a holistic framework to assess and mitigate insurance sector systemic risk. It is not yet known how these proposals will affect capital or other regulatory requirements given that several key items of the framework remain under discussion.

Regulators in various jurisdictions in which we operate have embarked on reforming their respective capital regulations. The impact of these changes remains uncertain.

IFRS 17 and IFRS 9

IFRS 17 and IFRS 9 are effective for insurance companies in 2023.

IFRS 17 will replace IFRS 4 “Insurance Contracts” and will materially change the timing of the recognition of earnings and therefore equity. Furthermore, the requirements of the new standard are complex and will necessitate significant enhancements to finance infrastructure and processes and could impact business strategy. IFRS 9 will impact the measurement and timing of investment income.

Risks related to the new standards include:

 

 

The impact on regulatory capital. In addition to the impact on timing of recognition of earnings and equity, the regulatory capital framework in Canada is currently aligned with IFRS. OSFI has stated that it intends to maintain capital frameworks consistent with current capital policies and to minimize potential industry-wide capital impacts that might arise from the accounting change. To achieve this outcome, we anticipate that OSFI will amend LICAT guidelines for IFRS 17 and is in the process of consulting directly with affected stakeholders.

 

The impact on our business strategy as a result of temporary volatility. The treatment of the discount rate and new business gains under IFRS 17 could create material temporary volatility in our financial results and depending on the LICAT treatment, on our capital position. The Company’s capital position and income for accounting purposes could be significantly influenced by prevailing market conditions, resulting in volatility of reported results, which may require changes to business strategies and the introduction of new non-GAAP measures to explain our results. The impact to business strategy could include changes to hedging and investment strategy, product strategy and the use of reinsurance and, as a result, could impact our exposures to other risks such as counterparty risk and liquidity risk.

 

The impact on tax. In certain jurisdictions, including Canada, the implementation of IFRS 17 could have a material effect on tax positions and other financial metrics that are dependent upon IFRS accounting values.

 

The impact on operational readiness. The adoption of IFRS 17 poses significant operational challenges for the insurance industry in the development and implementation of necessary technology systems solutions. The standard introduces complex estimation techniques, computational requirements and disclosures which necessitate a major transformation to the Company’s systems along with actuarial and financial reporting processes. Once a system solution is available, significant efforts are required from insurers to integrate it into their financial reporting environment, perform impact studies, and educate and socialize the potential impacts with stakeholders.

 

The impact of inconsistencies in timing of adoption between various jurisdictions. As a global insurer with subsidiaries in Asia, regional differences in effective dates will require us to maintain more than one set of financial records to support consolidated financial statements and for local entity reporting. Although early adoption is permitted, our local subsidiaries would be required to choose between alignment with the consolidated financial statements of the Canadian parent resulting in deviation with local competitors, in order to avoid maintaining two sets of financial records.

The Canadian Life and Health Insurance Association as well as Manulife and other Canadian and international insurers have highlighted the risk related to key jurisdictions adopting IFRS 17 on different timelines. Adoption of the standard in Canada before it is adopted by Europe and the UK increases the risk of potential changes to the interpretation and application of IFRS 17 during or subsequent to our adoption. This could result in significant revisions to our actuarial and accounting policies and estimates and potential systems changes.

Our extensive enterprise-wide implementation program includes the necessary resources to implement appropriate changes to policies and processes, education to internal and external stakeholders, sourcing appropriate data and deploying system solutions. Our governance model and active engagement with industry working groups helps to manage the risks noted above.

Additional Risk Factors That May Affect Future Results

Other factors that may affect future results include changes in government trade policy, monetary policy or fiscal policy; political conditions and developments in or affecting the countries in which we operate; technological changes; public infrastructure disruptions; changes in consumer spending and saving habits; the possible impact on local, national or global economies from public health emergencies, and international conflicts and other developments including those relating to terrorist activities. Although we take steps to anticipate and minimize risks in general, unforeseen future events may have a negative impact on our business, financial condition and results of operations.

We caution that the preceding discussion of risks that may affect future results is not exhaustive. When relying on our forward-looking statements to make decisions with respect to our Company, investors and others should carefully consider the foregoing risks, as well as other uncertainties and potential events, and other external and Company specific risks that may adversely affect the future business, financial condition or results of operations of our Company.

 

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10. Capital Management Framework

Manulife seeks to manage its capital with the objectives of:

 

 

Operating with sufficient capital to be able to honour all commitments to its policyholders and creditors with a high degree of confidence;

 

Retaining the ongoing confidence of regulators, policyholders, rating agencies, investors and other creditors in order to ensure access to capital markets; and

 

Optimizing return on capital to meet shareholders’ expectations subject to constraints and considerations of adequate levels of capital established to meet the first two objectives.

Capital is managed and monitored in accordance with the Capital Management Policy. The Policy is reviewed and approved by the Board of Directors annually and is integrated with the Company’s risk and financial management frameworks. It establishes guidelines regarding the quantity and quality of capital, internal capital mobility, and proactive management of ongoing and future capital requirements.

Our capital management framework takes into account the requirements of the Company as a whole as well as the needs of each of our subsidiaries. Internal capital targets are set above regulatory requirements, and consider a number of factors, including results of sensitivity and stress testing and our own risk assessments, as well as business needs. We monitor against these internal targets and initiate actions appropriate to achieving our business objectives.

We periodically assess the strength of our capital position under various stress scenarios. The annual Financial Condition Testing (“FCT”, formerly Dynamic Capital Adequacy Testing) typically quantifies the financial impact of economic events arising from shocks in public equity and other markets, interest rates and credit, amongst others. Our 2020 FCT results demonstrate that we would have sufficient assets, under the various adverse scenarios tested, to discharge our policy liabilities. This conclusion was also supported by a variety of other stress tests conducted by the Company.

We use an Economic Capital (“EC”) framework to inform our internal view of the level of required capital and available capital. The EC framework is a key component of the Own Risk and Solvency Assessment process, which ties together our risk management, strategic planning and capital management practices to confirm that our capital levels continue to be adequate from an economic perspective.

Capital management is also integrated into our product planning and performance management practices.

The composition of capital between equity and other capital instruments impacts the financial leverage ratio which is an important consideration in determining the Company’s financial strength and credit ratings. The Company monitors and rebalances its capital mix through capital issuances and redemptions.

Financing Activities

Securities transactions

During 2020, we raised a total of $4.3 billion of debt securities in Canada, the U.S. and Asia; and $1.9 billion of debt securities matured or were redeemed at par.

 

($ millions)   Issued     Redeemed/Matured  

2.237% MFC Subordinated debentures, issued on May 12, 2020

  $ 996                $  

2.818% MFC Subordinated debentures, issued on May 12, 2020

 

 

995

 

 

 

 

2.484% MFC US Senior notes, issued on May 19, 2020

 

 

632

 

 

 

 

2.396% MFC US Senior notes, issued on Jun 1, 2020

 

 

254

 

 

 

 

3.050% MFC US Senior notes, issued on Aug 27, 2020

 

 

1,460

 

 

 

 

2.640% MLI Subordinated debentures, redeemed on Jan 15, 2020

 

 

 

 

 

500

 

2.100% MLI Subordinated debentures, redeemed on Jun 1, 2020

 

 

 

 

 

750

 

4.900% MFC US Senior debenture notes, matured on Sept 17, 2020

 

 

 

 

 

649

 

Total

 

$

  4,337

 

 

           $

  1,899

 

In addition, following the announcement during the fourth quarter of 2020, MLI redeemed in full its 2.389% subordinated debentures at par, on January 5, 2021.

Normal Course Issuer Bid

On March 13, 2020, the Office of the Superintendent of Financial Institutions (“OSFI”) announced measures to support the resilience of financial institutions. Consistent with these measures, OSFI set the expectation for all federally regulated financial institutions that dividend increases and share buybacks should be halted for the time being. Accordingly, the Company has not repurchased its shares since March 13, 2020.

 

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MFC’s normal course issuer bid (“NCIB”) expired on November 13, 2020. Under this NCIB that commenced on November 14, 2019, MFC purchased for cancellation 16.5 million of its common shares at an average price of $25.26 per share for a total cost of $0.42 billion.

During 2020, MFC purchased and subsequently cancelled 10.2 million of its common shares at an average price of $24.86 per common share for a total cost of $0.25 billion.

Consolidated capital

 

As at December 31,

($ millions)

  2020     2019     2018  

Non-controlling interests

 

$

1,455

 

 

$

1,211

 

 

$

1,093

 

Participating policyholders’ equity

 

 

(784

 

 

(243

 

 

94

 

Preferred shares

 

 

3,822

 

 

 

3,822

 

 

 

3,822

 

Common shareholders’ equity(1)

 

 

48,513

 

 

 

45,316

 

 

 

42,142

 

Total equity

 

 

53,006

 

 

 

50,106

 

 

 

47,151

 

Adjusted for accumulated other comprehensive loss on cash flow hedges

 

 

(229

 

 

(143

 

 

(127

Total equity excluding accumulated other comprehensive loss on cash flow hedges

 

 

53,235

 

 

 

50,249

 

 

 

47,278

 

Qualifying capital instruments

 

 

7,829

 

 

 

7,120

 

 

 

8,732

 

Consolidated capital(2)

 

$

  61,064

 

 

$

  57,369

 

 

$

  56,010

 

 

(1)

Common shareholders’ equity is equal to total shareholders’ equity less preferred shares.

(2)

Consolidated capital does not include $6.2 billion (2019 – $4.5 billion, 2018 – $4.8 billion) of MFC senior debt as this form of financing does not meet OSFI’s definition of regulatory capital at the MFC level. The Company has down-streamed the proceeds from this financing into operating entities in a form that qualifies as regulatory capital at the subsidiary level.

Consolidated capital was $61.1 billion as at December 31, 2020 compared with $57.4 billion as at December 31, 2019, an increase of $3.7 billion. The increase was primarily driven by growth in retained earnings of $3.4 billion, net capital issuances of $0.7 billion, which does not include MFC senior debt as it does not qualify as regulatory capital,1 and an increase in unrealized gains of AFS debt securities of $0.4 billion, partially offset by a reduction in participating policyholders’ equity of $0.5 billion and the impact of a stronger Canadian dollar of $0.4 billion.

Remittance of Capital

As part of its capital management, Manulife promotes internal capital mobility so that Manulife’s parent company, MFC, has access to funds to meet its obligations and to optimize capital deployment. Cash remittance is defined as the cash remitted or payable to the Group from operating subsidiaries and excess capital generated by standalone Canadian operations. It is one of the key metrics used by management to evaluate our financial flexibility. In 2020, MFC subsidiaries delivered $1.6 billion in remittances compared with $2.8 billion in 2019. The $1.2 billion reduction was due to capital injections to our Asia operations in response to the low interest-rate environment partially offset by stronger remittances from US and Canada.

Financial Leverage Ratio

MFC’s financial leverage ratio increased to 26.6% as at December 31, 2020 from 25.1% as at December 31, 2019, driven by the impact of net issuance of $2.4 billion of securities, partially offset by the growth in retained earnings.

Common Shareholder Dividends

The declaration and payment of shareholder dividends and the amount thereof are at the discretion of the Board of Directors and depend upon various factors, including the results of operations, financial condition, future prospects of the Company, dividend payout ratio and taking into account regulatory restrictions on the payment of shareholder dividends. On March 13, 2020, OSFI announced measures to support the resilience of financial institutions and set the expectation for all federally regulated financial institutions that dividend increases and share buybacks should be halted for the time being.

Common Shareholder Dividends Paid

The Company increased the quarterly dividend paid on its common shares beginning with the dividend paid in the first quarter of 20202, from $0.25 per common share to $0.28 per common share, bringing total common shareholder dividends to $1.12 in 2020, an increase of 12% from 2019.

 

For the years ended December 31,

$ per share

  2020     2019     2018  

Dividends paid

 

$

  1.12

 

 

$

  1.00

 

 

$

  0.91

 

 

1 

Consolidated capital does not include MFC senior debt (net issuance of $1.7 billion in 2020) as this form of financing does not meet OSFI’s definition of regulatory capital at the MFC level. The Company has down-streamed the proceeds from this financing into operating entities in a form that qualifies as regulatory capital at the subsidiary level.

2 

Declared February 12, 2020.

 

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The Company offers a Dividend Reinvestment Program (“DRIP”) whereby shareholders may elect to automatically reinvest dividends in the form of MFC common shares instead of receiving cash. The offering of the program and its terms of execution are subject to the Board of Directors’ discretion.

During 2020, the required common shares in connection with the DRIP were purchased on the open market with no applicable discount.

Regulatory Capital Position1

MFC and MLI are regulated by OSFI and are subject to consolidated risk based capital requirements. Manulife monitors and manages its consolidated capital in compliance with the OSFI LICAT guideline. Under this regime our available capital and other eligible capital resources are measured against a required amount of risk capital determined in accordance with the guideline. For regulatory purposes, LICAT available capital is based on the consolidated capital, adjusted for certain deductions, limits and restrictions, as mandated by the LICAT guideline.

Manulife’s operating activities are conducted within MLI and its subsidiaries. MLI‘s LICAT total ratio was 149% as at December 31, 2020, compared with 140% as at December 31, 2019. The nine percentage point increase from December 31, 2019 was driven by market movements primarily from lower risk-free interest rates, by net capital issuances2 and by the reinsurance of a block of legacy U.S. BOLI business, partly offset by several smaller items.

MFC’s LICAT total ratio was 135% as at December 31, 2020 compared with 129% as at December 31, 2019, with the increase driven by similar factors that impacted the movement in MLI’s LICAT total ratio. The difference between the MLI and MFC ratios is largely due to the $6.2 billion (2019 – $4.5 billion) of MFC senior debt outstanding that does not qualify as available capital at the MFC level but, based on the form it was down-streamed to MLI, it qualifies as regulatory capital at the MLI level.

The LICAT total ratios as at December 31, 2020 resulted in excess capital of $29.1 billion over OSFI’s supervisory target ratio of 100% for MLI, and $27.0 billion over OSFI’s regulatory minimum target ratio of 90% for MFC (no supervisory target is applicable to MFC). As at December 31, 2020, all MLI’s subsidiaries maintained capital levels in excess of local requirements.

Credit Ratings

Manulife’s operating companies have strong financial strength ratings from credit rating agencies. These ratings are important factors in establishing the competitive position of insurance companies and maintaining public confidence in products being offered. Maintaining strong ratings on debt and capital instruments issued by MFC and its subsidiaries allows us to access capital markets at competitive pricing levels. Should these credit ratings decrease materially, our cost of financing may increase and our access to funding and capital through capital markets could be reduced.

During 2020, S&P, Moody’s, Fitch and AM Best Company (“AM Best”) maintained their assigned ratings of MFC and its primary insurance operating companies, while DBRS upgraded their rating of the Manulife group in September 2020.

The following table summarizes the financial strength ratings of MLI and certain of its subsidiaries as at January 31, 2021.

Financial Strength Ratings

 

Subsidiary  

Jurisdiction

 

S&P

 

Moody’s

 

DBRS

 

Fitch

 

AM Best

The Manufacturers Life Insurance Company

 

Canada

 

AA-

 

A1

 

AA

 

AA-

 

A+ (Superior)

John Hancock Life Insurance Company (U.S.A.)

 

United States

 

AA-

 

A1

 

Not Rated

 

AA-

 

A+ (Superior)

Manulife (International) Limited

 

Hong Kong

 

AA-

 

Not Rated

 

Not Rated

 

Not Rated

 

Not Rated

Manulife Life Insurance Company

 

Japan

 

A+

 

Not Rated

 

Not Rated

 

Not Rated

 

Not Rated

Manulife (Singapore) Pte. Ltd.

 

Singapore

 

AA-

 

Not Rated

 

Not Rated

 

Not Rated

 

Not Rated

As of January 31, 2021, S&P, Moody’s, Fitch, DBRS and AM Best had a stable outlook on these ratings. The DBRS ratings upgrade resolved the positive outlook placed on the group in 2019. The S&P rating and related outlook for Manulife Life Insurance Company are constrained by the sovereign rating on Japan (A+/Stable).

 

 

1 

The “Risk Factors and Risk Management” section of the MD&A outlines a number of regulatory capital risks.

2 

LICAT reflects capital redemptions once the intention to redeem has been announced. As a result, the December 31, 2020 LICAT ratio reflects the impact of the $350 million of MLI subordinated debentures redeemed in January 2021 (announced in November 2020).

 

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11. Critical Actuarial and Accounting Policies

The preparation of Consolidated Financial Statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities as at the date of the Consolidated Financial Statements, and the reported amounts of revenue and expenses during the reporting periods. Actual results may differ from these estimates. The most significant estimation processes relate to assumptions used in measuring insurance and investment contract liabilities, assessing assets for impairment, determining of pension and other post-employment benefit obligation and expense assumptions, determining income taxes and uncertain tax positions and fair valuation of certain invested assets. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the year in which the estimates are revised and in any future years affected. Although some variability is inherent in these estimates, management believes that the amounts recorded are appropriate. The significant accounting policies used and the most significant judgments made by management in applying these accounting policies in the preparation of the 2020 Annual Consolidated Financial Statements are described in note 1 to the Consolidated Financial Statements.

Critical Actuarial Policies – Policy Liabilities (Insurance and Investment Contract Liabilities)

Policy liabilities for IFRS are valued in Canada under standards established by the Actuarial Standards Board. These standards are designed to ensure we establish an appropriate liability on the Consolidated Statements of Financial Position to cover future obligations to all our policyholders. The assumptions underlying the valuation of policy liabilities are required to be reviewed and updated on an ongoing basis to reflect recent and emerging trends in experience and changes in risk profile of the business. In conjunction with prudent business practices to manage both product and asset related risks, the selection and monitoring of appropriate valuation assumptions is designed to minimize our exposure to measurement uncertainty related to policy liabilities.

Policy liabilities have two major components: a best estimate amount and a provision for adverse deviation. The best estimate amount represents the estimated value of future policyholder benefits and settlement obligations to be paid over the term remaining on in-force policies, including the costs of servicing the policies. The best estimate amount is reduced by the future expected policy revenues and future expected investment income on assets supporting the policies, before any consideration for reinsurance ceded. To determine the best estimate amount, assumptions must be made for a number of key factors, including future mortality and morbidity rates, investment returns, rates of policy termination, and premium persistency, operating expenses, certain taxes (other than income taxes and includes temporary tax timing and permanent tax rate differences on the cash flows available to satisfy policy obligations) and foreign currency. Reinsurance is used to transfer part or all of a policy liability to another insurance company at terms negotiated with that insurance company. A separate asset for reinsurance ceded is calculated based on the terms of the reinsurance treaties that are in-force, with deductions taken for the credit standing of the reinsurance counterparties where appropriate.

To recognize the uncertainty involved in determining the best estimate actuarial liability assumptions, a provision for adverse deviation (“PfAD”) is established. The PfAD is determined by including a margin of conservatism for each assumption to allow for possible mis-estimation of, or deterioration in, future experience in order to provide greater comfort that the policy liabilities will be sufficient to pay future benefits. The CIA establishes suggested ranges for the level of margins for adverse deviation based on the risk profile of the business. Our margins are set taking into account the risk profile of our business. The effect of these margins is to increase policy liabilities over the best estimate assumptions. The margins for adverse deviation decrease the income that is recognized at the time a new policy is sold and increase the income recognized in later periods as the margins release as the remaining policy risks reduce.

Best Estimate Assumptions

We follow established processes to determine the assumptions used in the valuation of our policy liabilities. The nature of each risk factor and the process for setting the assumptions used in the valuation are discussed below.

Mortality

Mortality relates to the occurrence of death. Mortality assumptions are based on our internal as well as industry past and emerging experience and are differentiated by sex, underwriting class, policy type and geographic market. We make assumptions about future mortality improvements using historical experience derived from population data. Reinsurance is used to offset some of our direct mortality exposure on in-force life insurance policies with the impact of the reinsurance directly reflected in our policy valuation for the determination of policy liabilities net of reinsurance. Actual mortality experience is monitored against these assumptions separately for each business. The results are favourable where mortality rates are lower than assumed for life insurance and where mortality rates are higher than assumed for payout annuities. Overall 2020 experience was unfavourable (2019 – unfavourable) when compared with our assumptions.

Morbidity

Morbidity relates to the occurrence of accidents and sickness for the insured risks. Morbidity assumptions are based on our internal as well as industry past and emerging experience and are established for each type of morbidity risk and geographic market. For our JH Long Term Care business we make assumptions about future morbidity changes. Actual morbidity experience is monitored against these

 

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assumptions separately for each business. Our morbidity risk exposure relates to future expected claims costs for long-term care insurance, as well as for group benefits and certain individual health insurance products we offer. Overall 2020 experience was favourable (2019 – unfavourable) when compared with our assumptions.

Policy Termination and Premium Persistency

Policy termination includes lapses and surrenders, where lapses represent the termination of policies due to non-payment of premiums and surrenders represent the voluntary termination of policies by policyholders. Premium persistency represents the level of ongoing deposits on contracts where there is policyholder discretion as to the amount and timing of deposits. Policy termination and premium persistency assumptions are primarily based on our recent experience adjusted for expected future conditions. Assumptions reflect differences by type of contract within each geographic market and actual experience is monitored against these assumptions separately for each business. Overall 2020 experience was unfavourable (2019 – unfavourable) when compared with our assumptions.

Expenses and Taxes

Operating expense assumptions reflect the projected costs of maintaining and servicing in-force policies, including associated overhead expenses. The expenses are derived from internal cost studies and are projected into the future with an allowance for inflation. For some developing businesses, there is an expectation that unit costs will decline as these businesses mature. Actual expenses are monitored against assumptions separately for each business. Overall maintenance expenses for 2020 were unfavourable (2019 – unfavourable) when compared with our assumptions. Taxes reflect assumptions for future premium taxes and other non-income related taxes. For income taxes, policy liabilities are adjusted only for temporary tax timing and permanent tax rate differences on the cash flows available to satisfy policy obligations.

Investment Returns

As noted in the “Risk Factors and Risk Management – Market Risk – Asset Liability Management Strategy” section above, our general fund product liabilities are categorized into groups with similar characteristics in order to support them with a specific asset strategy. We seek to align the asset strategy for each group to the premium and benefit pattern, policyholder options and guarantees, and crediting rate strategies of the products they support. The projected cash flows from the assets are combined with projected cash flows from future asset purchases/sales to determine expected rates of return for future years. The investment strategies for future asset purchases and sales are based on our target investment policies for each segment and the reinvestment returns are derived from current and projected market rates for fixed interest investments and our projected outlook for non-fixed interest assets. Credit losses are projected based on our own and industry experience, as well as specific reviews of the current investment portfolio. Investment return assumptions for each asset class also incorporate expected investment management expenses that are derived from internal cost studies. In 2020, actual investment returns were unfavourable (2019 – unfavourable) when compared with our assumptions. Investment-related experience and the direct impact of interest rates and equity markets are discussed in the “Financial Performance” section above.

Segregated Funds

We offer segregated funds to policyholders that offer certain guarantees, including guaranteed returns of principal on maturity or death, as well as guarantees of minimum withdrawal amounts or income benefits. The on-balance sheet liability for these benefits is the expected cost of these guarantees including appropriate valuation margins for the various contingencies including mortality and lapse. The dominant driver of the cost of guarantees is the return on the underlying funds in which the policyholders invest. See “Risk Factors and Risk Management – Market Risk – Hedging Strategies for Variable Annuity and Other Equity Risks” and the “Financial Performance – Analysis of Net Income” sections above.

Foreign Currency

Foreign currency risk results from a mismatch of the currency of the policy liabilities and the currency of the assets designated to support these obligations. We generally match the currency of our assets with the currency of the liabilities they support, with the objective of mitigating the risk of economic loss arising from movements in currency exchange rates. Where a currency mismatch exists, the assumed rate of return on the assets supporting the liabilities is reduced to reflect the potential for adverse movements in exchange rates.

Experience Adjusted Products

Where policies have features that allow the impact of changes in experience to be passed on to policyholders through policy dividends, experience rating refunds, credited rates or other adjustable features, the projected policyholder benefits are adjusted to reflect the projected experience. Minimum contractual guarantees and other market considerations are taken into account in determining the policy adjustments.

Provision for Adverse Deviation

The total provision for adverse deviation is the sum of the provisions for adverse deviation for each risk factor. Margins for adverse deviation are established by product type and geographic market for each assumption or factor used in the determination of the best estimate actuarial liability. The margins are established based on the risk characteristics of the business being valued.

 

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Margins for interest rate risk are included by testing a number of scenarios of future interest rates. The margin can be established by testing a limited number of scenarios, some of which are prescribed by Canadian Actuarial Standards of Practice, and determining the liability based on the worst outcome. Alternatively, the margin can be set by testing many scenarios, which are developed according to actuarial guidance. Under this approach the liability would be the average of the outcomes above a percentile in the range prescribed by the Canadian Actuarial Standards of Practice.

In addition to the explicit margin for adverse deviation, the valuation basis for segregated fund liabilities explicitly limits the future revenue recognition in the valuation basis to the amount necessary to offset acquisition expenses, after allowing for the cost of any guarantee features. The fees that are in excess of this limitation are reported as an additional margin and are shown in segregated fund non-capitalized margins.

The provision for adverse deviation and the future revenue deferred in the valuation due to the limitations on recognition of future revenue in the valuation of segregated fund liabilities are shown in the table below.

 

As at December 31,

($ millions)

  2020     2019  

Best estimate actuarial liability

  $   268,147     $   246,105  

Provision for adverse deviation (“PfAD”)

   

Insurance risks (mortality/morbidity)

  $ 19,549     $ 18,147  

Policyholder behaviour (lapse/surrender/premium persistency)

    6,757       6,010  

Expenses

    1,950       1,688  

Investment risks (non-credit)

    33,531       29,650  

Investment risks (credit)

    1,121       1,061  

Segregated funds guarantees

    2,178       1,940  

Total PfAD(1)

    65,086       58,496  

Segregated funds – additional margins

    16,388       13,680  

Total of PfAD and additional segregated fund margins

  $ 81,474     $ 72,176  

 

(1)

Reported net actuarial liabilities (excluding the $4,720 million (2019 – $5,031 million) reinsurance asset related to the Company’s in-force participating life insurance closed block that is retained on a funds withheld basis as part of the New York Life transaction) as at December 31, 2020 of $333,233 million (2019 – $304,601 million) are comprised of $268,147 million (2019 – $246,105 million) of best estimate actuarial liabilities and $65,086 million (2019 – $58,496 million) of PfAD.

The change in the PfAD from period to period is impacted by changes in liability and asset composition, by currency and interest rate movements and by material changes in valuation assumptions. The overall increase in PfADs for insurance risks was primarily due to the impact of lower interest rates in the U.S. and Canada, the annual review of actuarial valuation methods and assumptions as well as the expected PfAD growth from in-force and new business, partially offset by the appreciation of the Canadian dollar relative to the U.S. dollar and Hong Kong dollar. The overall increase in PfADs for policyholder behaviour and expense was driven by the impact of lower interest rates in the U.S. and Canada and the expected PfAD growth from in-force and new business, partially offset by the appreciation of the Canadian dollar. The overall increase in PfADs for non-credit investment risks was driven by the expected PfAD growth from in-force and new business, lower interest rates in the U.S. and Canada, and the annual review of actuarial valuation methods and assumptions, partially offset by the appreciation of the Canadian dollar. The increase in the additional segregated fund margins was primarily due to increases in equity market and the annual review of actuarial valuation methods and assumptions.

Sensitivity of Earnings to Changes in Assumptions

When the assumptions underlying our determination of policy liabilities are updated to reflect recent and emerging experience or change in outlook, the result is a change in the value of policy liabilities which in turn affects net income attributed to shareholders. The sensitivity of net income attributed to shareholders to changes in non-economic and certain asset related assumptions underlying policy liabilities is shown below and assumes that there is a simultaneous change in the assumptions across all business units. The sensitivity of net income attributed to shareholders to a deterioration or improvement in non-economic assumptions underlying long-term care policy liabilities as at December 31, 2020 is also shown below.

For changes in asset related assumptions, the sensitivity is shown net of the corresponding impact on income of the change in the value of the assets supporting policy liabilities. In practice, experience for each assumption will frequently vary by geographic market and business, and assumption updates are made on a business/geographic specific basis. Actual results can differ materially from these estimates for a variety of reasons including the interaction among these factors when more than one changes, changes in actuarial and investment return and future investment activity assumptions, actual experience differing from the assumptions, changes in business mix, effective tax rates and other market factors, and the general limitations of our internal models.

 

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Potential impact on net income attributed to shareholders arising from changes to non-economic assumptions(1)

 

As at December 31,
($ millions)
   Decrease in after-tax net income
attributed to shareholders
 
           2020              2019  

Policy related assumptions

     

2% adverse change in future mortality rates(2),(4)

     

Products where an increase in rates increases insurance contract liabilities

   $ (500    $ (500

Products where a decrease in rates increases insurance contract liabilities

     (600      (500

5% adverse change in future morbidity rates (incidence and termination)(3),(4),(5)

       (5,700        (5,100

10% adverse change in future policy termination rates(4)

     (2,600      (2,400

5% increase in future expense levels

     (600      (600

 

(1)

The participating policy funds are largely self-supporting and generate no material impact on net income attributed to shareholders as a result of changes in non-economic assumptions. Experience gains or losses would generally result in changes to future dividends, with no direct impact to shareholders.

(2)

An increase in mortality rates will generally increase policy liabilities for life insurance contracts whereas a decrease in mortality rates will generally increase policy liabilities for policies with longevity risk such as payout annuities.

(3)

No amounts related to morbidity risk are included for policies where the policy liability provides only for claims costs expected over a short period, generally less than one year, such as Group Life and Health.

(4)

The impacts of the sensitivities on LTC for morbidity, mortality and lapse do not assume any partial offsets from the Company’s ability to contractually raise premium rates in such events, subject to state regulatory approval. In practice, we would plan to file for rate increases equal to the amount of deterioration resulting from the sensitivity.

(5)

This includes a 5% deterioration in incidence rates and 5% deterioration in claim termination rates.

Potential impact on net income attributed to shareholders arising from changes to non-economic assumptions for Long Term Care(1)

 

As at December 31,

($ millions)

   Decrease in after-tax net income
attributed to shareholders
 
   2020      2019  

Policy related assumptions

     

2% adverse change in future mortality rates(2),(3)

   $ (300    $ (300

5% adverse change in future morbidity incidence rates(2),(3),(4)

       (2,100        (1,900

5% adverse change in future morbidity claims termination rates(2),(3),(4)

     (3,100      (2,800

10% adverse change in future policy termination rates(2),(3)

     (400      (400

5% increase in future expense levels(3)

     (100      (100

 

(1)

Translated from US$ at 1.2732 for 2020.

(2)

The impacts of the sensitivities on LTC for morbidity, mortality and lapse do not assume any partial offsets from the Company’s ability to contractually raise premium rates in such events, subject to state regulatory approval. In practice, we would plan to file for rate increases equal to the amount of deterioration resulting from the sensitivities.

(3)

The impact of favourable changes to all the sensitivities is relatively symmetrical.

(4)

The comparatives for 2019 have been updated to reflect refinements between incidence and termination impacts implemented in 2020.

Potential impact on net income attributed to shareholders arising from changes to asset related assumptions supporting actuarial liabilities(1)

 

As at December 31,

($ millions)

 

Increase (decrease) in after-tax net income

attributed to shareholders

 
  2020           2019  
  Increase     Decrease           Increase     Decrease  

Asset related assumptions updated periodically in valuation basis changes

                  

100 basis point change in future annual returns for public equities(1)

  $ 500     $ (500     $ 500       $     (500

100 basis point change in future annual returns for ALDA(2)

      4,200         (5,200         3,800         (4,400

100 basis point change in equity volatility assumption for stochastic segregated fund modelling(3)

    (200     200         (300     300  

 

(1)

The sensitivity to public equity returns above includes the impact on both segregated fund guarantee reserves and on other policy liabilities. Expected long-term annual market growth assumptions for public equities are based on long-term historical observed experience and compliance with actuarial standards. As at December 31, 2020, the growth rates inclusive of dividends in the major markets used in the stochastic valuation models for valuing segregated fund guarantees are 9.2% (9.2% – December 31, 2019) per annum in Canada, 9.6% (9.6% – December 31, 2019) per annum in the U.S. and 6.2% (6.2% – December 31, 2019) per annum in Japan. Growth assumptions for European equity funds are market-specific and vary between 8.3% and 9.9%.

(2)

ALDA include commercial real estate, timber, farmland, direct oil and gas properties, and private equities, some of which relate to oil and gas. Expected long-term return assumptions for ALDA and public equity are set in accordance with the Standards of Practice for the valuation of insurance contract liabilities and guidance published by the CIA. Annual best estimate return assumptions for ALDA and public equity include market growth rates and annual income, such as rent, production proceeds and dividends, and will vary based on our holding period. Over a 20-year horizon, our best estimate return assumptions range between 5.25% and 11.65%, with an average of 9.3% (9.3% – December 31, 2019) based on the current asset mix backing our guaranteed insurance and annuity business as of December 31, 2020. Our return assumptions including the margins for adverse deviations in our valuation, which take into account the uncertainty of achieving the returns, range between 2.5% and 7.5%, with an average of 6.1% (6.1% – December 31, 2019) based on the asset mix backing our guaranteed insurance and annuity business as of December 31, 2020.

(3)

Volatility assumptions for public equities are based on long-term historical observed experience and compliance with actuarial standards. The resulting volatility assumptions are 16.5% per annum in Canada and 17.1% per annum in the U.S. for large cap public equities, and 19.1% per annum in Japan. For European equity funds, the volatility varies between 16.3% and 17.7%.

 

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Review of Actuarial Methods and Assumptions

A comprehensive review of actuarial methods and assumptions is performed annually. The review is designed to reduce the Company’s exposure to uncertainty by ensuring assumptions for both asset related and liability related risks remain appropriate. This is accomplished by monitoring experience and selecting assumptions which represent a current best estimate view of expected future experience, and margins for adverse deviations that are appropriate for the risks assumed. While the assumptions selected represent the Company’s current best estimates and assessment of risk, the ongoing monitoring of experience and changes in the economic environment are likely to result in future changes to the actuarial assumptions, which could materially impact the measurement of insurance contract liabilities.

2020 Review of Actuarial Methods and Assumptions

The completion of the 2020 annual review of actuarial methods and assumptions resulted in an increase in insurance contract liabilities of $563 million, net of reinsurance, and a decrease in net income attributed to shareholders of $198 million post-tax.

 

    Change in insurance contract liabilities, net of reinsurance        

For the year ended December 31, 2020

($ millions)

  Total    

Attributed to

participating

policyholders’

account(1)

   

Attributed to

shareholders’

account

   

Change in net

income attributed

to shareholders

(post-tax)

 

Canada variable annuity product review

  $ (42   $     $ (42   $ 31  

Mortality and morbidity updates

    (304     (1     (303     232  

Lapses and policyholder behaviour

    893             893       (682

Investment-related updates

    (212     (153     (59     31  

Other updates

    228       455       (227         190  

Net impact

  $     563     $     301     $     262     $ (198

 

(1)

The change in insurance contract liabilities, net of reinsurance, attributable to the participating policyholders’ account was driven by refinements to our valuation models, primarily due to annual updates to reflect market movements in the first half of 2020.

Canada variable annuity product review

The review of our variable annuity product in Canada resulted in a $31 million post-tax gain to net income attributed to shareholders.

The gain was driven by refinements to our segregated fund guaranteed minimum withdrawal benefit valuation models, partially offset by updates to lapse assumptions to reflect emerging experience.

Updates to mortality and morbidity

Mortality and morbidity updates resulted in a $232 million post-tax gain to net income attributed to shareholders.

The gain was primarily driven by a review of our reinsurance arrangements and mortality margins for preferred risk classes in our Canada Individual Insurance business, as well as updates to the morbidity assumptions on certain products in Japan. This was partially offset by a charge from the review of mortality assumptions in our U.S. Insurance business, where emerging experience showed higher mortality at older attained ages.

Other updates to mortality and morbidity assumptions were made across several products, largely in Canada, to reflect recent experience resulting in a net post-tax gain to net income attributable to shareholders.

Updates to lapses and policyholder behaviour

Updates to lapses and policyholder behaviour assumptions resulted in a $682 million post-tax charge to net income attributed to shareholders.

We completed a detailed review of the lapse assumptions for universal life policies in Canada, including both yearly renewable term, and level cost of insurance products. We lowered the ultimate lapse assumptions due to the emergence of more recent data, which resulted in a post-tax charge of $504 million to net income attributed to shareholders, primarily driven by adverse experience on large policies.

Other updates to lapse and policyholder behaviour assumptions were made across several products to reflect recent experience resulting in a net post-tax charge to net income attributable to shareholders. The primary driver of the charge was adverse lapse experience from retail policies in Japan.

Investment-related updates

Updates to investment return assumptions resulted in a $31 million post-tax gain to net income attributed to shareholders.

Other updates

Other updates resulted in a $190 million post-tax gain to net income attributed to shareholders. This incorporated several positive items including updates to our U.S. segregated fund guaranteed minimum withdrawal benefit valuation models, as well as updates to the projection of our tax and liability cash flows in the U.S to align with updated U.S. tax and statutory reporting standard changes, partially offset by refinements to our valuation models, primarily driven by annual updates to reflect market movements in the first half of 2020.

 

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Impact of changes in actuarial methods and assumptions by segment

The impact of changes in actuarial methods and assumptions in Canada resulted in a $77 million post-tax gain to net income attributed to shareholders. The gain was driven by updates to certain Individual Insurance reinsurance arrangements and mortality margins for preferred risk classes, as well as refinements to our valuation models, primarily driven by annual updates to reflect market movements in the first half of 2020, largely offset by updated lapse assumptions on our universal life products.

In the U.S., the impact of changes in actuarial methods and assumptions resulted in a $301 million post-tax charge to net income attributed to shareholders. The charge was driven by updates to our life mortality assumptions to reflect emerging experience, as well as refinements to our valuation models, primarily driven by annual updates to reflect market movements in the first half of 2020, partially offset by updates to our U.S. segregated fund guaranteed minimum withdrawal benefit valuation models, as well as updates to the projection of our tax and liability cash flows to align with updated U.S. tax and statutory reporting standards.

The impact of changes in actuarial methods and assumptions in Asia resulted in a $41 million post-tax charge to net income attributed to shareholders. The charge was primarily driven by Japan, whereby lapse and morbidity updates on certain products to reflect emerging experience were partially offsetting.

The impact of changes in actuarial methods and assumptions in Corporate and Other (which includes our Reinsurance business) resulted in a $67 million post-tax gain to net income attributed to shareholders.

2019 Review of Actuarial Methods and Assumptions

The 2019 full year review of actuarial methods and assumptions resulted in an increase in insurance contract liabilities of $74 million, net of reinsurance, and a decrease in net income attributed to shareholders of $21 million post-tax.

 

    Change in insurance contract liabilities, net of reinsurance        

For the year ended December 31, 2019

($ millions)

  Total     Attributed to
participating
policyholders’
account
    Attributed to
shareholders’
account
    Change in net
income attributed to
shareholders
(post-tax)
 

Long-term care triennial review

  $ 11     $     $ 11     $ (8

Mortality and morbidity updates

    25       47       (22     14  

Lapses and policyholder behaviour

    135       17         118       (75

Investment return assumptions

    12       81       (69     70  

Other updates

      (109       (163     54         (22

Net impact

  $ 74     $ (18   $ 92     $ (21

Long-term care triennial review

U.S. Insurance completed a comprehensive long-term care (“LTC”) experience study in 2019. The review included all aspects of claim assumptions, the impact of policyholder benefit reductions as well as the progress on future premium rate increases and a review of margins on the business. The impact of the LTC review was approximately net neutral to net income attributed to shareholders.

The experience study showed lower termination rates than expected during the elimination or “qualifying” period (which is the period between when a claim is filed and when benefit payments begin), and favourable incidence as policyholders are filing claims at a lower rate than expected. In addition, policyholders are electing to reduce their benefits in lieu of paying increased premiums. The overall claims experience review led to a post-tax charge to net income attributed to shareholders of approximately $1.9 billion (US$1.4 billion), which includes a gain of approximately $0.2 billion (US$0.16 billion) for the impact of benefit reductions.

The experience study included additional claims data due to the natural aging of the block of business. As a result, we reduced certain margins for adverse deviations, which resulted in a post-tax gain to net income attributed to shareholders of approximately $0.7 billion (US$0.5 billion).

While the study continued to support the assumptions of both future morbidity and mortality improvement, we reduced our morbidity improvement assumption, which resulted in a post-tax charge to net income attributed to shareholders of approximately $0.7 billion (US$0.5 billion).1

The review of premium increases assumed in the policy liabilities resulted in a post-tax gain to net income attributed to shareholders of approximately $2.0 billion (US$1.5 billion) related to the expected timing and amount of premium increases that are subject to state approval and reflects a 30% provision for adverse deviation. The expected premium increases are informed by past approval rates applied to prior state filings that remain outstanding and estimated new requests based on our 2019 review of morbidity, mortality and lapse assumptions. Our actual experience in obtaining premium increases could be materially different than what we have assumed, resulting in further increases or decreases in policy liabilities, which could be material.2

 

1 

The padded morbidity assumption is 0.25% for 25 years (down from 0.45%) and unpadded morbidity improvement assumption is 0.50% to age 100 (down from 0.75%).

2 

See “Caution regarding forward-looking statements” above.

 

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Updates to mortality and morbidity assumptions

Mortality and morbidity updates resulted in a $14 million post-tax gain to net income attributed to shareholders. This included a review of our Canada Individual Insurance mortality and reinsurance arrangements.

Updates to lapses and policyholder behaviour

Updates to lapses and policyholder behaviour assumptions resulted in a $75 million post-tax charge to net income attributed to shareholders.

The primary driver of the charge was an update to our lapse assumptions across several term and whole life product lines within our Canada Individual Insurance business, partially offset by several updates to lapse and premium persistency assumptions in other geographies.

Updates to investment return assumptions

Updates to investment return assumptions resulted in a $70 million post-tax gain to net income attributed to shareholders.

The primary driver of the gain was an update to our senior secured loan default rates to reflect recent experience, as well as our investment and crediting rate strategy for certain universal life products. This was partially offset by updates to certain private equity investment assumptions in Canada.

Other updates

Other updates resulted in a $22 million post-tax charge to net income attributed to shareholders.

Impact of changes in actuarial methods and assumptions by segment

The impact of changes in actuarial methods and assumptions in Canada was a post-tax charge to net income attributed to shareholders of $108 million. This charge was driven by updates to lapse rates for certain products within Canada Individual Insurance and updates to certain private equity investment assumptions. In the U.S., we recorded a post-tax gain to net income attributed to shareholders of $71 million, driven primarily by updates to senior secured loan default rates. In addition, several modelling refinements netted to a positive impact. Updates to assumptions in Asia segment and Corporate and Other segment (which includes our Reinsurance business) resulted in a post-tax gain of $16 million.

Change in net insurance contract liabilities

The change in net insurance contract liabilities can be attributed to several sources: new business, acquisitions, in-force movement and currency impact. Changes in net insurance contract liabilities are substantially offset in the financial statements by premiums, investment income, policy benefits and other policy related cash flows. The changes in net insurance contract liabilities by business segment are shown below:

2020 Net Insurance Contract Liability Movement Analysis

 

For the year ended December 31, 2020

($ millions)

  Asia     Canada     U.S.     Corporate
and Other
    Total  

Balance, January 1

  $ 87,937     $ 83,297     $ 138,859     $ (285   $ 309,808  

New business(1),(2)

    3,014       (229     381             3,166  

In-force movement(1),(3)

    11,516       7,897       14,370       (131     33,652  

Changes in methods and assumptions(1)

    393       (619     840       (51     563  

Reinsurance transactions(1),(4)

                (3,360           (3,360

Currency impact(5)

    98             (4,151     9       (4,044

Balance, December 31

  $   102,958     $   90,346     $   146,939     $   (458)     $   339,785  

 

(1)

The $31,719 million increase reported as the change in insurance contract liabilities and change in reinsurance assets on the 2020 Consolidated Statements of Income primarily consists of changes due to the changes in methods and assumptions, normal in-force movement, new policies and associated embedded derivatives, partially offset by reinsurance transactions. The net impact of these items result in an increase of $34,021 million, of which $32,709 million is included in the Consolidated Statements of Income as an increase in insurance contract liabilities and change in reinsurance assets, with the remaining $1,312 million increase included in net claims and benefits. The change in insurance contract liabilities amount on the Consolidated Statements of Income also includes the change in embedded derivatives associated with insurance contracts, however these embedded derivatives are included in other liabilities on the Consolidated Statements of Financial Position.

(2)

New business policy liability impact is positive/(negative) when estimated future premiums, together with future investment income, are expected to be more/(less) than sufficient to pay estimated future benefits, policyholder dividends and refunds, taxes (excluding income taxes) and expenses on new policies issued.

(3)

The net in-force movement over the year was an increase of $33,652 million, primarily reflecting the impact of interest rate declines and expected growth in insurance contract liabilities in all three geographic segments.

(4) 

On September 30, 2020, the Company, through its subsidiary John Hancock Life Insurance Company (U.S.A.), entered into a reinsurance agreement with Global Atlantic Financial Group Ltd to reinsure a block of legacy U.S. bank owned life insurance (“BOLI”). Under the terms of the transaction, the Company will maintain responsibility for servicing the policies with no expected impact to the BOLI policyholders. The transaction was structured such that the Company ceded policyholder contract liabilities and transferred invested assets backing these liabilities.

(5)

The decrease in policy liabilities from currency impact reflects the appreciation of the Canadian dollar relative to the U.S. dollar, Hong Kong dollar, slightly offset by the depreciation of the Canadian dollar relative to the Japanese yen. To the extent assets are currency matched to liabilities, the decrease in insurance contract liabilities due to currency impact is offset by a corresponding decrease from currency impact in the value of assets supporting those liabilities.

 

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2019 Net Insurance Contract Liability Movement Analysis

 

For the year ended December 31, 2019

($ millions)

  Asia     Canada     U.S.     Corporate
and Other
    Total  

Balance, January 1

  $   76,127     $   76,628     $   133,142     $ (168   $   285,729  

New business(1),(2)

    2,996       (227     482             3,251  

In-force movement(1),(3)

    12,079       6,770       12,163       (91     30,921  

Changes in methods and assumptions(1)

    60       133       (84     (35     74  

Currency impact(4)

    (3,325     (7     (6,844               9       (10,167

Balance, December 31

  $ 87,937     $ 83,297     $ 138,859     $ (285   $ 309,808  

 

(1)

The $32,458 million increase reported as the change in insurance contract liabilities and change in reinsurance assets on the 2019 Consolidated Statements of Income primarily consists of changes due to the changes in methods and assumptions, normal in-force movement, new policies and associated embedded derivatives. The net impact of these items result in an increase of $34,246 million, of which $33,496 million is included in the Consolidated Statements of Income as an increase in insurance contract liabilities and change in reinsurance assets, with the remaining $750 million increase included in net claims and benefits. The change in insurance contract liabilities amount on the Consolidated Statements of Income also includes the change in embedded derivatives associated with insurance contracts, however these embedded derivatives are included in other liabilities on the Consolidated Statements of Financial Position.

(2)

New business policy liability impact is positive/(negative) when estimated future premiums, together with future investment income, are expected to be more/(less) than sufficient to pay estimated future benefits, policyholder dividends and refunds, taxes (excluding income taxes) and expenses on new policies issued.

(3)

The net in-force movement over the year was an increase of $30,921 million, primarily reflecting the impact of interest rate declines and expected growth in insurance contract liabilities in all three geographic segments.

(4)

The decrease in policy liabilities from currency impact reflects the appreciation of the Canadian dollar relative to the U.S. dollar, Hong Kong dollar and Japanese yen. To the extent assets are currency matched to liabilities, the increase in insurance contract liabilities due to currency impact is offset by a corresponding increase from currency impact in the value of assets supporting those liabilities.

Critical Accounting Policies

Consolidation

The Company is required to consolidate the financial position and results of entities it controls. Control exists when the Company:

 

 

Has the power to govern the financial and operating policies of the entity;

 

Is exposed to a significant portion of the entity’s variable returns; and

 

Is able to use its power to influence variable returns from the entity.

The Company uses the same principles to assess control over any entity it is involved with. In evaluating control, potential factors assessed include the effects of:

 

 

Substantive potential voting rights that are currently exercisable or convertible;

 

Contractual management relationships with the entity;

 

Rights and obligations resulting from policyholders to manage investments on their behalf; and

 

The effect of any legal or contractual restraints on the Company from using its power to affect its variable returns from the entity.

An assessment of control is based on arrangements in place and the assessed risk exposures at inception. Initial evaluations are reconsidered at a later date if:

 

 

The Company acquires additional interests in the entity or its interests in an entity are diluted;

 

The contractual arrangements of the entity are amended such that the Company’s involvement with the entity changes; or

 

The Company’s ability to use its power to affect its variable returns from the entity changes.

Subsidiaries are consolidated from the date on which control is obtained by the Company and cease to be consolidated from the date that control ceases.

Fair Value of Invested Assets

A large portion of the Company’s invested assets are recorded at fair value. Refer to note 1 of the 2020 Annual Consolidated Financial Statements for a description of the methods used in determining fair values. When quoted prices in active markets are not available for a particular investment, significant judgment is required to determine an estimated fair value based on market standard valuation methodologies including discounted cash flow methodologies, matrix pricing, consensus pricing services, or other similar techniques. The inputs to these market standard valuation methodologies include: current interest rates or yields for similar instruments, credit rating of the issuer or counterparty, industry sector of the issuer, coupon rate, call provisions, sinking fund requirements, tenor (or expected tenor) of the instrument, management’s assumptions regarding liquidity, volatilities and estimated future cash flows. Accordingly, the estimated fair values are based on available market information and management’s judgments about the key market factors impacting these financial instruments. Financial markets are susceptible to severe events evidenced by rapid depreciation in asset values accompanied by a reduction in asset liquidity. The Company’s ability to sell assets, or the price ultimately realized for these assets, depends upon the demand and liquidity in the market and increases the use of judgment in determining the estimated fair value of certain assets.

 

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Evaluation of Invested Asset Impairment

AFS fixed income and equity securities are carried at fair market value, with changes in fair value recorded in other comprehensive income (“OCI”) with the exception of unrealized gains and losses on foreign currency translation of AFS fixed income securities which are included in net income attributed to shareholders. Securities are reviewed on a regular basis and any fair value decrement is transferred out of AOCI and recorded in net income attributed to shareholders when it is deemed probable that the Company will not be able to collect all amounts due according to the contractual terms of a fixed income security or when fair value of an equity security has declined significantly below cost or for a prolonged period of time.

Provisions for impairments of mortgage loans and private placement loans are recorded with losses reported in earnings when there is no longer reasonable assurance as to the timely collection of the full amount of the principal and interest.

Significant judgment is required in assessing whether an impairment has occurred and in assessing fair values and recoverable values. Key matters considered include economic factors, Company and industry specific developments, and specific issues with respect to single issuers and borrowers.

Changes in circumstances may cause future assessments of asset impairment to be materially different from current assessments, which could require additional provisions for impairment. Additional information on the process and methodology for determining the allowance for credit losses is included in the discussion of credit risk in note 9 to the 2020 Consolidated Financial Statements.

Derivative Financial Instruments

The Company uses derivative financial instruments (“derivatives”) including swaps, forwards and futures agreements, and options to help manage current and anticipated exposures to changes in interest rates, foreign exchange rates, commodity prices and equity market prices, and to replicate permissible investments. Refer to note 4 to the 2020 Consolidated Financial Statements for a description of the methods used to determine the fair value of derivatives.

The accounting for derivatives is complex and interpretations of the primary accounting guidance continue to evolve in practice. Judgment is applied in determining the availability and application of hedge accounting designations and the appropriate accounting treatment under such accounting guidance. Differences in judgment as to the availability and application of hedge accounting designations and the appropriate accounting treatment may result in a differing impact on the Consolidated Financial Statements of the Company from that previously reported. Assessments of hedge effectiveness and measurements of ineffectiveness of hedging relationships are also subject to interpretations and estimations. If it was determined that hedge accounting designations were not appropriately applied, reported net income attributed to shareholders could be materially affected.

Employee Future Benefits

The Company maintains defined contribution and defined benefit pension plans and other post-employment plans for employees and agents, including registered (tax qualified) pension plans that are typically funded, as well as supplemental non-registered (non-qualified) pension plans for executives, retiree welfare plans and disability welfare plans that are typically not funded. The largest defined benefit pension and retiree welfare plans in the U.S. and Canada are the material plans that are discussed herein and in note 15 to the 2020 Annual Consolidated Financial Statements.

Due to the long-term nature of defined benefit pension and retiree welfare plans, the calculation of the defined benefit obligation and net benefit cost depends on various assumptions such as discount rates, salary increase rates, cash balance interest crediting rates, health care cost trend rates and rates of mortality. These assumptions are determined by management and are reviewed annually. The key assumptions, as well as the sensitivity of the defined benefit obligation to changes in these assumptions, are presented in note 15 to the 2020 Annual Consolidated Financial Statements.

Changes in assumptions and differences between actual and expected experience give rise to actuarial gains and losses that affect the amount of the defined benefit obligation and OCI. For 2020, the amount recorded in OCI was a gain of $47 million (2019 – gain of $113 million) for the defined benefit pension plans and a gain of $10 million (2019 – loss of $21 million) for the retiree welfare plans.

Contributions to the registered (tax qualified) defined benefit pension plans are made in accordance with the applicable U.S. and Canadian regulations. During 2020, the Company contributed $6 million (2019 – $13 million) to these plans. As at December 31, 2020, the difference between the fair value of assets and the defined benefit obligation for these plans was a surplus of $446 million (2019 – surplus of $394 million). For 2021, the contributions to the plans are expected to be approximately $2 million.1

The Company’s supplemental pension plans for executives are not funded; benefits under these plans are paid as they become due. During 2020, the Company paid benefits of $65 million (2019 – $62 million) under these plans. As at December 31, 2020, the defined benefit obligation for these plans, which is reflected as a liability in the balance sheet, amounted to $752 million (2019 – $758 million).

The Company’s retiree welfare plans are partially funded, although there are no regulations or laws governing or requiring the funding of these plans. As at December 31, 2020, the difference between the fair value of plan assets and the defined benefit obligation for these plans was a deficit of $32 million (2019 – deficit of $47 million).

 

1 

See “Caution regarding forward-looking statements” above.

 

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Income Taxes

The Company is subject to income tax laws in various jurisdictions. Tax laws are complex and potentially subject to different interpretations by the taxpayer and the relevant tax authority. The provision for income taxes represents management’s interpretation of the relevant tax laws and its estimate of current and future income tax implications of the transactions and events during the period. A deferred tax asset or liability results from temporary differences between carrying values of the assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are recorded based on expected future tax rates and management’s assumptions regarding the expected timing of the reversal of such temporary differences. The realization of deferred tax assets depends upon the existence of sufficient taxable income within the carryback or carry forward periods under the tax law in the applicable tax jurisdiction. A deferred tax asset is recognized to the extent that future realization of the tax benefit is probable. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the tax benefit will be realized. At December 31, 2020, we had $4,842 million of deferred tax assets (December 31, 2019 – $4,574 million). Factors in management’s determination include, among other things, the following:

 

 

Future taxable income exclusive of reversing temporary differences and carry forwards;

 

Future reversals of existing taxable temporary differences;

 

Taxable income in prior carryback years; and

 

Tax planning strategies.

The Company may be required to change its provision for income taxes if the ultimate deductibility of certain items is successfully challenged by taxing authorities or if estimates used in determining the amount of deferred tax assets to recognize change significantly, or when receipt of new information indicates the need for adjustment in the recognition of deferred tax assets. Additionally, future events, such as changes in tax laws, tax regulations, or interpretations of such laws or regulations, could have an impact on the provision for income tax, deferred tax balances, actuarial liabilities (see Critical Actuarial and Accounting Policies – Expenses and Taxes above) and the effective tax rate. Any such changes could significantly affect the amounts reported in the Consolidated Financial Statements in the year these changes occur.

Goodwill and Intangible Assets

At December 31, 2020, under IFRS we had $5,714 million of goodwill and $4,215 million of intangible assets ($1,560 million of which are intangible assets with indefinite lives). Goodwill and intangible assets with indefinite lives are tested at the cash generating unit level (“CGU”) or group of CGUs level. A CGU comprises the smallest group of assets that are capable of generating largely independent cash flows and is either a business segment or a level below. The tests performed in 2020 demonstrated that there was no impairment of goodwill or intangible assets with indefinite lives. Changes in discount rates and cash flow projections used in the determination of embedded values or reductions in market-based earnings multiples may result in impairment charges in the future, which could be material.

Impairment charges could occur in the future as a result of changes in economic conditions. The goodwill testing for 2021 will be updated based on the conditions that exist in 2021 and may result in impairment charges, which could be material.

Future Accounting and Reporting Changes

There are several new accounting and reporting changes issued under IFRS including those still under development by the IASB. We have summarized below key recently issued accounting standards that are anticipated to have a significant impact on the Company. Accounting and reporting changes are discussed in note 2 of the 2020 Consolidated Financial Statements.

IFRS 9 “Financial Instruments”

IFRS 9 “Financial Instruments” was issued in November 2009 and amended in October 2010, November 2013 and July 2014, and is effective for years beginning on or after January 1, 2018, to be applied retrospectively, or on a modified retrospective basis. Additionally, the IASB issued amendments in October 2017 that are effective for annual periods beginning on or after January 1, 2019. In conjunction with the amendments to IFRS 17 issued in June 2020, the IASB amended IFRS 4 “Insurance Contracts” to permit eligible insurers to apply IFRS 9 effective January 1, 2023, alongside IFRS 17. The standard is intended to replace IAS 39 “Financial Instruments: Recognition and Measurement”.

The project has been divided into three phases: classification and measurement, impairment of financial assets, and hedge accounting. IFRS 9’s current classification and measurement methodology provides that financial assets are measured at either amortized cost or fair value on the basis of the entity’s business model for managing the financial assets and the contractual cash flow characteristics of the financial assets. The classification and measurement for financial liabilities remains generally unchanged; however, for a financial liability designated as at fair value through profit or loss, revisions have been made in the accounting for changes in fair value attributable to changes in the credit risk of that liability. Gains or losses caused by changes in an entity’s own credit risk on such liabilities are no longer recognized in profit or loss but instead are reflected in OCI.

Revisions to hedge accounting were issued in November 2013 as part of the overall IFRS 9 project. The amendment introduces a new hedge accounting model, together with corresponding disclosures about risk management activity for those applying hedge accounting. The new model represents a substantial overhaul of hedge accounting that will enable entities to better reflect their risk management activities in their financial statements.

 

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Revisions issued in July 2014 replace the existing incurred loss model used for measuring the allowance for credit losses with an expected loss model. Changes were also made to the existing classification and measurement model designed primarily to address specific application issues raised by early adopters of the standard. They also address the income statement accounting mismatches and short-term volatility issues which have been identified as a result of the insurance contracts project.

The Company elected to defer IFRS 9 until January 1, 2023 as permitted under the amendments to IFRS 4 “Insurance Contracts”. The Company is assessing the impact of this standard.

IFRS 17 “Insurance Contracts”

The original IFRS 17 standard was issued in May 2017 and the effective date was set for years beginning on January 1, 2021. Amendments to IFRS 17 “Insurance Contracts” were issued in June 2020 and include a two-year deferral of the effective date. IFRS 17 as amended, is effective for years beginning on January 1, 2023, to be applied retrospectively. If full retrospective application to a group of contracts is impractical, the modified retrospective or fair value methods may be used. The standard will replace IFRS 4 “Insurance Contracts” and will materially change the recognition and measurement of insurance contracts and the corresponding presentation and disclosures in the Company’s Financial Statements.

The principles underlying IFRS 17 differ from the CALM as permitted by IFRS 4. While there are many differences, the following outlines two of the key differences:

 

 

Under IFRS 17 the discount rate used to estimate the present value of insurance contract liabilities is based on the characteristics of the liability, whereas under CALM, the Company uses the rates of returns for current and projected assets supporting insurance contract liabilities to value the liabilities. The difference in the discount rate approach also impacts the timing of investment-related experience earnings emergence. Under CALM, investment- related experience includes the impact of investing activities. The impact of investing activities is directly related to the CALM methodology. Under IFRS 17, the impact of investing activities will emerge over the life of the asset and is independent of the liability measurement.

 

Under IFRS 17 new business gains are recorded on the Consolidated Statements of Financial Position (in the contractual service margin component of the insurance contract liability) and amortized into income as services are provided, new business losses are recorded into income immediately. Under CALM new business gains (and losses) are recognized in income immediately.

The treatment of the discount rate and new business gains under IFRS 17 could create additional volatility in our financial results and depending on the LICAT treatment, on our capital position. This may require the introduction of new non-GAAP measures to explain our results.

In addition, in certain jurisdictions, including Canada, it could have a material effect on tax and regulatory capital positions and other financial metrics that are dependent upon IFRS accounting values. A summary of some of the key risks are outlined in the “Risk Factors and Risk Management – Emerging Risks” section above.

The Company continues its assessment of the implications of this standard and expects that it will have a significant impact on the Company’s Consolidated Financial Statements. The establishment of a Contractual Service Margin on our in-force business is expected to lead to an increase in insurance contract liabilities and corresponding decrease in equity upon transition. The Contractual Service Margin represents unearned profits that are expected to amortize into income as services are provided. We continue to evaluate the potential impacts of all other changes including available accounting policy choices under IFRS 17 on the measurement of our insurance contract liabilities.

 

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12. Controls and Procedures

Disclosure Controls and Procedures

Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us is recorded, processed, summarized, and reported accurately and completely and within the time periods specified under Canadian and U.S. securities laws. Our process includes controls and procedures that are designed to ensure that information is accumulated and communicated to management, including the CEO and CFO, to allow timely decisions regarding required disclosure.

As of December 31, 2020, management evaluated the effectiveness of its disclosure controls and procedures as defined under the rules adopted by the U.S. Securities and Exchange Commission and the Canadian securities regulatory authorities. This evaluation was performed under the supervision of the Audit Committee, the CEO and CFO. Based on that evaluation, the CEO and CFO concluded that our disclosure controls and procedures were effective as at December 31, 2020.

MFC’s Audit Committee has reviewed this MD&A and the 2020 Consolidated Financial Statements and MFC’s Board of Directors approved these reports prior to their release.

Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control system was designed to provide reasonable assurance to management and the Board of Directors regarding the preparation and fair presentation of published financial statements in accordance with generally accepted accounting principles. All internal control systems, no matter how well designed, have inherent limitations due to manual controls. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Management maintains a comprehensive system of controls intended to ensure that transactions are executed in accordance with management’s authorization, assets are safeguarded, and financial records are reliable. Management also takes steps to ensure that information and communication flows are effective and to monitor performance, including performance of internal control procedures.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020 based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission 2013 framework in Internal Control – Integrated Framework. Based on this assessment, management believes that, as of December 31, 2020, the Company’s internal control over financial reporting is effective.

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2020 has been audited by Ernst & Young LLP, the Company’s independent registered public accounting firm that also audited the Consolidated Financial Statements of the Company for the year ended December 31, 2020. Their report expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020.

Changes in Internal Control over Financial Reporting

No changes were made in our internal control over financial reporting during the year ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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13. Performance and Non-GAAP Measures

We use a number of non-GAAP financial measures to measure overall performance and to assess each of our businesses. A financial measure is considered a non-GAAP measure for Canadian securities law purposes if it is presented other than in accordance with generally accepted accounting principles used for the Company’s audited financial statements. Non-GAAP measures include: core earnings (loss); core ROE; diluted core earnings per common share; pre-tax core earnings; core earnings before income taxes, depreciation and amortization (“core EBITDA”); core EBITDA margin; core investment gains; core general expenses, constant exchange rate basis (measures that are reported on a constant exchange rate basis include percentage growth/decline in core earnings, core general expenses, pre-tax core earnings, sales, APE sales, gross flows, net flows, core EBITDA, new business value (“NBV”), assets under management, assets under management and administration (“AUMA”), average assets under management and administration (“average AUMA”) and Global Wealth and Asset Management revenue); assets under administration; expense efficiency ratio; assets under management and administration; assets under management; average AUMA, consolidated capital; embedded value; new business value; new business value margin (“NBV margin”); sales; APE sales; gross flows; and net flows. Non-GAAP financial measures are not defined terms under GAAP and, therefore, are unlikely to be comparable to similar terms used by other issuers. Therefore, they should not be considered in isolation or as a substitute for any other financial information prepared in accordance with GAAP.

Core earnings (loss) is a non-GAAP measure which we believe aids investors in better understanding the long-term earnings capacity and valuation of the business. Core earnings allows investors to focus on the Company’s operating performance by excluding the direct impact of changes in equity markets and interest rates, changes in actuarial methods and assumptions as well as a number of other items, outlined below, that we believe are material, but do not reflect the underlying earnings capacity of the business. For example, due to the long-term nature of our business, the mark-to-market movements of equity markets, interest rates, foreign currency exchange rates and commodity prices from period-to-period can, and frequently do, have a substantial impact on the reported amounts of our assets, liabilities and net income attributed to shareholders. These reported amounts are not actually realized at the time and may never be realized if the markets move in the opposite direction in a subsequent period. This makes it very difficult for investors to evaluate how our businesses are performing from period-to-period and to compare our performance with other issuers.

We believe that core earnings better reflect the underlying earnings capacity and valuation of our business. We use core earnings as the basis for management planning and reporting and, along with net income attributed to shareholders, as a key metric used in our short and mid-term incentive plans at the total Company and operating segment level.

While core earnings is relevant to how we manage our business and offers a consistent methodology, it is not insulated from macro-economic factors which can have a significant impact. See “Quarterly Financial Information” below for reconciliation of core earnings to net income (loss) attributed to shareholders.

Any future changes to the core earnings definition referred to below, will be disclosed.

Items included in core earnings:

 

1.

Expected earnings on in-force policies, including expected release of provisions for adverse deviation, fee income, margins on group business and spread business such as Manulife Bank and asset fund management.

2.

Macro hedging costs based on expected market returns.

3.

New business strain and gains.

4.

Policyholder experience gains or losses.

5.

Acquisition and operating expenses compared with expense assumptions used in the measurement of policy liabilities.

6.

Up to $400 million of net favourable investment-related experience reported in a single year, which are referred to as “core investment gains”. This means up to $100 million in the first quarter, up to $200 million on a year-to-date basis in the second quarter, up to $300 million on a year-to-date basis in the third quarter and up to $400 million on a full year basis in the fourth quarter. Any investment-related experience losses reported in a quarter will be offset against the net year-to-date investment-related experience gains with the difference being included in core earnings subject to a maximum of the year-to-date core investment gains and a minimum of zero, which reflects our expectation that investment-related experience will be positive through-the-business cycle. To the extent any investment-related experience losses cannot be fully offset in a quarter they will be carried forward to be offset against investment-related experience gains in subsequent quarters in the same year, for purposes of determining core investment gains. Investment-related experience relates to fixed income investing, ALDA returns, credit experience and asset mix changes other than those related to a strategic change. An example of a strategic asset mix change is outlined below.

 

  ¡   

This favourable and unfavourable investment-related experience is a combination of reported investment experience as well as the impact of investing activities on the measurement of our policy liabilities. We do not attribute specific components of investment-related experience to amounts included or excluded from core earnings.

  ¡   

The $400 million threshold represents the estimated average annualized amount of net favourable investment-related experience that the Company reasonably expects to achieve through-the-business cycle based on historical experience. It is not a forecast of expected net favourable investment-related experience for any given fiscal year.

  ¡   

Our average net annualized investment-related experience calculated from the introduction of core earnings in 2012 to the end of 2020 was $380 million a decrease from the average of $527 million (2012-2019) due to losses on investment-related experience (compared with average gains in prior years, including the core investment gains).

 

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  ¡   

The decision announced on December 22, 2017 to reduce the allocation to ALDA in the portfolio asset mix supporting our legacy businesses was the first strategic asset mix change since we introduced the core earnings metric in 2012. We refined our description of investment-related experience in 2017 to note that asset mix changes other than those related to a strategic change are taken into consideration in the investment-related experience component of core investment gains.

  ¡   

While historical investment return time horizons may vary in length based on underlying asset classes generally exceeding 20 years, for purposes of establishing the threshold, we look at a business cycle that is five or more years and includes a recession. We monitor the appropriateness of the threshold as part of our annual five-year planning process and would adjust it, either to a higher or lower amount, in the future if we believed that our threshold was no longer appropriate.

  ¡   

Specific criteria used for evaluating a potential adjustment to the threshold may include, but are not limited to, the extent to which actual investment-related experience differs materially from actuarial assumptions used in measuring insurance contract liabilities, material market events, material dispositions or acquisitions of assets, and regulatory or accounting changes.

 

7.

Earnings on surplus other than mark-to-market items. Gains on available-for-sale (“AFS”) equities and seed money investments in segregated and mutual funds are included in core earnings.

8.

Routine or non-material legal settlements.

9.

All other items not specifically excluded.

10.

Tax on the above items.

11.

All tax related items except the impact of enacted or substantively enacted income tax rate changes.

Items excluded from core earnings:

 

1.

The direct impact of equity markets and interest rates and variable annuity guarantee liabilities includes the items listed below.

 

  ¡   

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 not dynamically hedged.

  ¡   

Gains (charges) on general fund equity investments supporting policy liabilities and on fee income.

  ¡   

Gains (charges) on macro equity hedges relative to expected costs. The expected cost of macro hedges is calculated using the equity assumptions used in the valuation of insurance and investment contract liabilities.

  ¡   

Gains (charges) on higher (lower) fixed income reinvestment rates assumed in the valuation of insurance and investment contract liabilities.

  ¡   

Gains (charges) on sale of AFS bonds and open derivatives not in hedging relationships in the Corporate and Other segment.

 

2.

Net favourable investment-related experience in excess of $400 million per annum or net unfavourable investment-related experience on a year-to-date basis.

3.

Mark-to-market gains or losses on assets held in the Corporate and Other segment other than gains on AFS equities and seed money investments in new segregated or mutual funds.

4.

Changes in actuarial methods and assumptions. As noted in the “Critical Actuarial and Accounting Policies” section above, policy liabilities for IFRS are valued in Canada under standards established by the Actuarial Standards Board. The standards require a comprehensive review of actuarial methods and assumptions to be performed annually. The review is designed to reduce the Company’s exposure to uncertainty by ensuring assumptions for both asset related and liability related risks remain appropriate and is accomplished by monitoring experience and selecting assumptions which represent a current best estimate view of expected future experience, and margins that are appropriate for the risks assumed. Changes related to ultimate reinvestment rates (“URR”) are included in the direct impact of equity markets and interest rates and variable annuity guarantee liabilities. By excluding the results of the annual reviews, core earnings assist investors in evaluating our operational performance and comparing our operational performance from period to period with other global insurance companies because the associated gain or loss is not reflective of current year performance and not reported in net income in most actuarial standards outside of Canada.

5.

The impact on the measurement of policy liabilities of changes in product features or new reinsurance transactions, if material.

6.

Goodwill impairment charges.

7.

Gains or losses on disposition of a business.

8.

Material one-time only adjustments, including highly unusual/extraordinary and material legal settlements or other items that are material and exceptional in nature.

9.

Tax on the above items.

10.

Impact of enacted or substantially enacted income tax rate changes.

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.

 

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The Company also uses financial performance measures that are prepared on a constant exchange rate basis, which are non-GAAP measures that exclude the impact of currency fluctuations (from local currency to Canadian dollars at a total Company level and from local currency to U.S. dollars in Asia). Amounts stated on a constant exchange rate basis in this report are calculated, as appropriate, using the income statement and balance sheet exchange rates effective for the fourth quarter of 2020. Measures that are reported on a constant exchange rate basis include growth in core earnings, core general expenses, pre-tax core earnings, sales, APE sales, gross flows, net flows, core EBITDA, new business value, new business value margin, assets under management, assets under management and administration, average assets under management and administration and Global Wealth and Asset Management revenue.

Assets under management and administration (“AUMA”) is a non-GAAP measure of the size of the Company. It is comprised of the non-GAAP measures assets under management (“AUM”), which includes both assets of general account and external client assets for which we provide investment management services, and assets under administration, which includes assets for which we provide administrative services only. Assets under management and administration is a common industry metric for WAM businesses.

Assets under management and administration

 

As at December 31,

($ millions)

  2020     2019  

Total invested assets

  $ 410,977     $ 378,527  

Segregated funds net assets

    367,436       343,108  

Assets under management per financial statements

    778,413       721,635  

Mutual funds

    238,068       217,015  

Institutional advisory accounts (excluding segregated funds)

    107,387       95,410  

Other funds

    10,880       9,401  

Total assets under management

    1,134,748       1,043,461  

Other assets under administration

    162,688       145,397  

Currency impact

          (12,039

AUMA at constant exchange rates

  $   1,297,436     $   1,176,819  

Average assets under management and administration (“average AUMA”) is a non-GAAP measure of the average of Global WAM’s AUMA during the reporting period. It is a measure used in analyzing and explaining fee income and earnings of our Global Wealth and Asset Management segment. It is calculated as the average of the opening balance of AUMA and the ending balance of AUMA using daily balances where available and month-end or quarter-end averages when daily averages are unavailable.

Consolidated capital

The definition we use for consolidated capital, a non-GAAP measure, serves as a foundation of our capital management activities at the MFC level. For regulatory reporting purposes, the numbers are further adjusted for various additions or deductions to capital as mandated by the guidelines used by OSFI. Consolidated capital is calculated as the sum of: (i) total equity excluding accumulated other comprehensive income (“AOCI”) on cash flow hedges; and (ii) liabilities for capital instruments.

Consolidated capital

 

As at December 31,

($ millions)

  2020     2019  

Total equity

  $ 53,005     $ 50,106  

Add AOCI loss on cash flow hedges

    230       143  

Add qualifying capital instruments

    7,829       7,120  

Consolidated capital

  $   61,064     $   57,369  

Core EBITDA is a non-GAAP measure which Manulife uses to better understand the long-term earnings capacity and valuation of our Global WAM business on a basis more comparable to how the profitability of global asset managers is generally measured. Core EBITDA presents core earnings before the impact of interest, taxes, depreciation, and amortization. Core EBITDA excludes certain acquisition expenses related to insurance contracts in our retirement businesses which are deferred and amortized over the expected lifetime of the customer relationship under the CALM. Core EBITDA was selected as a key performance indicator for our Global WAM business, as EBITDA is widely used among asset management peers, and core earnings is a primary profitability metric for the Company overall.

Core EBITDA margin is a non-GAAP measure which Manulife uses to better understand the long-term profitability of our Global WAM business on a more comparable basis to how profitability of global asset managers are measured. Core EBITDA margin presents core earnings before the impact of interest, taxes, depreciation, and amortization divided by total revenue from these businesses. Core EBITDA margin was selected as a key performance indicator for our Global WAM business, as EBITDA margin is widely used among asset management peers, and core earnings is a primary profitability metric for the Company overall.

 

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Global Wealth and Asset Management

 

For the years ended December 31,

($ millions)

  2020     2019  

Core EBITDA

  $   1,680     $   1,536  

Amortization of deferred acquisition costs and other depreciation

    (320     (311

Amortization of deferred sales commissions

    (85     (81

Core earnings before income taxes

    1,275       1,144  

Core income tax (expense) recovery

    (172     (123

Core earnings

  $ 1,103     $ 1,021  

 

Core EBITDA

  $   1,680     $   1,536  

Revenue

    5,749       5,595  

Core EBITDA Margin

    29.2%       27.5%  

Expense efficiency ratio is a non-GAAP measure which Manulife uses to measure progress towards our target to be more efficient. Efficiency ratio is defined as pre-tax general expenses included in core earnings (“core general expenses”) divided by the sum of core earnings before income taxes (“pre-tax core earnings”) and core general expenses.

Embedded value (“EV”) is a measure of the present value of shareholders’ interests in the expected future distributable earnings on in-force business reflected in the Consolidated Statements of Financial Position of Manulife, excluding any value associated with future new business. EV is calculated as the sum of the adjusted net worth and the value of in-force business. The adjusted net worth is the IFRS shareholders’ equity adjusted for goodwill and intangibles, fair value of surplus assets, the carrying value of debt and preferred shares, and local statutory balance sheet, regulatory reserve, and capital for Manulife’s Asian business. The value of in-force business in Canada and the U.S. is the present value of expected future IFRS earnings on in-force business less the present value of the cost of holding capital to support the in-force business under the LICAT framework. The value of in-force business in Asia reflects local statutory earnings and capital requirements. The value of in-force excludes our Global WAM, Manulife Bank and Property and Casualty Reinsurance businesses.

New business value (“NBV”) is the change in embedded value as a result of sales in the reporting period. NBV is calculated as the present value of shareholders’ interests in expected future distributable earnings, after the cost of capital, on actual new business sold in the period using assumptions that are consistent with the assumptions used in the calculation of embedded value. NBV excludes businesses with immaterial insurance risks, such as the Company’s Global WAM, Manulife Bank and the short-term Property and Casualty Reinsurance businesses. NBV is a useful metric to evaluate the value created by the Company’s new business franchise.

New business value margin (“NBV margin”) is calculated as NBV divided by APE excluding non-controlling interests. APE is calculated as 100% of annualized first year premiums for recurring premium products, and as 10% of single premiums for single premium products. Both NBV and APE used in the NBV margin calculation are after non-controlling interests and exclude our Global WAM, Manulife Bank and Property and Casualty Reinsurance businesses. NBV margin is a useful metric to help understand the profitability of our new business.

Sales are measured according to product type:

For individual insurance, sales include 100% of new annualized premiums and 10% of both excess and single premiums. For individual insurance, new annualized premiums reflect the annualized premium expected in the first year of a policy that requires premium payments for more than one year. Single premium is the lump sum premium from the sale of a single premium product, e.g. travel insurance. Sales are reported gross before the impact of reinsurance.

For group insurance, sales include new annualized premiums and administrative services only premium equivalents on new cases, as well as the addition of new coverages and amendments to contracts, excluding rate increases.

APE sales are comprised of 100% of regular premiums/deposits and 10% of single premiums/deposits for both insurance and insurance-based wealth accumulation products.

Insurance-based wealth accumulation product sales include all new deposits into variable and fixed annuity contracts. As we discontinued sales of new Variable Annuity contracts in the U.S. in 1Q13, subsequent deposits into existing U.S. Variable Annuity contracts are not reported as sales. Asia variable annuity deposits are included in APE sales.

Bank new lending volumes include bank loans and mortgages authorized in the period.

Gross flows is a new business measure presented for our Global WAM business and includes all deposits into mutual funds, college savings 529 plans, group pension/retirement savings products, private wealth and institutional asset management products. Gross flows is a common industry metric for WAM businesses as it provides a measure of how successful the businesses are at attracting assets.

Net flows is presented for our Global WAM business and includes gross flows less redemptions for mutual funds, college savings 529 plans, group pension/retirement savings products, private wealth and institutional asset management products. Net flows is a common industry metric for WAM businesses as it provides a measure of how successful the businesses are at attracting and retaining assets. When gross flows exceed redemptions, net flows will be positive and will be referred to as net inflows. Conversely, when redemptions exceed gross flows, net flows will be negative and will be referred to as net outflows.

 

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14. Additional Disclosures

Contractual Obligations

In the normal course of business, the Company enters into contracts that give rise to obligations fixed by agreement as to the timing and dollar amount of payment.

As at December 31, 2020, the Company’s contractual obligations and commitments were as follows:

 

Payments due by period

($ millions)

  Total     Less than 1
year
    1 to 3 years     3 to 5 years     After 5 years  

Long-term debt(1)

  $ 11,342     $ 243     $ 486     $ 486     $ 10,127  

Liabilities for capital instruments(1)

    9,611       598       463       924       7,626  

Investment commitments

    9,937       3,272       3,401       2,759       505  

Lease liabilities

    353       116       115       47       75  

Insurance contract liabilities(2)

    827,727       10,672       9,859       15,416       791,780  

Investment contract liabilities(1)

    5,551       297       514       520       4,220  

Deposits from bank clients

    20,889       16,783       2,591       1,515        

Other

    1,126       300       615       203       8  

Total contractual obligations

  $   886,536     $   32,281     $   18,044     $   21,870     $   814,341  

 

(1)

The contractual payments include principal, interest and distributions; and reflect the amounts payable up to and including the final contractual maturity date. The contractual payments reflect the amounts payable from January 1, 2021 up to and including the final contractual maturity date. In the case of floating rate obligations, the floating rate index is based on the interest rates as at December 31, 2020 and is assumed to remain constant to the final contractual maturity date. The Company may have the contractual right to redeem or repay obligations prior to maturity and if such right is exercised, total contractual obligations paid and the timing of payment could vary significantly from the amounts and timing included in the table. We redeemed $0.35 billion of 2.389% Fixed/Floating Subordinated Debentures on January 5, 2021. This redemption has been reflected in the contractual payments.

(2)

Insurance contract liabilities cash flows include estimates related to the timing and payment of death and disability claims, policy surrenders, policy maturities, annuity payments, minimum guarantees on segregated fund products, policyholder dividends, commissions and premium taxes offset by contractual future premiums on in-force contracts. These estimated cash flows are based on the best estimate assumptions used in the determination of insurance contract liabilities. These amounts are undiscounted and reflect recoveries from reinsurance agreements. Due to the use of assumptions, actual cash flows may differ from these estimates (see “Policy Liabilities”). Cash flows include embedded derivatives measured separately at fair value.

Legal and Regulatory Proceedings

We are regularly involved in legal actions, both as a defendant and as a plaintiff. Information on legal and regulatory proceedings can be found in note 18 of the 2020 Annual Consolidated Financial Statements.

 

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Table of Contents

Quarterly Financial Information

The following table provides summary information related to our eight most recently completed quarters:

 

As at and for the three months ended

($ millions, except per share amounts or otherwise
stated)

  Dec 31,
2020
    Sept 30,
2020
    Jun 30,
2020
    Mar 31,
2020
    Dec 31,
2019
    Sept 30,
2019
    Jun 30,
2019
    Mar 31,
2019
 

Revenue

               

Premium income

               

Life and health insurance(1)

  $ 8,651     $ 5,302     $ 7,560     $ 8,454     $ 8,373     $ 8,309     $ 7,696     $ 8,077  

Annuities and pensions

    672       704       673       901       865       1,026       995       237  

Net premium income

    9,323       6,006       8,233       9,355       9,238       9,335       8,691       8,314  

Investment income

    4,366       3,521       5,262       3,284       4,004       3,932       3,710       3,747  

Realized and unrealized gains and losses on assets supporting insurance and investment contract liabilities(2)

    1,683       1,100       11,626       4,558       (4,503     6,592       7,185       8,926  

Other revenue

    2,497       2,749       2,365       2,980       2,433       2,770       2,634       2,562  

Total revenue

  $   17,869     $   13,376     $   27,486     $   20,177     $   11,172     $   22,629     $   22,220     $   23,549  

Income (loss) before income taxes

  $ 2,065     $ 2,170     $ 832     $ 1,704     $ 1,225     $ 715     $ 1,756     $ 2,524  

Income tax (expense) recovery

    (224     (381     7       (597     (89     (100     (240     (289

Net income (loss)

  $ 1,841     $ 1,789     $ 839     $ 1,107     $ 1,136     $ 615     $ 1,516     $ 2,235  

Net income (loss) attributed to shareholders

  $ 1,780     $ 2,068     $ 727     $ 1,296     $ 1,228     $ 723     $ 1,475     $ 2,176  

Reconciliation of core earnings to net income attributed to shareholders

               

Total core earnings(3)

  $ 1,474     $ 1,453     $ 1,561     $ 1,028     $ 1,477     $ 1,527     $ 1,452     $ 1,548  

Other items to reconcile net income attributed to shareholders to core earnings:

               

Investment-related experience outside of core earnings

    585       147       (916     (608     182       (289     146       327  

Direct impact of equity markets, interest rates and variable annuity guarantee liabilities

    (323     390       73       792       (389     (494     (144     249  

Change in actuarial methods and assumptions

          (198                       (21            

Reinsurance transactions

    44       276       9       12       (34           63       52  

Tax-related items and other

                      72       (8           (42      

Net income (loss) attributed to shareholders

  $ 1,780     $ 2,068     $ 727     $ 1,296     $ 1,228     $ 723     $ 1,475     $ 2,176  

Basic earnings (loss) per common share

  $ 0.90     $ 1.04     $ 0.35     $ 0.64     $ 0.61     $ 0.35     $ 0.73     $ 1.09  

Diluted earnings (loss) per common share

  $ 0.89     $ 1.04     $ 0.35     $ 0.64     $ 0.61     $ 0.35     $ 0.73     $ 1.08  

Segregated funds deposits

  $ 9,741     $ 9,158     $ 8,784     $ 11,215     $ 9,417     $ 9,160     $ 9,398     $ 10,586  

Total assets (in billions)

  $ 880     $ 876     $ 866     $ 831     $ 809     $ 812     $ 790     $ 780  

Weighted average common shares (in millions)

    1,940       1,940       1,939       1,943       1,948       1,961       1,965       1,965  

Diluted weighted average common shares (in millions)

    1,943       1,942       1,941       1,947       1,953       1,965       1,969       1,969  

Dividends per common share

  $ 0.280     $ 0.280     $ 0.280     $ 0.280     $ 0.250     $ 0.250     $ 0.250     $ 0.250  

CDN$ to US$1 — Statement of Financial Position

    1.2732       1.3339       1.3628       1.4187       1.2988       1.3243       1.3087       1.3363  

CDN$ to US$1 — Statement of Income

    1.3030       1.3321       1.3854       1.3449       1.3200       1.3204       1.3377       1.3295  

 

(1)

Includes ceded premiums related to the reinsurance of a block of our legacy U.S. Bank-Owned Life Insurance of US$2.4 billion in 3Q20.

(2)

For fixed income assets supporting insurance and investment contract liabilities and for equities supporting pass-through products and derivatives related to variable hedging programs, the impact of realized and unrealized gains (losses) on the assets is largely offset in the change in insurance and investment contract liabilities.

(3)

This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” above.

 

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Table of Contents

Selected Annual Financial Information

 

As at and for the years ended December 31,

($ millions, except per share amounts)

  2020     2019     2018  

Revenue

     

Asia

  $ 28,455     $ 28,673     $ 19,710  

Canada

    18,638       19,609       13,598  

U.S.

    23,361       24,594       586  

Global Wealth and Asset Management

    5,749       5,595       5,463  

Corporate and Other

    2,705       1,099       (385

Total revenue

  $ 78,908     $ 79,570     $ 38,972  

Total assets

  $   880,349     $   809,130     $   750,271  

Long-term financial liabilities

     

Long-term debt

  $ 6,164     $ 4,543     $ 4,769  

Capital instruments

    7,829       7,120       8,732  

Total financial liabilities

  $ 13,993     $ 11,663     $ 13,501  

Dividend per common share

  $ 1.12     $ 1.00     $ 0.91  

Cash dividend per Class A Share, Series 2

    1.1625       1.1625       1.1625  

Cash dividend per Class A Share, Series 3

    1.125       1.125       1.125  

Cash dividend per Class 1 Share, Series 3

    0.5445       0.5445       0.5445  

Cash dividend per Class 1 Share, Series 4

    0.587       0.7713       0.6536  

Cash dividend per Class 1 Share, Series 5

    0.9728       0.9728       0.9728  

Cash dividend per Class 1 Share, Series 7

    1.078       1.078       1.078  

Cash dividend per Class 1 Share, Series 9

    1.0878       1.0878       1.0878  

Cash dividend per Class 1 Share, Series 11

    1.1828       1.1828       1.1371  

Cash dividend per Class 1 Share, Series 13

    1.1035       1.1035       0.9884  

Cash dividend per Class 1 Share, Series 15

    0.9465       0.9608       0.975  

Cash dividend per Class 1 Share, Series 17

    0.950       0.975       0.975  

Cash dividend per Class 1 Share, Series 19

    0.9266       0.95       0.95  

Cash dividend per Class 1 Share, Series 21

    1.400       1.40       1.40  

Cash dividend per Class 1 Share, Series 23

    1.2125       1.2125       1.2125  

Cash dividend per Class 1 Share, Series 25(1)

    1.175       1.175       0.9706  

 

(1)

On February 20, 2018, MFC issued 10 million of Non-cumulative Rate Reset Class 1 Shares Series 25.

Differences between IFRS and Hong Kong Financial Reporting Standards

Manulife’s Consolidated Financial Statements are presented in accordance with IFRS. IFRS differs in certain respects from Hong Kong Financial Reporting Standards (“HKFRS”). Until IFRS 17 “Insurance Contracts” becomes effective, IFRS 4 “Insurance Contracts” permits the use of the insurance standard in effect at the time an issuer adopts IFRS. IFRS insurance contract liabilities are valued in Canada under standards established by the Canadian Actuarial Standards Board. In certain interest rate environments, insurance contract liabilities determined in accordance with HKFRS may be higher than those computed in accordance with current IFRS.

IFRS and Hong Kong Regulatory Requirements

Insurers in Hong Kong are required by the Insurance Authority to meet minimum solvency requirements. As at December 31, 2020, the Company’s business that falls within the scope of these requirements has sufficient assets to meet the minimum solvency requirements under both Hong Kong regulatory requirements and IFRS.

Outstanding Common Shares

As at January 31, 2021, MFC had 1,940,458,689 common shares outstanding.

Additional Information Available

Additional information relating to Manulife, including MFC’s Annual Information Form, is available on the Company’s website at www.manulife.com and on SEDAR at www.sedar.com.

 

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Table of Contents

Responsibility for Financial Reporting

The accompanying consolidated financial statements of Manulife Financial Corporation are the responsibility of management and have been approved by the Board of Directors. It is also the responsibility of management to ensure that all information in the annual report to shareholders is consistent with these consolidated financial statements.

The consolidated financial statements have been prepared by management in accordance with International Financial Reporting Standards and the accounting requirements of the Office of the Superintendent of Financial Institutions, Canada. When alternative accounting methods exist, or when estimates and judgment are required, management has selected those amounts that present the Company’s financial position and results of operations in a manner most appropriate to the circumstances.

Appropriate systems of internal control, policies and procedures have been maintained to ensure that financial information is both relevant and reliable. The systems of internal control are assessed on an ongoing basis by management and the Company’s internal audit department.

The actuary appointed by the Board of Directors (the “Appointed Actuary”) is responsible for ensuring that assumptions and methods used in the determination of policy liabilities are appropriate to the circumstances and that reserves will be adequate to meet the Company’s future obligations under insurance and annuity contracts.

The Board of Directors is responsible for ensuring that management fulfills its responsibility for financial reporting and is ultimately responsible for reviewing and approving the consolidated financial statements. These responsibilities are carried out primarily through an Audit Committee of unrelated and independent directors appointed by the Board of Directors.

The Audit Committee meets periodically with management, the internal auditors, the peer reviewers, the external auditors and the Appointed Actuary to discuss internal control over the financial reporting process, auditing matters and financial reporting issues. The Audit Committee reviews the consolidated financial statements prepared by management and then recommends them to the Board of Directors for approval. The Audit Committee also recommends to the Board of Directors and shareholders the appointment of external auditors and approval of their fees.

The consolidated financial statements have been audited by the Company’s external auditors, Ernst & Young LLP, in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Ernst & Young LLP has full and free access to management and the Audit Committee.

 

LOGO    LOGO

Roy Gori

President and Chief Executive Officer

  

Philip Witherington

Chief Financial Officer

Toronto, Canada

February 10, 2021

Appointed Actuary’s Report to the Shareholders

I have valued the policy liabilities and reinsurance recoverables of Manulife Financial Corporation for its Consolidated Statements of Financial Position as at December 31, 2020 and 2019 and their change in the Consolidated Statements of Income for the years then ended in accordance with actuarial practice generally accepted in Canada, including selection of appropriate assumptions and methods.

In my opinion, the amount of policy liabilities net of reinsurance recoverables makes appropriate provision for all policyholder obligations and the consolidated financial statements fairly present the results of the valuation.

 

 

LOGO

Steven Finch

Appointed Actuary

Toronto, Canada

February 10, 2021

 

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Table of Contents

Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of Manulife Financial Corporation

Opinion on the Consolidated Financial Statements

We have audited the consolidated financial statements of Manulife Financial Corporation (the “Company”), which comprise the Consolidated Statements of Financial Position as at December 31, 2020 and 2019, and the Consolidated Statements of Income, Consolidated Statements of Comprehensive Income, Consolidated Statements of Changes in Equity and Consolidated Statements of Cash Flows for the years then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as at December 31, 2020 and 2019, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

Basis for Opinion

We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of the audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context.

We have fulfilled the responsibilities described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the consolidated financial statements. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying consolidated financial statements.

 

   
    

Valuation of Insurance Contract Liabilities

 

 

Key Audit
Matter

 

 

The Company recorded insurance contract liabilities of $385.6 billion at December 31, 2020 on its consolidated statement of financial position. Insurance contract liabilities are reported gross of reinsurance ceded and represent management’s estimate of the amount which, together with estimated future premiums and net investment income, will be sufficient to pay estimated future benefits, policyholder dividends and refunds, taxes (other than income taxes) and expenses on insurance policies in-force. Insurance contract liabilities are determined using the Canadian Asset Liability Method (CALM), as required by the Canadian Institute of Actuaries (CIA). The valuation of insurance contract liabilities is based on an explicit projection of cash flows using current assumptions for each material cash flow item. Cash flows related to insurance contract liabilities have two major components: a best estimate assumption and a provision for adverse deviation. Best estimates are made with respect to key assumptions including mortality, morbidity, investment returns, policy termination rates, premium persistency, expenses, and taxes. A provision for adverse deviation is recorded to reflect the inherent uncertainty related to the timing and amount of the best estimate assumptions and is determined by including a margin of conservatism for each assumption. Disclosures on this matter are found in Note 1 ‘Nature of Operations and Significant Accounting Policies’ and Note 6 ‘Insurance Contract Liabilities and Reinsurance Assets’ of the consolidated financial statements.

 

Auditing the valuation of insurance contract liabilities was complex and required the application of significant auditor judgement due to the complexity of the cash flow models, the selection and use of assumptions, and the interrelationship of these variables in measuring insurance contract liabilities. The audit effort involved professionals with specialized skill and knowledge to assist in evaluating the audit evidence obtained.

 

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Table of Contents
   
    

Valuation of Insurance Contract Liabilities

 

 

How Our Audit Addressed the Key Audit Matter

 

 

We obtained an understanding, evaluated the design, and tested the operating effectiveness of management’s controls over the valuation of insurance contract liabilities. The controls we tested related to, among other areas, actuarial methodology, integrity of data used, controls over relevant information technology, and the assumption setting and implementation processes used by management.

 

To test the valuation of insurance contract liabilities, our audit procedures included, among other procedures, involving our actuarial specialists to assess the methodology and assumptions with respect to compliance with the Company’s policies. We performed audit procedures over key assumptions, including the implementation of those assumptions into the models. These procedures included testing underlying support and documentation, including reviewing a sample of experience studies supporting specific assumptions, challenging the nature, timing, and completeness of changes recorded, assessing whether individual changes were errors or refinements of estimates, and comparing the level of margins for adverse deviation to suggested ranges established by the CIA. We also performed independent recalculation procedures on a sample of insurance policies to evaluate management’s recorded reserves. In addition, we assessed the adequacy of the disclosures provided in the notes to the consolidated financial statements.

   
    

Valuation of Invested Assets with Significant Non-Observable Market Inputs

 

 

Key Audit
Matter

 

 

The Company recorded invested assets of $17.5 billion at December 31, 2020 on its consolidated statement of financial position which are both (a) measured at fair value and (b) subject to a valuation estimate that includes significant non-observable market inputs. These invested assets are classified as level 3 within the Company’s hierarchy of fair value measurements and include real estate, timber and agriculture, high estimation uncertainty bonds, and private equities which are valued using internal models. There is increased measurement uncertainty associated with these invested assets due to market disruption associated with COVID-19. These assets are valued based on internal models or third-party pricing sources that incorporate assumptions with a high-level of subjectivity. Examples of such assumptions include interest rates, yield curves, credit ratings and related spreads, expected future cash flows and transaction prices of comparable assets. Disclosures on this matter are found in Note 1 ‘Nature of Operations and Significant Accounting Policies’ and Note 3 ‘Invested Assets and Investment Income’ of the consolidated financial statements.

 

Auditing the valuation of these invested assets was complex and required the application of significant auditor judgment in assessing the valuation methodologies and non-observable inputs used. The valuation of these assets is sensitive to the significant non-observable market inputs described above, which are inherently forward-looking and could be affected by future economic and market conditions. The audit effort involved professionals with specialized skill and knowledge to assist in evaluating the audit evidence obtained.

 

 

How Our Audit Addressed the Key Audit Matter

 

 

We obtained an understanding, evaluated the design, and tested the operating effectiveness of management’s controls over the investment valuation process. The controls we tested related to, among other areas, management’s determination and approval of assumptions and methodologies used in model-based valuations and management’s review of valuations provided by third-party pricing sources.

 

To test the valuation of these invested assets, our audit procedures included, among other procedures, involving our valuation specialists to assess the methodologies and significant assumptions used by management. These procedures included assessing the valuation methodologies used with respect to the Company’s policies, valuation guidelines, and industry practice and comparing a sample of valuation assumptions used against benchmarks, including comparable transactions and independent pricing sources where available. We also performed independent investment valuations on a sample of investments with high estimation uncertainty to evaluate management’s recorded values. In addition, we assessed the adequacy of the disclosures provided in the notes to the consolidated financial statements.

Other Information

Management is responsible for the other information. The other information comprises:

 

 

Management’s Discussion and Analysis; and

 

The information, other than the consolidated financial statements and our auditor’s report thereon, in the 2020 Annual Report.

Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.

In connection with our audit of the consolidated financial statements, our responsibility is to read the other information, and in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated.

We obtained Management’s Discussion and Analysis prior to the date of this auditor’s report. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact in this auditor’s report. We have nothing to report in this regard.

The 2020 Annual Report is expected to be made available to us after the date of the auditor’s report. If based on the work we will perform on this other information, we conclude there is a material misstatement of other information, we are required to report that fact to those charged with governance.

 

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Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Company’s financial reporting process.

Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

 

 

Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

 

Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control.

 

Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

 

Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern.

 

Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

 

Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Company to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our report of independent registered public accounting firm unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

The engagement partner on the audit resulting in this report of independent registered public accounting firm is Sean Musselman.

 

LOGO

Chartered Professional Accountants

Licensed Public Accountants

Toronto, Canada

February 10, 2021

 

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Table of Contents

Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of Manulife Financial Corporation

Opinion on the Consolidated Financial Statements

We have audited the accompanying Consolidated Statements of Financial Position of Manulife Financial Corporation (the “Company”) as of December 31, 2020 and 2019, the related Consolidated Statements of Income, Consolidated Statements of Comprehensive Income, Consolidated Statements of Changes in Equity and Consolidated Statements of Cash Flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

Report on Internal Control over Financial Reporting

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 10, 2021, expressed an unqualified opinion thereon.    

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

 

   
    

Valuation of Insurance Contract Liabilities

 

Description of the Matter

 

 

The Company recorded insurance contract liabilities of $385.6 billion at December 31, 2020 on its consolidated statement of financial position. Insurance contract liabilities are reported gross of reinsurance ceded and represent management’s estimate of the amount which, together with estimated future premiums and net investment income, will be sufficient to pay estimated future benefits, policyholder dividends and refunds, taxes (other than income taxes) and expenses on insurance policies in-force. Insurance contract liabilities are determined using the Canadian Asset Liability Method (CALM), as required by the Canadian Institute of Actuaries (CIA). The valuation of insurance contract liabilities is based on an explicit projection of cash flows using current assumptions for each material cash flow item. Cash flows related to insurance contract liabilities have two major components: a best estimate assumption and a provision for adverse deviation. Best estimates are made with respect to key assumptions including mortality, morbidity, investment returns, policy termination rates, premium persistency, expenses, and taxes. A provision for adverse deviation is recorded to reflect the inherent uncertainty related to the timing and amount of the best estimate assumptions and is determined by including a margin of conservatism for each assumption. Disclosures on this matter are found in Note 1 ‘Nature of Operations and Significant Accounting Policies’ and Note 6 ‘Insurance Contract Liabilities and Reinsurance Assets’ of the consolidated financial statements.

 

Auditing the valuation of insurance contract liabilities was complex and required the application of significant auditor judgement due to the complexity of the cash flow models, the selection and use of assumptions, and the interrelationship of these variables in measuring insurance contract liabilities. The audit effort involved professionals with specialized skill and knowledge to assist in evaluating the audit evidence obtained.

 

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Table of Contents
   
    

Valuation of Insurance Contract Liabilities

 

How We Addressed the Matter in Our Audit

 

 

We obtained an understanding, evaluated the design, and tested the operating effectiveness of management’s controls over the valuation of insurance contract liabilities. The controls we tested related to, among other areas, actuarial methodology, integrity of data used, controls over relevant information technology, and the assumption setting and implementation processes used by management.

 

To test the valuation of insurance contract liabilities, our audit procedures included, among other procedures, involving our actuarial specialists to assess the methodology and assumptions with respect to compliance with the Company’s policies. We performed audit procedures over key assumptions, including the implementation of those assumptions into the models. These procedures included testing underlying support and documentation, including reviewing a sample of experience studies supporting specific assumptions, challenging the nature, timing, and completeness of changes recorded, assessing whether individual changes were errors or refinements of estimates, and comparing the level of margins for adverse deviation to suggested ranges established by the CIA. We also performed independent recalculation procedures on a sample of insurance policies to evaluate management’s recorded reserves. In addition, we assessed the adequacy of the disclosures provided in the notes to the consolidated financial statements.

 

   
    

Valuation of Invested Assets with Significant Non-Observable Market Inputs

 

Description of the Matter

 

 

The Company recorded invested assets of $17.5 billion at December 31, 2020 on its consolidated statement of financial position which are both (a) measured at fair value and (b) subject to a valuation estimate that includes significant non-observable market inputs. These invested assets are classified as level 3 within the Company’s hierarchy of fair value measurements and include real estate, timber and agriculture, high estimation uncertainty bonds, and private equities which are valued using internal models. There is increased measurement uncertainty associated with these invested assets due to market disruption associated with COVID-19. These assets are valued based on internal models or third-party pricing sources that incorporate assumptions with a high-level of subjectivity. Examples of such assumptions include interest rates, yield curves, credit ratings and related spreads, expected future cash flows and transaction prices of comparable assets. Disclosures on this matter are found in Note 1 ‘Nature of Operations and Significant Accounting Policies’ and Note 3 ‘Invested Assets and Investment Income’ of the consolidated financial statements.

 

Auditing the valuation of these invested assets was complex and required the application of significant auditor judgment in assessing the valuation methodologies and non-observable inputs used. The valuation of these assets is sensitive to the significant non-observable market inputs described above, which are inherently forward-looking and could be affected by future economic and market conditions. The audit effort involved professionals with specialized skill and knowledge to assist in evaluating the audit evidence obtained.

 

How We Addressed the Matter in Our Audit

 

 

We obtained an understanding, evaluated the design, and tested the operating effectiveness of management’s controls over the investment valuation process. The controls we tested related to, among other areas, management’s determination and approval of assumptions and methodologies used in model-based valuations and management’s review of valuations provided by third-party pricing sources.

 

To test the valuation of these invested assets, our audit procedures included, among other procedures, involving our valuation specialists to assess the methodologies and significant assumptions used by management. These procedures included assessing the valuation methodologies used with respect to the Company’s policies, valuation guidelines, and industry practice and comparing a sample of valuation assumptions used against benchmarks, including comparable transactions and independent pricing sources where available. We also performed independent investment valuations on a sample of investments with high estimation uncertainty to evaluate management’s recorded values. In addition, we assessed the adequacy of the disclosures provided in the notes to the consolidated financial statements.

 

 

 

LOGO

Chartered Professional Accountants

Licensed Public Accountants

We have served as Manulife Financial Corporation’s auditors since 1905.

Toronto, Canada

February 10, 2021

 

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Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of Manulife Financial Corporation

Opinion on Internal Control over Financial Reporting

We have audited Manulife Financial Corporation’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the “COSO criteria”). In our opinion, Manulife Financial Corporation (the “Company”) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Consolidated Statements of Financial Position of the Company as of December 31, 2020 and 2019, and the related Consolidated Statements of Income, Consolidated Statements of Comprehensive Income, Consolidated Statements of Changes in Equity and Consolidated Statements of Cash Flows for the years then ended, and the related notes and our report dated February 10, 2021, expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in Management’s Report on Internal Control Over Financial Reporting contained in the Management’s Discussion and Analysis. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

 

LOGO

Chartered Professional Accountants

Licensed Public Accountants

Toronto, Canada

February 10, 2021

 

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Consolidated Statements of Financial Position

 

As at December 31,

(Canadian $ in millions)

  2020     2019  

Assets

   

Cash and short-term securities

  $ 26,167     $ 20,300  

Debt securities

      218,724         198,122  

Public equities

    23,722       22,851  

Mortgages

    50,207       49,376  

Private placements

    40,756       37,979  

Policy loans

    6,398       6,471  

Loans to bank clients

    1,976       1,740  

Real estate

    12,832       12,928  

Other invested assets

    30,195       28,760  

Total invested assets (note 3)

    410,977       378,527  

Other assets

   

Accrued investment income

    2,523       2,416  

Outstanding premiums

    1,444       1,385  

Derivatives (note 4)

    27,793       19,449  

Reinsurance assets (notes 6 and 7)

    45,836       41,446  

Deferred tax assets (note 16)

    4,842       4,574  

Goodwill and intangible assets (note 5)

    9,929       9,975  

Miscellaneous

    9,569       8,250  

Total other assets

    101,936       87,495  

Segregated funds net assets (note 22)

    367,436       343,108  

Total assets

  $ 880,349     $ 809,130  

Liabilities and Equity

   

Liabilities

   

Insurance contract liabilities (note 6)

  $ 385,554     $ 351,161  

Investment contract liabilities (note 7)

    3,288       3,104  

Deposits from bank clients

    20,889       21,488  

Derivatives (note 4)

    14,962       10,284  

Deferred tax liabilities (note 16)

    2,614       1,972  

Other liabilities

    18,607       16,244  
    445,914       404,253  

Long-term debt (note 9)

    6,164       4,543  

Capital instruments (note 10)

    7,829       7,120  

Segregated funds net liabilities (note 22)

    367,436       343,108  

Total liabilities

    827,343       759,024  

Equity

   

Preferred shares (note 11)

    3,822       3,822  

Common shares (note 11)

    23,042       23,127  

Contributed surplus

    261       254  

Shareholders’ retained earnings

    18,887       15,488  

Shareholders’ accumulated other comprehensive income (loss):

   

Pension and other post-employment plans

    (313     (350

Available-for-sale securities

    1,838       1,511  

Cash flow hedges

    (229     (143

Real estate revaluation reserve

    34       31  

Translation of foreign operations

    4,993       5,398  

Total shareholders’ equity

    52,335       49,138  

Participating policyholders’ equity

    (784     (243

Non-controlling interests

    1,455       1,211  

Total equity

    53,006       50,106  

Total liabilities and equity

  $ 880,349     $ 809,130  

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

LOGO    LOGO

Roy Gori

President and Chief Executive Officer

  

John Cassaday

Chairman of the Board of Directors

 

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Table of Contents

Consolidated Statements of Income

 

For the years ended December 31,

(Canadian $ in millions except per share amounts)

  2020     2019  

Revenue

   

Premium income

   

Gross premiums

  $   41,408     $   41,059  

Premiums ceded to reinsurers

    (8,491     (5,481

Net premiums

    32,917       35,578  

Investment income (note 3)

   

Investment income

    16,433       15,393  

Realized and unrealized gains (losses) on assets supporting insurance and investment contract liabilities and on the macro hedge program

    18,967       18,200  

Net investment income

    35,400       33,593  

Other revenue (note 13)

    10,591       10,399  

Total revenue

    78,908       79,570  

Contract benefits and expenses

   

To contract holders and beneficiaries

   

Gross claims and benefits (note 6)

    30,133       28,660  

Increase (decrease) in insurance contract liabilities (note 6)

    36,982       33,727  

Increase (decrease) in investment contract liabilities (note 7)

    178       170  

Benefits and expenses ceded to reinsurers

    (6,795     (5,373

(Increase) decrease in reinsurance assets (note 6)

    (5,263     (1,269

Net benefits and claims

    55,235       55,915  

General expenses

    7,510       7,686  

Investment expenses (note 3)

    1,787       1,748  

Commissions

    6,043       6,293  

Interest expense

    1,181       1,319  

Net premium taxes

    381       389  

Total contract benefits and expenses

    72,137       73,350  

Income before income taxes

    6,771       6,220  

Income tax expense (note 16)

    (1,195     (718

Net income

  $ 5,576     $ 5,502  

Net income (loss) attributed to:

   

Non-controlling interests

  $ 250     $ 233  

Participating policyholders

    (545     (333

Shareholders

    5,871       5,602  
    $ 5,576     $ 5,502  

Net income attributed to shareholders

    5,871       5,602  

Preferred share dividends

    (171     (172

Common shareholders’ net income

  $ 5,700     $ 5,430  

Earnings per sharea

   

Basic earnings per common share (note 11)

  $ 2.94     $ 2.77  

Diluted earnings per common share (note 11)

    2.93       2.77  

Dividends per common share

    1.12       1.00  

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

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Consolidated Statements of Comprehensive Income

 

For the years ended December 31,

(Canadian $ in millions)

  2020     2019  

Net income

  $ 5,576     $ 5,502  

Other comprehensive income (loss) (“OCI”), net of tax:

   

Items that may be subsequently reclassified to net income:

   

Foreign exchange gains (losses) on:

   

Translation of foreign operations

    (505     (1,933

Net investment hedges

    100       320  

Available-for-sale financial securities:

   

Unrealized gains (losses) arising during the year

    2,506       2,212  

Reclassification of net realized (gains) losses and impairments to net income

    (2,175     (433

Cash flow hedges:

   

Unrealized gains (losses) arising during the year

    (81     (28

Reclassification of realized losses to net income

    (5     12  

Share of other comprehensive income (losses) of associates

    2       1  

Total items that may be subsequently reclassified to net income

    (158     151  

Items that will not be reclassified to net income:

   

Change in pension and other post-employment plans

    37       76  

Real estate revaluation reserve

    5       11  

Total items that will not be reclassified to net income

    42       87  

Other comprehensive income (loss), net of tax

    (116     238  

Total comprehensive income (loss), net of tax

  $ 5,460     $    5,740  

Total comprehensive income (loss) attributed to:

   

Non-controlling interests

  $ 254     $ 237  

Participating policyholders

    (541     (334

Shareholders

       5,747       5,837  

Income Taxes included in Other Comprehensive Income

 

For the years ended December 31,

(Canadian $ in millions)

  2020     2019  

Income tax expense (recovery) on:

   

Unrealized gains/losses on available-for-sale financial securities

  $    574     $ 558  

Reclassification of realized gains/losses and recoveries/impairments to net income on available-for-sale financial securities

    (576     (140

Unrealized gains/losses on cash flow hedges

    (19     (20

Reclassification of realized gains/losses to net income on cash flow hedges

    (2     4  

Unrealized foreign exchange gains/losses on translation of foreign operations

          (1

Unrealized foreign exchange gains/losses on net investment hedges

    8       39  

Change in pension and other post-employment plans

    9       18  

Real estate revaluation reserve

    2        

Share of other comprehensive income (loss) of associates

    (1      

Total income tax expense (recovery)

  $ (5   $      458  

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

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Consolidated Statements of Changes in Equity

 

For the years ended December 31,

(Canadian $ in millions)

  2020     2019  

Preferred shares

   

Balance, beginning of year

  $ 3,822     $ 3,822  

Balance, end of year

    3,822       3,822  

Common shares

   

Balance, beginning of year

    23,127       22,961  

Repurchased (note 11)

    (121     (677

Issued on exercise of stock options and deferred share units

    36       104  

Issued under dividend reinvestment and share purchase plans

          739  

Balance, end of year

      23,042       23,127  

Contributed surplus

   

Balance, beginning of year

    254       265  

Exercise of stock options and deferred share units

    (7     (20

Stock option expense

    14       11  

Impact of deferred tax asset rate change

          (2

Balance, end of year

    261       254  

Shareholders’ retained earnings

   

Balance, beginning of year

    15,488         12,704  

Opening adjustment at adoption of IFRS 16

          (19

Net income attributed to shareholders

    5,871       5,602  

Common shares repurchased (note 11)

    (132     (662

Preferred share dividends

    (171     (172

Common share dividends

    (2,169     (1,965

Balance, end of year

    18,887       15,488  

Shareholders’ accumulated other comprehensive income (loss) (“AOCI”)

   

Balance, beginning of year

    6,447       6,212  

Change in unrealized foreign exchange gains (losses) of net foreign operations

    (405     (1,612

Change in actuarial gains (losses) on pension and other post-employment plans

    37       76  

Change in unrealized gains (losses) on available-for-sale financial securities

    325       1,775  

Change in unrealized gains (losses) on derivative instruments designated as cash flow hedges

    (86     (16

Change in real estate revaluation reserve

    3       11  

Share of other comprehensive income (losses) of associates

    2       1  

Balance, end of year

    6,323       6,447  

Total shareholders’ equity, end of year

    52,335       49,138  

Participating policyholders’ equity

   

Balance, beginning of year

    (243     94  

Opening adjustment at adoption of IFRS 16

          (3

Net income (loss) attributed to participating policyholders

    (545     (333

Other comprehensive income attributed to policyholders

    4       (1

Balance, end of year

    (784     (243

Non-controlling interests

   

Balance, beginning of year

    1,211       1,093  

Net income attributed to non-controlling interests

    250       233  

Other comprehensive income (loss) attributed to non-controlling interests

    4       4  

Contributions (distributions/disposal), net

    (10     (119

Balance, end of year

    1,455       1,211  

Total equity, end of year

  $ 53,006     $ 50,106  

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

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Consolidated Statements of Cash Flows

 

For the years ended December 31,

(Canadian $ in millions)

  2020     2019  

Operating activities

   

Net income

  $ 5,576     $ 5,502  

Adjustments:

   

Increase in insurance contract liabilities

       36,982       33,727  

Increase in investment contract liabilities

    178       170  

(Increase) decrease in reinsurance assets excluding coinsurance transactions (note 6)

    (2,374     (557

Amortization of (premium) discount on invested assets

    154       117  

Other amortization

    656       626  

Net realized and unrealized (gains) losses and impairment on assets

    (22,521     (20,265

Deferred income tax expense (recovery)

    280       (454

Stock option expense

    14       11  

Cash provided by operating activities before undernoted items

    18,945       18,877  

Changes in policy related and operating receivables and payables

    1,103       1,665  

Cash provided by (used in) operating activities

    20,048          20,542  

Investing activities

   

Purchases and mortgage advances

    (111,981     (80,610

Disposals and repayments

    98,850       65,333  

Change in investment broker net receivables and payables

    (1,017     1,159  

Net cash flows from acquisition and disposal of subsidiaries and businesses

          288  

Cash provided by (used in) investing activities

    (14,148     (13,830

Financing activities

   

Issue of long-term debt, net (note 9)

    2,455        

Redemption of long-term debt (note 9)

    (652      

Issue of capital instruments, net (note 10)

    1,990        

Redemption of capital instruments (note 10)

    (1,250     (1,500

Secured borrowings (note 3 (f))

    1,376       107  

Change in repurchase agreements and securities sold but not yet purchased

    24       266  

Changes in deposits from Bank clients, net

    (579     1,819  

Lease payments

    (134     (117

Shareholders’ dividends paid in cash

    (2,340     (1,398

Common shares repurchased (note 11)

    (253     (1,339

Common shares issued, net (note 11)

    36       104  

Contributions from (distributions to) non-controlling interests, net

    (10     (22

Cash provided by (used in) financing activities

    663       (2,080

Cash and short-term securities

   

Increase (decrease) during the year

    6,563       4,632  

Effect of foreign exchange rate changes on cash and short-term securities

    (528     (466

Balance, beginning of year

    19,548       15,382  

Balance, December 31

    25,583       19,548  

Cash and short-term securities

   

Beginning of year

   

Gross cash and short-term securities

    20,300       16,215  

Net payments in transit, included in other liabilities

    (752     (833

Net cash and short-term securities, January 1

    19,548       15,382  

End of year

   

Gross cash and short-term securities

    26,167       20,300  

Net payments in transit, included in other liabilities

    (584     (752

Net cash and short-term securities, December 31

  $ 25,583     $ 19,548  

Supplemental disclosures on cash flow information

   

Interest received

  $ 11,736     $ 11,549  

Interest paid

    1,188       1,299  

Income taxes paid

    1,358       104  

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

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Table of Contents

Notes to Consolidated Financial Statements

 

Page Number   Note      
116   Note 1    Nature of Operations and Significant Accounting Policies
124   Note 2    Accounting and Reporting Changes
125   Note 3    Invested Assets and Investment Income
133   Note 4    Derivative and Hedging Instruments
139   Note 5    Goodwill and Intangible Assets
141   Note 6    Insurance Contract Liabilities and Reinsurance Assets
150   Note 7    Investment Contract Liabilities
151   Note 8    Risk Management
158   Note 9    Long-Term Debt
159   Note 10    Capital Instruments
160   Note 11    Share Capital and Earnings Per Share
162   Note 12    Capital Management
162   Note 13    Revenue from Service Contracts
163   Note 14    Stock-Based Compensation
165   Note 15    Employee Future Benefits
169   Note 16    Income Taxes
171   Note 17    Interests in Structured Entities
173   Note 18    Commitments and Contingencies
175   Note 19    Segmented Information
177   Note 20    Related Parties
177   Note 21    Subsidiaries
179   Note 22    Segregated Funds
180   Note 23    Information Provided in Connection with Investments in Deferred Annuity Contracts and SignatureNotes Issued or Assumed by John Hancock Life Insurance Company (U.S.A.)
186   Note 24    Comparatives

 

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Table of Contents

Notes to Consolidated Financial Statements

(Canadian $ in millions except per share amounts or unless otherwise stated)

Note 1    Nature of Operations and Significant Accounting Policies

(a)    Reporting entity

Manulife Financial Corporation (“MFC”) is a publicly traded company and the holding company of The Manufacturers Life Insurance Company (“MLI”), a Canadian life insurance company. MFC and its subsidiaries (collectively, “Manulife” or the “Company”) is a leading financial services group with principal operations in Asia, Canada and the United States. Manulife’s international network of employees, agents and distribution partners offers financial protection and wealth management products and services to personal and business clients as well as asset management services to institutional customers. The Company operates as Manulife in Canada and Asia and as John Hancock in the United States.

MFC is domiciled in Canada and incorporated under the Insurance Companies Act (Canada) (“ICA”). These Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).

These Consolidated Financial Statements should be read in conjunction with “Risk Management” in the 2020 Management’s Discussion and Analysis (“MD&A”) dealing with IFRS 7 “Financial Instruments: Disclosures” as the discussion on market risk and liquidity risk includes certain disclosures that are considered an integral part of these Consolidated Financial Statements.

These Consolidated Financial Statements as at and for the year ended December 31, 2020 were authorized for issue by MFC’s Board of Directors on February 10, 2021.

(b)    Basis of preparation

The preparation of Consolidated Financial Statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities as at the date of the Consolidated Financial Statements, and the reported amounts of revenue and expenses during the reporting periods. Actual results may differ from these estimates. The most significant estimation processes relate to evaluating assumptions used in measuring insurance and investment contract liabilities, assessing assets for impairment, determining pension and other post-employment benefit obligation and expense assumptions, determining income taxes and uncertain tax positions, and estimating fair values of certain invested assets. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the year in which the estimates are revised and in any future years affected. Although some variability is inherent in these estimates, management believes that the amounts recorded are appropriate. The significant accounting policies used and the most significant judgments made by management in applying these accounting policies in the preparation of these Consolidated Financial Statements are summarized below.

The Company’s results and operations have been and may continue to be adversely impacted by the COVID -19 pandemic and the recent economic downturn. The adverse effects include but are not limited to significant volatility in equity markets, decline in interest rates, increase in credit risk, strain on commodity markets and alternative long duration asset prices, foreign currency exchange rate volatility, increases in insurance claims, persistency and redemptions, and disruption of business operations. The breadth and depth of these events and their duration contribute additional uncertainty around estimates used in determining the carrying value of certain assets and liabilities included in these Consolidated Financial Statements.

The uncertainty regarding key inputs used in establishing the carrying amounts of certain invested assets are outlined in the notes to these Consolidated Financial Statements. The Company has applied appropriate measurement techniques using reasonable judgment and estimates from the perspective of a market participant to reflect current economic conditions. The impact of these techniques has been reflected in these Financial Statements. Changes in the inputs used could materially impact the respective carrying values.

(c)    Fair value measurement

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (not a forced liquidation or distress sale) between market participants at the measurement date; fair value is an exit value.

When available, quoted market prices are used to determine fair value. If quoted market prices are not available, fair value is typically based upon alternative valuation techniques such as discounted cash flows, matrix pricing, consensus pricing services and other techniques. Broker quotes are generally used when external public vendor prices are not available.

The Company has a valuation process in place that includes a review of price movements relative to the market, a comparison of prices between vendors, and a comparison to internal matrix pricing which uses predominately external observable data. Judgment is applied in adjusting external observable data for items including liquidity and credit factors.

 

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The Company categorizes its fair value measurement results according to a three-level hierarchy. The hierarchy prioritizes the inputs used by the Company’s valuation techniques based on their reliability. A level is assigned to each fair value measurement based on the lowest level input significant to the fair value measurement in its entirety. The three levels of the fair value hierarchy are defined as follows:

Level 1 – Fair value measurements that reflect unadjusted, quoted prices in active markets for identical assets and liabilities that the Company can access at the measurement date, reflecting market transactions.

Level 2 – Fair value measurements using inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in inactive markets, inputs that are observable that are not prices (such as interest rates, credit risks, etc.) and inputs that are derived from or corroborated by observable market data. Most debt securities are classified within Level 2. Also, included in the Level 2 category are derivative instruments that are priced using models with observable market inputs, including interest rate swaps, equity swaps, credit default swaps and foreign currency forward contracts.

Level 3 – Fair value measurements using significant non-market observable inputs. These include valuations for assets and liabilities that are derived using data, some or all of which is not market observable, including assumptions about risk. Level 3 security valuations include less liquid securities such as real estate investment property, other invested assets, timber investments held within segregated funds, certain long-duration bonds and other securities that have little or no price transparency. Certain derivative financial instrument valuations are also included in Level 3.

(d)    Basis of consolidation

MFC consolidates the financial statements of all entities it controls, including certain structured entities. Subsidiaries are entities controlled by the Company. The Company has control over an entity when the Company has the power to govern the financial and operating policies of the entity, and is exposed to variable returns from its activities which are significant in relation to the total variable returns of the entity and the Company is able to use its power over the entity to affect its share of variable returns. In assessing control, significant judgment is applied while considering all relevant facts and circumstances. When assessing decision-making power, the Company considers the extent of its rights relative to the management of an entity, the level of voting rights held in an entity which are potentially or presently exercisable, the existence of any contractual management agreements which may provide the Company with power over an entity’s financial and operating policies, and to the extent of other parties’ ownership in an entity, if any, the possibility for de facto control being present. When assessing variable returns, the Company considers the significance of direct and indirect financial and non-financial variable returns to the Company from an entity’s activities in addition to the proportionate significance of such returns. The Company also considers the degree to which its interests are aligned with those of other parties investing in an entity and the degree to which it may act in its own interest.

The financial statements of subsidiaries are included in MFC’s consolidated results from the date control is established and are excluded from consolidation from the date control ceases. The initial control assessment is performed at inception of the Company’s involvement with the entity and is reconsidered if the Company acquires or loses power over key operating and financial policies of the entity; acquires additional interests or disposes of interests in the entity; the contractual arrangements of the entity are amended such that the Company’s proportionate exposure to variable returns changes; or if the Company’s ability to use its power to affect its variable returns from the entity changes.

The Company’s Consolidated Financial Statements have been prepared using uniform accounting policies for like transactions and events in similar circumstances. Intercompany balances, and income and expenses arising from intercompany transactions, have been eliminated in preparing the Consolidated Financial Statements.

Non-controlling interests are interests of other parties in the equity of MFC’s subsidiaries and are presented within total equity, separate from the equity of MFC’s participating policyholders and shareholders. Non-controlling interests in the net income and other comprehensive income (“OCI”) of MFC’s subsidiaries are included in total net income and total OCI, respectively. An exception to this occurs where the subsidiary’s shares are either puttable by the shareholder or required to be redeemed for cash on a fixed or determinable date, in which case other parties’ interests in the subsidiary’s capital are presented as liabilities of the Company and other parties’ interests in the subsidiary’s net income and OCI are recorded as expenses of the Company.

The equity method of accounting is used to account for entities over which the Company has significant influence or joint control (“associates” or “joint ventures”), whereby the Company records its share of the associate’s or joint venture’s net assets and financial results using uniform accounting policies for similar transactions and events. Significant judgment is used to determine whether voting rights, contractual management rights and other relationships with the entity, if any, provide the Company with significant influence or joint control over the entity. Gains and losses on the sale of associates or joint ventures are included in income when realized, while impairment losses are recognized immediately when there is objective evidence of impairment. Gains and losses on commercial transactions with associates or joint ventures are eliminated to the extent of the Company’s interest in the associate or joint venture. Investments in associates or joint ventures are included in other invested assets on the Company’s Consolidated Statements of Financial Position.

 

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(e)    Invested assets

Invested assets that are considered financial instruments are classified as fair value through profit or loss (“FVTPL”), loans and receivables, or as available-for-sale (“AFS”) financial assets. The Company determines the classification of its financial assets at initial recognition. Invested assets are recognized initially at fair value plus, in the case of investments not at FVTPL, directly attributable transaction costs. Invested assets are classified as financial instruments at FVTPL if they are held for trading, if they are designated by management under the fair value option, or if they are designated by management when they include one or more embedded derivatives. Invested assets classified as AFS are non-derivative financial assets that do not fall into any of the other categories described above.

Valuation methods for the Company’s invested assets are described above. All fair value valuations are performed in accordance with IFRS 13 “Fair Value Measurement”. Disclosure of financial instruments carried at fair value within the three levels of the fair value hierarchy and disclosure of the fair value for financial instruments not carried at fair value on the Consolidated Statements of Financial Position are presented in note 3. Fair value valuations are performed by the Company and by third-party service providers. When third-party service providers are engaged, the Company performs a variety of procedures to corroborate pricing information. These procedures may include, but are not limited to, inquiry and review of valuation techniques, inputs to the valuation and vendor controls reports.

Cash and short-term securities comprise of cash, current operating accounts, overnight bank and term deposits, and fixed income securities held for meeting short-term cash commitments. Short-term securities are carried at fair value. Short-term securities are comprised of investments due to mature within one year of the date of purchase. Commercial paper and discount notes are classified as Level 2 because these securities are typically not actively traded. Net payments in transit and overdraft bank balances are included in other liabilities.

Debt securities are carried at fair value. Debt securities are generally valued by independent pricing vendors using proprietary pricing models incorporating current market inputs for similar instruments with comparable terms and credit quality (matrix pricing). The significant inputs include, but are not limited to, yield curves, credit risks and spreads, prepayment rates and volatility of these inputs. These debt securities are classified as Level 2 but can be Level 3 if significant inputs are market unobservable. Realized gains and losses on sale of debt securities and unrealized gains and losses on debt securities designated as FVTPL are recognized in investment income immediately. Unrealized gains and losses on AFS debt securities are recorded in OCI, except for unrealized gains and losses on foreign currency translation which are included in income. Impairment losses on AFS debt securities are recognized in income on an individual security basis when there is objective evidence of impairment. Impairment is considered to have occurred, based on management’s judgment, when it is deemed probable that the Company will not be able to collect all amounts due according to the debt security’s contractual terms.

Public equities are comprised of common and preferred equities and are carried at fair value. Public equities are generally classified as Level 1, as fair values are normally based on quoted market prices. Realized gains and losses on sale of equities and unrealized gains and losses on equities designated as FVTPL are recognized in investment income immediately. Unrealized gains and losses on AFS equities are recorded in OCI. Impairment losses on AFS equities are recognized in income on an individual security basis when there is objective evidence of impairment. Impairment is considered to have occurred when fair value has declined below cost by a significant amount or for a prolonged period. Significant judgment is applied in determining whether the decline is significant or prolonged.

Mortgages are carried at amortized cost and are classified as Level 3 for fair value purposes due to the lack of market observability of certain significant valuation inputs. Realized gains and losses are recorded in investment income immediately. Impairment losses are recorded on mortgages when there is no longer reasonable assurance as to the timely collection of the full amount of principal and interest and are measured based on the discounted value of expected future cash flows at the original effective interest rates inherent in the mortgage. Expected future cash flows of impaired mortgages are typically determined with reference to the fair value of collateral security underlying the mortgage, net of expected costs of realization and including any applicable insurance recoveries. Significant judgment is applied in the determination of impairment including the timing and amount of future collections.

The Company accounts for insured and uninsured mortgage securitizations as secured financing transactions since the criteria for sale accounting are not met. For these transactions, the Company continues to recognize the mortgages and records a liability in other liabilities for the amounts owed at maturity. Interest income from these mortgages and interest expense on the borrowings are recorded using the effective interest rate method.

Private placements, which include corporate loans for which there is no active market, are carried at amortized cost and are generally classified as Level 2 for fair value disclosure purposes or as Level 3 if significant inputs are market unobservable. Realized gains and losses are recorded in income immediately. Impairment losses are recorded on private placements when there is no longer assurance as to the timely collection of the full amount of principal and interest. Impairment is measured based on the discounted value of expected future cash flows at the original effective interest rate inherent in the loan. Significant judgment is applied in the determination of impairment including the timing and amount of future collections.

Policy loans are carried at an amount equal to their unpaid balances and are classified as Level 2 for fair value disclosure purposes. Policy loans are fully collateralized by the cash surrender value of the underlying policies.

Loans to Manulife Bank of Canada (“Manulife Bank” or “Bank”) clients are carried at amortized cost and are classified as Level 2 for fair value disclosure purposes. A loan to a Bank client is considered impaired when there is objective evidence of impairment because of one or more loss events that have occurred after initial recognition, with a negative impact on the estimated future cash flows of the loan.

 

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Once established, allowances for impairment of mortgages, private placements and loans to Bank clients are reversed only if the conditions that caused the impairment no longer exist. Reversals of impairment charges on AFS debt securities are only recognized in income to the extent that increases in fair value can be attributed to events after the impairment loss being recorded. Impairment losses for AFS equity instruments are not reversed through income. On disposition of an impaired asset, any allowance for impairment is released.

In addition to impairments and provisions for loan losses (recoveries) reported in investment income, the measurement of insurance contract liabilities, via investment return assumptions, includes expected future credit losses on fixed income investments. Refer to note 6(d).

Interest income is recognized on debt securities, mortgages, private placements, policy loans and loans to Bank clients as it accrues and is calculated using the effective interest rate method. Premiums, discounts and transaction costs are amortized over the life of the underlying investment using the effective yield method for all debt securities as well as mortgages and private placements.

The Company records purchases and sales of invested assets on a trade date basis. Loans originated by the Company are recognized on a settlement date basis.

Real estate consists of both own use and investment property. Own use property is carried at cost less accumulated depreciation and any accumulated impairment losses. Depreciation is calculated based on the cost of an asset less its residual value and is recognized in income on a straight-line basis over the estimated useful life ranging from 30 to 60 years. Impairment losses are recorded in income to the extent the recoverable amount is less than the carrying amount. Where own use property is included in assets backing insurance contract liabilities, the fair value of the property is used in the valuation of insurance contract liabilities. Own use property is classified as Level 3 for fair value disclosure purposes.

An investment property is a property held to earn rental income, for capital appreciation, or both. Investment properties are measured at fair value, with changes in fair value recognized in income. Fair value is determined using external appraisals that are based on the highest and best use of the property. The valuation techniques include discounted cash flows, the direct capitalization method as well as comparable sales analysis and include both observable and unobservable inputs. Inputs include existing and assumed tenancies, market data from recent comparable transactions, future economic outlook and market risk assumptions, capitalization rates and internal rates of return. Investment properties are classified as Level 3 for fair value disclosure purposes.

When a property changes from own use to investment property, any gain or loss arising on the remeasurement of the property to fair value at the date of transfer is recognized in OCI, to the extent that it is not reversing a previous impairment loss. Reversals of impairment losses are recognized in income.

Other invested assets include private equity and property investments held in infrastructure and timber, as well as in agriculture and oil and gas sectors. Private equity investments are accounted for as associates or joint ventures using the equity method (as described in note 1(d) above) or are classified as FVTPL or AFS and carried at fair value. Investments in oil and gas exploration and evaluation activities are measured on the cost basis using the “successful efforts” method. Timber and agriculture properties are measured at fair value with changes in fair value recognized in income, except for buildings, equipment and bearer plants which are measured at amortized cost. The fair value of other invested assets is determined using a variety of valuation techniques as described in note 3. Other invested assets that are measured or disclosed at fair value are classified as Level 3.

Other invested assets also include investments in leveraged leases, which are accounted for using the equity method. The carrying value under the equity method reflects the amortized cost of the lease receivable and related non-recourse debt using the effective yield method.

(f)    Goodwill and intangible assets

Goodwill represents the difference between the fair value of purchase consideration of an acquired business and the Company’s proportionate share of the net identifiable assets acquired. It is initially recorded at cost and subsequently measured at cost less any accumulated impairment.

Goodwill is tested for impairment at least annually and whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable at the cash generating unit (“CGU”) or group of CGUs level. The Company allocates goodwill to CGUs or groups of CGUs for impairment testing at the lowest level within the entity where the goodwill is monitored for internal management purposes. The allocation is made to those CGUs or groups of CGUs that are expected to benefit from the business combination in which the goodwill arose. Any potential impairment of goodwill is identified by comparing the recoverable amount with the carrying value of a CGU or group of CGUs. Goodwill is reduced by the amount of deficiency, if any. If the deficiency exceeds the carrying amount of goodwill, the carrying values of the remaining assets in the CGU or group of CGUs are subject to being reduced by the excess on a pro-rata basis.

The recoverable amount of a CGU is the higher of the estimated fair value less costs to sell or the value-in-use of the CGU. In assessing value-in-use, estimated future cash flows are discounted using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the CGU. In some cases, the most recent detailed calculation made in a prior period of the recoverable amount of a CGU is used in the testing of impairment of goodwill in the current period. This is the case only if there are no significant changes to the CGU, the likelihood of impairment is remote based on the analysis of current events and circumstances, and the most recently calculated recoverable amount substantially exceeds the current carrying amount of the CGU.

 

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Intangible assets with indefinite useful lives include the John Hancock brand name, certain investment management contracts and agricultural water rights. The indefinite useful life assessment for the John Hancock brand name is based on the brand name being protected by indefinitely renewable trademarks in markets where branded products are sold, and for certain investment management contracts based on the ability to renew these contracts indefinitely. In addition, there are no legal, regulatory or contractual provisions that limit the useful lives of these intangible assets. An intangible asset with an indefinite useful life is not amortized but is subject to an annual impairment test which is performed more frequently if an indication that it is not recoverable arises.

Intangible assets with finite useful lives include acquired distribution networks, customer relationships, capitalized software, and certain investment management contracts and other contractual rights. Distribution networks, customer relationships, and other finite life intangible assets are amortized over their estimated useful lives, six to 68 years, either based on straight-line or in relation to other asset consumption metrics. Software intangible assets are amortized on a straight-line basis over their estimated useful lives of three to 10 years. Finite life intangible assets are assessed for indicators of impairment at each reporting period. If any indication of impairment arises, these assets are tested for impairment.

(g)    Miscellaneous assets

Miscellaneous assets include assets held in a rabbi trust with respect to unfunded defined benefit obligations, defined benefit assets, if any, deferred acquisition costs and capital assets. Rabbi trust assets are carried at fair value. Defined benefit assets carrying value is explained in note 1(o). Deferred acquisition costs are carried at cost less accumulated amortization and are amortized over the period redemption fees may be charged or over the period revenue is earned. Capital assets are carried at cost less accumulated amortization computed on a straight-line basis over their estimated useful lives, which vary from two to 10 years.

(h)    Segregated funds

The Company manages segregated funds on behalf of policyholders. The investment returns on these funds are passed directly to policyholders. In some cases, the Company has provided guarantees associated with these funds.

Segregated funds net assets are measured at fair value and include investments in mutual funds, debt securities, equities, cash, short-term investments and other investments. With respect to the consolidation requirement of IFRS, in assessing the Company’s degree of control over the underlying investments, the Company considers the scope of its decision-making rights, the rights held by other parties, its remuneration as an investment manager and its exposure to variability of returns from the investments. The Company has determined that it does not have control over the underlying investments as it acts as an agent on behalf of segregated fund policyholders.

The methodology applied to determine the fair value of investments held in segregated funds is consistent with that applied to invested assets held by the general fund, as described above in note 1(e). Segregated funds liabilities are measured based on the value of the segregated funds net assets. Investment returns on segregated funds assets belong to policyholders and the Company does not bear the risk associated with these assets outside of guarantees offered on certain variable life and annuity products, for which the underlying investments are held within segregated funds. Accordingly, investment income earned by segregated funds and expenses incurred by segregated funds are offset and are not separately presented in the Consolidated Statements of Income. Fee income earned by the Company for managing the segregated funds is included in other revenue.

Liabilities related to guarantees associated with certain segregated funds, as a result of certain variable life and annuity contracts, are recorded within the Company’s insurance contract liabilities. The Company holds assets supporting these guarantees in the general fund, which are included in invested assets according to their investment type.

(i)    Insurance and investment contract liabilities

Most contracts issued by the Company are considered insurance, investment or service contracts. Contracts under which the Company accepts significant insurance risk from a policyholder are classified as insurance contracts in the Consolidated Financial Statements. A contract is considered to have significant insurance risk if, and only if, an insured event could cause an insurer to make significant additional payments in any scenario, excluding scenarios that lack commercial substance at the inception of the contract. Contracts under which the Company does not accept significant insurance risk are either classified as investment contracts or considered service contracts and are accounted for in accordance with IAS 39Financial Instruments: Recognition and Measurement or IFRS 15 “Revenue from Contracts with Customers”, respectively.

Once a contract has been classified as an insurance contract it remains an insurance contract even if the insurance risk reduces significantly. Investment contracts can be reclassified as insurance contracts if insurance risk subsequently becomes significant.

Insurance contract liabilities, net of reinsurance assets, represent the amount which, together with estimated future premiums and net investment income, will be sufficient to pay estimated future benefits, policyholder dividends and refunds, taxes (other than income taxes) and expenses on policies in-force. Insurance contract liabilities are presented gross of reinsurance assets on the Consolidated Statements of Financial Position. The Company’s Appointed Actuary is responsible for determining the amount of insurance contract liabilities in accordance with standards established by the Canadian Institute of Actuaries. Insurance contract liabilities, net of reinsurance assets, have been determined using the Canadian Asset Liability Method (“CALM”) as permitted by IFRS 4 “Insurance Contracts”. Refer to note 6.

 

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Investment contract liabilities include contracts issued to retail and institutional investors that do not contain significant insurance risk. Investment contract liabilities and deposits are measured at amortized cost or at FVTPL by election. The election reduces accounting mismatches between FVTPL assets supporting these contracts and the related contract liabilities. Investment contract liabilities are derecognized when the contract expires, is discharged or is cancelled.

Derivatives embedded within insurance contracts are separately accounted for as derivatives if they are not considered to be closely related to the host insurance contract and do not meet the definition of an insurance contract. These embedded derivatives are presented separately in other assets or other liabilities and are measured at FVTPL.

(j)    Reinsurance assets

The Company uses reinsurance in the normal course of business to manage its risk exposure. Insurance ceded to a reinsurer does not relieve the Company from its obligations to policyholders. The Company remains liable to its policyholders for the portion reinsured to the extent that any reinsurer does not meet its obligations for reinsurance ceded to it under a reinsurance agreement.

Reinsurance assets represent the benefit derived from reinsurance agreements in-force at the reporting date, considering the financial condition of the reinsurer. Amounts recoverable from reinsurers are estimated in accordance with the terms of the relevant reinsurance contract.

Gains or losses on reinsurance transactions are recognized in income immediately on the transaction date and are not amortized. Premiums ceded and claims reimbursed are presented on a gross basis on the Consolidated Statements of Income. Reinsurance assets are not offset against the related insurance contract liabilities and are presented separately on the Consolidated Statements of Financial Position. Refer to note 6(a).

(k)    Other financial instruments accounted for as liabilities

The Company issues a variety of other financial instruments classified as liabilities, including notes payable, term notes, senior notes, senior debentures, subordinated notes, surplus notes and preferred shares. These financial liabilities are measured at amortized cost, with issuance costs deferred and amortized using the effective interest rate method.

(l)    Income taxes

The provision for income taxes is calculated based on income tax laws and income tax rates substantively enacted as at the date of the Consolidated Statements of Financial Position. The income tax provision is comprised of current income taxes and deferred income taxes. Current and deferred income taxes relating to items recognized in OCI and directly in equity are similarly recognized in OCI and directly in equity, respectively.

Current income taxes are amounts expected to be payable or recoverable for the current year and any adjustments to taxes payable in respect of previous years.

Deferred income taxes are provided for using the liability method and result from temporary differences between the carrying values of assets and liabilities and their respective tax bases. Deferred income taxes are measured at the substantively enacted tax rates that are expected to be applied to temporary differences when they reverse.

A deferred tax asset is recognized to the extent that future realization of the tax benefit is probable. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the tax benefit will be realized. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax assets and liabilities and they relate to income taxes levied by the same tax authority on the same taxable entity.

Deferred tax liabilities are recognized for all taxable temporary differences, except in respect of taxable temporary differences associated with investments in subsidiaries, associates and joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

The Company records liabilities for uncertain tax positions if it is probable that the Company will make a payment on tax positions due to examinations by tax authorities. These provisions are measured at the Company’s best estimate of the amount expected to be paid. Provisions are reversed to income in the period in which management assesses they are no longer required or determined by statute.

The Company is subject to income tax laws in various jurisdictions. Tax laws are complex and potentially subject to different interpretations by the taxpayer and the relevant tax authority. The provision for current income taxes and deferred income taxes represents management’s interpretation of the relevant tax laws and its estimate of current and future income tax implications of the transactions and events during the year. The Company may be required to change its provision for income taxes or deferred income tax balances when the ultimate deductibility of certain items is successfully challenged by taxing authorities, or if estimates used in determining the amount of deferred tax balances to recognize change significantly, or when receipt of new information indicates the need for adjustment in the amount of deferred income taxes to be recognized. Additionally, future events, such as changes in tax laws, tax regulations, or interpretations of such laws or regulations, could have an impact on the provision for income taxes, deferred tax balances and the effective tax rate. Any such changes could materially affect the amounts reported in the Consolidated Financial Statements in the period these changes occur.

 

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(m)    Foreign currency translation

Items included in the financial statements of each of the Company’s subsidiaries, joint ventures and associates are measured by each entity using the currency of the primary economic environment in which the entity operates (the “functional currency”). If their functional currency is other than Canadian dollar, these entities are foreign operations of the Company.

Transactions in a foreign currency are translated to the functional currency at the exchange rate prevailing at the date of the transaction. Assets and liabilities denominated in foreign currencies are translated to the functional currency at the exchange rate in effect at the reporting date. Revenue and expenses denominated in foreign currencies are translated at the average exchange rate prevailing during the quarter reported. Exchange gains and losses are recognized in income except for translation of net investments in foreign operations and the results of hedging these positions, and for non-monetary items designated as AFS. These foreign exchange gains and losses are recognized in OCI until such time that the foreign operation or non-monetary item is disposed of or control or significant influence over it is lost.

The Consolidated Financial Statements are presented in Canadian dollars. The financial statements of the Company’s foreign operations are translated from their functional currencies to Canadian dollars; assets and liabilities are translated at the exchange rate at the reporting date, and revenue and expenses are translated using the average exchange rates for the period. Foreign exchange gains and losses on these translations are recognized in OCI, subject to reclassification to income upon disposal of a foreign operation.

(n)    Stock-based compensation

The Company provides stock-based compensation to certain employees and directors as described in note 14. Compensation expense of equity instruments granted is accrued based on the best estimate of the number of instruments expected to vest, with revisions made to that estimate if subsequent information indicates that actual forfeitures are likely to differ from initial forfeiture estimates, unless forfeitures are due to market-based conditions.

Stock options are expensed with a corresponding increase in contributed surplus. Restricted share units and deferred share units are expensed with a corresponding liability accrued based on the market value of MFC’s common shares at the end of each quarter. Performance share units are expensed with a corresponding liability accrued based on specific performance conditions and the market value of MFC’s common shares at the end of each quarter. The change in the value of the awards resulting from changes in the market value of MFC’s common shares or changes in the specific performance conditions and credited dividends is recognized in income, offset by the impact of total return swaps used to manage the variability of the related liabilities.

Stock-based compensation cost is recognized over the applicable vesting period, unless the employee is eligible to retire at the time of grant or will be eligible to retire during the vesting period. Compensation costs attributable to stock options, restricted share units, and performance share units granted to employees who are eligible to retire on the grant date or who will become eligible to retire during the vesting period, are recognized at the grant date or over the period from the grant date to the date of retirement eligibility, respectively.

The Company’s contributions to the Global Share Ownership Plan (“GSOP”) (refer to note 14(d)), are expensed as incurred. Under the GSOP, subject to certain conditions, the Company will match a percentage of an employee’s eligible contributions to certain maximums. All contributions are used by the plan’s trustee to purchase MFC common shares in the open market.

(o)    Employee future benefits

The Company maintains defined contribution and defined benefit pension plans and other post-employment plans for employees and agents including registered (tax qualified) pension plans that are typically funded as well as supplemental non-registered (non-qualified) pension plans for executives, retiree and disability welfare plans that are typically not funded.

The Company’s obligation in respect of defined benefit pension and other post-employment benefits is calculated for each plan as the estimated present value of future benefits that eligible employees have earned in return for their service up to the reporting date using the projected benefit method. The discount rate used is based on the yield, as at the reporting date, of high-quality corporate debt securities that have approximately the same term as the benefit obligations and that are denominated in the same currency in which the benefits are expected to be paid.

To determine the Company’s net defined benefit asset or liability, the fair value of plan assets is deducted from the defined benefit obligations. When this calculation results in a surplus, the asset that can be recognized is limited to the present value of future economic benefit available in the form of future refunds from the plan or reductions in future contributions to the plan (the asset limit). Defined benefit assets are included in other assets and defined benefit liabilities are included in other liabilities.

Changes in the net defined benefit asset or liability due to re-measurement of pension and retiree welfare plans are recorded in OCI in the period in which they occur and are not reclassified to income in subsequent periods. They consist of actuarial gains and losses, the impact of the asset limit, if any, and the return on plan assets, excluding amounts included in net interest income or expense. Changes in the net defined benefit asset or liability due to re-measurement of disability welfare plans are recorded in income in the period in which they occur.

The cost of defined benefit pension plans is recognized over the employee’s years of service to retirement while the cost of retiree welfare plans is recognized over the employee’s years of service to their date of full eligibility. The net benefit cost for the year is recorded in income and is calculated as the sum of the service cost in respect of the fiscal year, the net interest income or expense and any applicable

 

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administration expenses, plus past service costs or credits resulting from plan amendments or curtailments. The net interest income or expense is determined by applying the discount rate to the net defined benefit asset or liability. The current year cost of disability welfare plans is the year-over-year change in the defined benefit obligation, including any actuarial gains or losses.

The cost of defined contribution plans is the contribution provided by the Company and is recorded in income in the periods during which services are rendered by employees.

(p)    Derivative and hedging instruments

The Company uses derivative financial instruments (“derivatives”) including swaps, forward and futures agreements, and options to manage current and anticipated exposures to changes in interest rates, foreign exchange rates, commodity prices and equity market prices, and to replicate permissible investments. Derivatives embedded in other financial instruments are separately recorded as derivatives when their economic characteristics and risks are not closely related to those of the host instrument, the terms of the embedded derivative are the same as those of a standalone derivative and the host instrument itself is not recorded at FVTPL. Derivatives which are separate financial instruments are recorded at fair value, and those with unrealized gains reported as derivative assets and those with unrealized losses reported as derivative liabilities.

A determination is made for each derivative as to whether to apply hedge accounting. Where hedge accounting is not applied, changes in the fair value of derivatives are recorded in investment income. Refer to note 3(c).

Where the Company has elected to apply hedge accounting, a hedging relationship is designated and documented at inception. Hedge effectiveness is evaluated at inception and throughout the term of the hedge. Hedge accounting is only applied when the Company expects that the hedging relationship will be highly effective in achieving offsetting changes in fair value or changes in cash flows attributable to the risk being hedged. The assessment of hedge effectiveness is performed at the end of each reporting period both prospectively and retrospectively. When it is determined that a hedging relationship is no longer effective, or the hedging instrument or the hedged item has been sold or terminated, the Company discontinues hedge accounting prospectively. In such cases, if the derivatives are not sold or terminated, any subsequent changes in fair value of the derivatives are recognized in investment income.

For derivatives that are designated as hedging instruments, changes in fair value are recorded according to the nature of the risks being hedged, as discussed below.

In a fair value hedging relationship, changes in fair value of the hedging instruments are recorded in investment income, offsetting changes in fair value of the hedged items, which would otherwise not be carried at fair value. Hedge ineffectiveness is recognized in investment income and arises from differences between changes in the fair values of hedging instruments and hedged items. When hedge accounting is discontinued, the carrying value of the hedged item is no longer adjusted and the cumulative fair value adjustments are amortized to investment income over the remaining term of the hedged item unless the hedged item is sold, at which time the balance is recognized immediately in investment income.

In a cash flow hedging relationship, the effective portion of the change in the fair value of the hedging instrument is recorded in OCI while the ineffective portion is recognized in investment income. Gains and losses in accumulated other comprehensive income (“AOCI”) are recognized in income during the same periods that the variability in the hedged cash flows or the hedged forecasted transactions are recognized in income. The reclassifications from AOCI are made to investment income, except for total return swaps that hedge stock-based compensation awards, which are reclassified to general expenses.

Gains and losses on cash flow hedges in AOCI are reclassified immediately to investment income when the hedged item is sold, or the forecasted transaction is no longer expected to occur. When a hedge is discontinued, but the hedged forecasted transaction is expected to occur, the amounts in AOCI are reclassified to investment income in the periods during which variability in the cash flows hedged or the hedged forecasted transaction is recognized in income.

In a net investment in foreign operations hedging relationship, gains and losses relating to the effective portion of the hedge are recorded in OCI. Gains and losses in AOCI are recognized in income during the periods when gains or losses on the underlying hedged net investment in foreign operations are recognized in income upon disposal of the foreign operation.

(q)    Premium income and related expenses

Gross premiums for all types of insurance contracts, and contracts with limited mortality or morbidity risk, are generally recognized as revenue when due. Premiums are reported gross of reinsurance ceded (refer to note 6).

(r)    Revenue from service contracts

The Company recognizes revenue from service contracts in accordance with IFRS 15. The Company’s service contracts generally impose single performance obligations, each consisting of a series of similar related services for each customer. Revenue is recorded as performance obligations are satisfied over time because the customers simultaneously receive and consume the benefits of the services rendered, measured using an output method. Revenue for variable consideration is recognized to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty is subsequently resolved. Refer to note 13.

 

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Note 2     Accounting and Reporting Changes

(a) Changes in accounting and reporting policy

(i) Amendments to IFRS 3 “Business Combinations”

Amendments to IFRS 3 “Business Combinations” were issued in October 2018 and are effective for business combinations occurring on or after January 1, 2020, with earlier application permitted. The amendments revise the definition of a business and permit a simplified assessment of whether an acquired set of activities and assets qualifies as a business. Application of the amendments are expected to result in fewer acquisitions qualifying as business combinations. Adoption of these amendments did not have a significant impact on the Company’s Consolidated Financial Statements.

(ii) Amendments to IAS 1 “Presentation of Financial Statements” and IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors”

Amendments to IAS 1 “Presentation of Financial Statements” and IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors” were issued in October 2018. The amendments are effective for annual periods beginning on or after January 1, 2020 and are to be applied prospectively. The amendments update the definition of material. Adoption of these amendments did not have a significant impact on the Company’s Consolidated Financial Statements.

(iii) Interest Rate Benchmark Reform Amendments to IFRS 9, IAS 39 and IFRS 7

Amendments to IFRS 9, IAS 39 and IFRS 7 were issued in September 2019 related to interest rate benchmark reform and are effective retrospectively for annual periods beginning on or after January 1, 2020. The amendments provide temporary relief for hedge accounting to continue during the period of uncertainty before replacement of an existing interest rate benchmark with an alternative risk-free rate. The amendments apply to all hedge accounting relationships that are affected by the interest rate benchmark reform. The IASB has issued further guidance addressing various accounting issues that will arise when the existing interest rate benchmark has been replaced (refer to note 2(b)). Adoption of these amendments did not have a significant impact on the Company’s Consolidated Financial Statements.

(b) Future accounting and reporting changes

(i) IFRS 17 “Insurance Contracts” and IFRS 9 “Financial Instruments”

Amendments to IFRS 17 “Insurance Contracts” were issued in June 2020 and include a two-year deferral of the effective date along with other changes targeted to address implementation concerns and challenges raised by stakeholders. Amendments include changes to loss recovery components for reinsurance contracts held, services related to investment activities and the allocation of acquisition cash flows. IFRS 17 as amended, is effective for years beginning on January 1, 2023, to be applied retrospectively. If full retrospective application to a group of contracts is impractical, the modified retrospective or fair value methods may be used.

In conjunction with the amendments to IFRS 17, the IASB also amended IFRS 4 “Insurance Contracts” to permit eligible insurers to apply IFRS 9 effective January 1, 2023, alongside IFRS 17.

The Company continues its assessment of the implications of this standard and expects that it will have a significant impact on the Company’s Consolidated Financial Statements. The establishment of a Contractual Service Margin on the Company’s in-force business is expected to lead to an increase in insurance contract liabilities and corresponding decrease in equity upon transition. The Contractual Service Margin represents unearned profits that are expected to amortize into income as services are provided. The Company continues to evaluate the potential impacts of all other changes including available accounting policy choices under IFRS 17 on the measurement of its insurance contract liabilities.

(ii) Annual Improvements 2018–2020 Cycle

Annual Improvements 2018–2020 Cycle was issued in May 2020 and is effective on or after January 1, 2022. The IASB issued four minor amendments to different standards as part of the Annual Improvements process, to be applied prospectively. Adoption of these amendments is not expected to have a significant impact on the Company’s Consolidated Financial Statements.

(iii) Amendments to IFRS 3 “Business Combinations”

Amendments to IFRS 3 “Business Combinations” were issued in May 2020, and are effective on or after January 1, 2022, with earlier application permitted. The amendments update references within IFRS 3 to the 2018 Conceptual Framework and require that the principles in IAS 37 “Provisions, Contingent Liabilities and Contingent Assets” be used to identify liabilities and contingent assets arising from a business combination. Adoption of these amendments is not expected to have a significant impact on the Company’s Consolidated Financial Statements.

(iv) Amendments to IAS 37 “Provisions, Contingent Liabilities and Contingent Assets”

Amendments to IAS 37 “Provisions, Contingent Liabilities and Contingent Assets” were issued in May 2020, and are effective on or after January 1, 2022, with earlier application permitted. The amendments address identifying onerous contracts and specify the cost of fulfilling a contract which includes all costs directly relate to the contract. These include incremental direct costs and allocations of other costs that relate directly to fulfilling the contract. Adoption of these amendments is not expected to have a significant impact on the Company’s Consolidated Financial Statements.

 

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(v) Interest Rate Benchmark Reform Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16

Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 were issued in August 2020 related to interest rate benchmark reform and are effective retrospectively for annual periods beginning January 1, 2021. The amendments provide relief from modification of financial assets and liabilities, and discontinuation of hedge relationships, when changing interest rate benchmarks from LIBOR to a replacement benchmark. The amendments include a practical expedient to treat changes in risk free rates as a change to a floating interest rate with an update to the effective rate of interest, rather than as a change in future cash flows which might require adjustments to carrying values through recording a modification gain or loss. Adoption of these amendments is not expected to have a significant impact on the Company’s Consolidated Financial Statements.

Note 3    Invested Assets and Investment Income

(a) Carrying values and fair values of invested assets

 

As at December 31, 2020   FVTPL(1)     AFS(2)     Other(3)     Total carrying
value(4)
    Total fair
value(5)
 

Cash and short-term securities(6)

  $ 2,079     $ 18,314     $ 5,774     $ 26,167     $ 26,167  

Debt securities(7)

         

Canadian government and agency

    20,667       4,548             25,215       25,215  

U.S. government and agency

    11,449       19,787             31,236       31,236  

Other government and agency

    19,732       4,613             24,345       24,345  

Corporate

    128,297       6,566             134,863       134,863  

Mortgage/asset-backed securities

    2,916       149             3,065       3,065  

Public equities(8)

    22,071       1,651             23,722       23,722  

Mortgages

                50,207       50,207       54,230  

Private placements

                40,756       40,756       47,890  

Policy loans

                6,398       6,398       6,398  

Loans to Bank clients

                1,976       1,976       1,982  

Real estate

         

Own use property(9)

                1,850       1,850       3,017  

Investment property

                10,982       10,982       10,982  

Other invested assets

         

Alternative long-duration assets(10),(11)

    16,183       88       9,901       26,172       27,029  

Various other (12)

    145             3,878       4,023       4,023  

Total invested assets

  $ 223,539     $ 55,716     $ 131,722     $ 410,977     $ 424,164  
As at December 31, 2019   FVTPL(1)     AFS(2)     Other(3)     Total carrying
value(4)
    Total fair
value(5)
 

Cash and short-term securities(6)

  $ 1,859     $ 13,084     $ 5,357     $ 20,300     $ 20,300  

Debt securities(7)

         

Canadian government and agency

    18,582       4,779             23,361       23,361  

U.S. government and agency

    11,031       17,221             28,252       28,252  

Other government and agency

    17,383       4,360             21,743       21,743  

Corporate

    116,044       5,285             121,329       121,329  

Mortgage/asset-backed securities

    3,267       170             3,437       3,437  

Public equities(8)

    20,060       2,791             22,851       22,851  

Mortgages

                49,376       49,376       51,450  

Private placements

                37,979       37,979       41,743  

Policy loans

                6,471       6,471       6,471  

Loans to Bank clients

                1,740       1,740       1,742  

Real estate

         

Own use property(9)

                1,926       1,926       3,275  

Investment property

                11,002       11,002       11,002  

Other invested assets

         

Alternative long-duration assets(10),(11)

    15,252       99       9,492       24,843       25,622  

Various other (12)

    149             3,768       3,917       3,918  

Total invested assets

  $   203,627     $   47,789     $   127,111     $   378,527     $   386,496  

 

(1)

FVTPL classification was elected for securities backing insurance contract liabilities to substantially reduce any accounting mismatch arising from changes in the fair value of these assets and changes in the value of the related insurance contract liabilities. If this election had not been made and instead the AFS classification was selected, there would be an accounting mismatch because changes in insurance contract liabilities are recognized in net income rather than in OCI.

(2)

Securities that are designated as AFS are not actively traded by the Company, but sales do occur as circumstances warrant. Such sales result in a reclassification of any accumulated unrealized gain (loss) in AOCI to net income as a realized gain (loss).

(3)

Primarily includes assets classified as loans and carried at amortized cost, own use properties, investment properties, equity method accounted investments, oil and gas investments, and leveraged leases. Refer to note 1(e) for further details regarding accounting policy.

 

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(4)

Fixed income invested assets above include debt securities, mortgages, private placements and approximately $246 (2019 – $179) of other invested assets, which primarily have contractual cash flows that qualify as Solely Payment of Principal and Interest (“SPPI”). Fixed income invested assets which do not have SPPI qualifying cash flows as at December 31, 2020 include debt securities, private placements and other invested assets with fair values of $94, $211 and $380, respectively (2019 – $98, $257 and $373). The change in the fair value of these invested assets during the year was $44 (2019 – $71).

(5)

The methodologies used in determining fair values of invested assets are described in note 1(c) and note 3(g).

(6)

Includes short-term securities with maturities of less than one year at acquisition amounting to $7,062 (2019 – $3,806), cash equivalents with maturities of less than 90 days at acquisition amounting to $13,331 (2019 – $11,136) and cash of $5,774 (2019 – $5,358).

(7)

Debt securities include securities which were acquired with maturities of less than one year and less than 90 days of $1,971 and $129, respectively (2019 – $537 and $69).

(8)

Includes $229 (2019 – $12) of public equities that are managed in conjunction with the Company’s alternative long duration asset (“ALDA”) strategy.

(9)

Includes accumulated depreciation of $376 (2019 – $414).

(10)

Includes investments in private equity of $7,954, infrastructure of $9,127, oil and gas of $2,296, timber and agriculture of $4,819 and various other invested assets of $1,976 (2019 – $6,396, $8,854, $3,245, $4,669 and $1,679, respectively). In 2019, a group of investments in hydro-electric power of $418 was sold.

(11)

In 2019, the Company sold $1,112 of North American Private Equity investments to Manulife Private Equity Partners, L.P, a closed-end pooled fund of funds. The Company provides management services to the fund.

(12)

Includes $3,371 (2019 – $3,371) of leveraged leases. Refer to note 1(e) regarding accounting policy.

(b) Equity method accounted invested assets

Other invested assets include investments in associates and joint ventures which are accounted for using the equity method of accounting as presented in the following table.

 

    2020           2019  
As at December 31,   Carrying
value
    % of total           Carrying
value
    % of total  

Leveraged leases

  $ 3,371       40       $ 3,371       43  

Timber and agriculture

    694       8         668       9  

Real estate

    1,187       14         1,031       13  

Other

    3,222       38         2,716       35  

Total

  $   8,474       100       $   7,786       100  

The Company’s share of profit and dividends from these investments for the year ended December 31, 2020 were $315 and $2, respectively (2019 – $369 and $2).

 

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(c) Investment income

 

For the year ended December 31, 2020   FVTPL     AFS     Other(1)     Total  

Cash and short-term securities

       

Interest income

  $ 24     $ 145     $     $ 169  

Gains (losses)(2)

    (24     (112           (136

Debt securities

       

Interest income

    5,805       692             6,497  

Gains (losses)(2)

    10,739       2,785             13,524  

Impairment loss, net

    (113     (6           (119

Public equities

       

Dividend income

    517       38             555  

Gains (losses)(2)

    2,020       21             2,041  

Impairment loss, net

          (54           (54

Mortgages

       

Interest income

                1,837       1,837  

Gains (losses)(2)

                86       86  

Provision, net

                (18     (18

Private placements

       

Interest income

                1,883       1,883  

Gains (losses)(2)

                (18     (18

Impairment loss, net

                (88     (88

Policy loans

                390       390  

Loans to Bank clients

       

Interest income

                72       72  

Provision, net

                (2     (2

Real estate

       

Rental income, net of depreciation(3)

                468       468  

Gains (losses)(2)

                (18     (18

Derivatives

       

Interest income, net

    924             (31     893  

Gains (losses)(2)

    6,501             28       6,529  

Other invested assets

       

Interest income

                72       72  

Oil and gas, timber, agriculture and other income

                1,435       1,435  

Gains (losses)(2)

    (210     1       32       (177

Impairment loss, net

    (9     (16     (396     (421

Total investment income

  $ 26,174     $ 3,494     $ 5,732     $ 35,400  

Investment income

       

Interest income

  $ 6,753     $ 837     $ 4,223     $ 11,813  

Dividend, rental and other income

    517       38       1,903       2,458  

Impairments, provisions and recoveries, net

    (123     (76     (504     (703

Other

    241       2,685       (61     2,865  
      7,388       3,484       5,561       16,433  

Realized and unrealized gains (losses) on assets supporting insurance and investment contract liabilities and on macro equity hedges

       

Debt securities

    10,747       1             10,748  

Public equities

    1,908       9             1,917  

Mortgages

                86       86  

Private placements

                (47     (47

Real estate

                1       1  

Other invested assets

    (318           103       (215

Derivatives, including macro equity hedging program

    6,449             28       6,477  
      18,786       10       171       18,967  

Total investment income

  $   26,174     $   3,494     $   5,732     $   35,400  

 

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For the year ended December 31, 2019   FVTPL     AFS     Other(1)     Total  

Cash and short-term securities

       

Interest income

  $ 32     $ 281     $     $ 313  

Gains (losses)(2)

    11       (29           (18

Debt securities

       

Interest income

    5,557       783             6,340  

Gains (losses)(2)

    11,525       472             11,997  

Recovery (impairment loss), net

    (9     1             (8

Public equities

       

Dividend income

    551       69             620  

Gains (losses)(2)

    3,079       109             3,188  

Impairment loss, net

          (24           (24

Mortgages

       

Interest income

                1,951       1,951  

Gains (losses)(2)

                26       26  

Provision, net

                31       31  

Private placements

       

Interest income

                1,782       1,782  

Gains (losses)(2)

                (62     (62

Impairment loss, net

                (35     (35

Policy loans

                391       391  

Loans to Bank clients

       

Interest income

                87       87  

Provision, net

                (1     (1

Real estate

       

Rental income, net of depreciation(3)

                505       505  

Gains (losses)(2)

                508       508  

Derivatives

       

Interest income, net

    579             (24     555  

Gains (losses)(2)

    2,653             (6     2,647  

Other invested assets

       

Interest income

                69       69  

Oil and gas, timber, agriculture and other income

                1,862       1,862  

Gains (losses)(2)

    742       (1     35       776  

Recovery, net

                93       93  

Total investment income

  $   24,720     $     1,661     $     7,212     $   33,593  

Investment income

       

Interest income

  $ 6,168     $ 1,064     $ 4,256     $ 11,488  

Dividend, rental and other income

    552       69       2,367       2,988  

Impairments, provisions and recoveries, net

    (9     (23     88       56  

Other

    265       539       57       861  
      6,976       1,649       6,768       15,393  

Realized and unrealized gains (losses) on assets supporting insurance and investment contract liabilities and on macro equity hedges

       

Debt securities

    11,521       7             11,528  

Public equities

    2,865       5             2,870  

Mortgages

                26       26  

Private placements

                (62     (62

Real estate

                514       514  

Other invested assets

    776             (28     748  

Derivatives, including macro equity hedging program

    2,582             (6     2,576  
      17,744       12       444       18,200  

Total investment income

  $ 24,720     $ 1,661     $ 7,212     $ 33,593  

 

(1)

Primarily includes investment income on loans carried at amortized cost, own use properties, investment properties, derivative and hedging instruments in cash flow hedging relationships, equity method accounted investments, oil and gas investments, and leveraged leases.

(2)

Includes net realized and unrealized gains (losses) for financial instruments at FVTPL, real estate investment properties, and other invested assets measured at fair value. Also includes net realized gains (losses) for financial instruments at AFS and other invested assets carried at amortized cost.

(3)

Rental income from investment properties is net of direct operating expenses.

 

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(d) Investment expenses

The following table presents total investment expenses.

 

For the years ended December 31,   2020     2019  

Related to invested assets

  $ 649     $ 617  

Related to segregated, mutual and other funds

    1,138       1,131  

Total investment expenses

  $   1,787     $   1,748  

(e) Investment properties

The following table presents the rental income and direct operating expenses of investment properties.

 

For the years ended December 31,   2020     2019  

Rental income from investment properties

  $ 874     $ 864  

Direct operating expenses of rental investment properties

      (491     (464

Total

  $ 383     $   400  

(f) Mortgage securitization

The Company securitizes certain insured and uninsured fixed and variable rate residential mortgages and Home Equity Lines of Credit (“HELOC”) through creation of mortgage-backed securities under the Canadian Mortgage Bond Program (“CMB”), and the HELOC securitization program.

Benefits received from the securitization include interest spread between the asset and associated liability. There are no expected credit losses on securitized mortgages under the Canada Mortgage and Housing Corporation (“CMHC”) sponsored CMB and the Platinum Canadian Mortgage Trust (“PCMT”) HELOC securitization programs as they are insured by CMHC and other third-party insurance programs against borrowers’ default. Mortgages securitized in the Platinum Canadian Mortgage Trust II (“PCMT II”) program are uninsured.

Cash flows received from the underlying securitized assets/mortgages are used to settle the related secured borrowing liability. For CMB transactions, receipts of principal are deposited into a trust account for settlement of the liability at time of maturity. These transferred assets and related cash flows cannot be transferred or used for other purposes. For the HELOC transactions, investors are entitled to periodic interest payments, and the remaining cash receipts of principal are allocated to the Company (the “Seller”) during the revolving period of the deal and are accumulated for settlement during an accumulation period or repaid to the investor monthly during a reduction period, based on the terms of the note.

Securitized assets and secured borrowing liabilities

 

As at December 31, 2020    Securitized assets         
Securitization program    Securitized
mortgages
     Restricted cash and
short-term securities
     Total      Secured borrowing
liabilities(2)
 

HELOC securitization(1)

   $ 2,356      $      $ 2,356      $ 2,250  

CMB securitization

     2,273               2,273        2,332  

Total

   $ 4,629      $      $ 4,629      $ 4,582  
As at December 31, 2019    Securitized assets         
Securitization program    Securitized
mortgages
     Restricted cash and
short-term securities
     Total      Secured borrowing
liabilities(2)
 

HELOC securitization(1)

   $ 2,285      $ 8      $ 2,293      $   2,250  

CMB securitization

     1,620               1,620        1,632  

Total

   $   3,905      $   8      $   3,913      $   3,882  

 

(1)

Manulife Bank, a subsidiary, securitizes a portion of its HELOC receivables through Platinum Canadian Mortgage Trust (“PCMT”), and Platinum Canadian Mortgage Trust II (“PCMT II”). PCMT funds the purchase of the co-ownership interests from Manulife Bank by issuing term notes collateralized by an underlying pool of CMHC insured HELOCs to institutional investors. PCMT II funds the purchase of the co-ownership interests from Manulife Bank by issuing term notes collateralized by an underlying pool of uninsured HELOCs to institutional investors. The restricted cash balance for the HELOC securitization reflects a cash reserve fund established in relation to the transactions. The reserve will be drawn upon only in the event of insufficient cash flows from the underlying HELOCs to satisfy the secured borrowing liability.

(2)

Secured borrowing liabilities primarily comprise of Series 2011-1 notes with a floating rate which are expected to mature on December 15, 2021, and the Series 2016-1 notes with a floating rate which are expected to mature on May 15, 2022. Manulife Bank also securitizes insured amortizing mortgages under the National Housing Act Mortgage-Backed Securities (“NHA MBS”) program sponsored by CMHC. Manulife Bank participates in CMB programs by selling NHA MBS securities to Canada Housing Trust (“CHT”), as a source of fixed rate funding.

As at December 31, 2020, the fair value of securitized assets and associated liabilities were $4,679 and $4,661, respectively (2019 – $3,950 and $3,879).

 

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(g) Fair value measurement

The following table presents the fair values of invested assets and segregated funds net assets measured at fair value categorized by the fair value hierarchy.

 

As at December 31, 2020   Total fair value     Level 1     Level 2     Level 3  

Cash and short-term securities

       

FVTPL

  $ 2,079     $     $ 2,079     $  

AFS

    18,314             18,314        

Other

    5,774       5,774              

Debt securities

       

FVTPL

       

Canadian government and agency

    20,667             20,667        

U.S. government and agency

    11,449             11,449        

Other government and agency

    19,732             19,732        

Corporate

    128,297             127,787       510  

Residential mortgage-backed securities

    9             9        

Commercial mortgage-backed securities

    1,172             1,172        

Other asset-backed securities

    1,735             1,690       45  

AFS

       

Canadian government and agency

    4,548             4,548        

U.S. government and agency

    19,787             19,787        

Other government and agency

    4,613             4,613        

Corporate

    6,566             6,563       3  

Residential mortgage-backed securities

    1             1        

Commercial mortgage-backed securities

    93             93        

Other asset-backed securities

    55             55        

Public equities

       

FVTPL

    22,071       22,071              

AFS

    1,651       1,651              

Real estate – investment property(1)

    10,982                   10,982  

Other invested assets(2)

    19,149       100             19,049  

Segregated funds net assets(3)

    367,436       327,437       35,797       4,202  

Total

  $ 666,180     $ 357,033     $ 274,356     $ 34,791  
As at December 31, 2019   Total fair value     Level 1     Level 2     Level 3  

Cash and short-term securities

       

FVTPL

  $ 1,859     $     $ 1,859     $  

AFS

    13,084             13,084        

Other

    5,357       5,357              

Debt securities

       

FVTPL

       

Canadian government and agency

    18,582             18,582        

U.S. government and agency

    11,031             11,031        

Other government and agency

    17,383             17,383        

Corporate

    116,044             115,411       633  

Residential mortgage-backed securities

    13             13        

Commercial mortgage-backed securities

    1,271             1,271        

Other asset-backed securities

    1,983             1,983        

AFS

       

Canadian government and agency

    4,779             4,779        

U.S. government and agency

    17,221             17,221        

Other government and agency

    4,360             4,360        

Corporate

    5,285             5,270       15  

Residential mortgage-backed securities

    1             1        

Commercial mortgage-backed securities

    102             102        

Other asset-backed securities

    67             67        

Public equities

       

FVTPL

    20,060       20,060              

AFS

    2,791       2,788       3        

Real estate – investment property(1)

    11,002                   11,002  

Other invested assets(2)

    18,194       91             18,103  

Segregated funds net assets(3)

    343,108       303,567       35,029       4,512  

Total

  $   613,577     $   331,863     $   247,449     $   34,265  

 

(1)

For investment properties, the significant unobservable inputs are capitalization rates (ranging from 2.75% to 8.50% during the year and ranging from 2.75% to 8.75% during 2019) and terminal capitalization rates (ranging from 3.25% to 9.25% during the year and ranging from 3.80% to 9.25% during 2019). Holding other factors constant, a lower capitalization or terminal capitalization rate will tend to increase the fair value of an investment property. Changes in fair value based on variations in unobservable inputs generally cannot be extrapolated because the relationship between the directional changes of each input is not usually linear.

 

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(2)

Other invested assets measured at fair value are held primarily in infrastructure and timber sectors. The significant inputs used in the valuation of the Company’s infrastructure investments are primarily future distributable cash flows, terminal values and discount rates. Holding other factors constant, an increase to future distributable cash flows or terminal values would tend to increase the fair value of an infrastructure investment, while an increase in the discount rate would have the opposite effect. Discount rates during the year ranged from 7.00% to 15.6% (2019 – ranged from 7.00% to 16.5%). Disclosure of distributable cash flow and terminal value ranges are not meaningful given the disparity in estimates by project. The significant inputs used in the valuation of the Company’s investments in timberland are timber prices and discount rates. Holding other factors constant, an increase to timber prices would tend to increase the fair value of a timberland investment, while an increase in the discount rates would have the opposite effect. Discount rates during the year ranged from 5.0% to 7.0% (2019 – ranged from 5.0% to 7.0%). A range of prices for timber is not meaningful as the market price depends on factors such as property location and proximity to markets and export yards.

(3)

Segregated funds net assets are measured at fair value. The Company’s Level 3 segregated funds assets are predominantly in investment properties and timberland properties valued as described above.

The following table presents fair value of invested assets not measured at fair value by the fair value hierarchy.

 

As at December 31, 2020   Carrying value     Fair value     Level 1     Level 2     Level 3  

Mortgages(1)

  $ 50,207     $ 54,230     $     $     $ 54,230  

Private placements(2)

    40,756       47,890             41,398       6,492  

Policy loans(3)

    6,398       6,398             6,398        

Loans to Bank clients(4)

    1,976       1,982             1,982        

Real estate–own use property(5)

    1,850       3,017                   3,017  

Other invested assets(6)

    11,046       11,903       128             11,775  

Total invested assets disclosed at fair value

  $ 112,233     $ 125,420     $ 128     $ 49,778     $ 75,514  
As at December 31, 2019   Carrying value     Fair value     Level 1     Level 2     Level 3  

Mortgages(1)

  $ 49,376     $ 51,450     $     $     $ 51,450  

Private placements(2)

    37,979       41,743             36,234       5,509  

Policy loans(3)

    6,471       6,471             6,471        

Loans to Bank clients(4)

    1,740       1,742             1,742        

Real estate–own use property(5)

    1,926       3,275                   3,275  

Other invested assets(6)

    10,566       11,346       165             11,181  

Total invested assets disclosed at fair value

  $   108,058     $   116,027     $   165     $   44,447     $   71,415  

 

(1)

Fair value of commercial mortgages is determined through an internal valuation methodology using both observable and unobservable inputs. Unobservable inputs include credit assumptions and liquidity spread adjustments. Fair value of fixed-rate residential mortgages is determined using the discounted cash flow method. Inputs used for valuation are primarily comprised of prevailing interest rates and prepayment rates, if applicable. Fair value of variable-rate residential mortgages is assumed to be their carrying value.

(2)

Fair value of private placements is determined through an internal valuation methodology using both observable and unobservable inputs. Unobservable inputs include credit assumptions and liquidity spread adjustments. Private placements are classified within Level 2 unless the liquidity adjustment constitutes a significant price impact, in which case the securities are classified as Level 3.

(3)

Fair value of policy loans is equal to their unpaid principal balances.

(4)

Fair value of fixed-rate loans to Bank clients is determined using the discounted cash flow method. Inputs used for valuation are primarily comprised of current interest rates. Fair value of variable-rate loans is assumed to be their carrying value.

(5)

Fair value of own use real estate and the fair value hierarchy are determined in accordance with the methodologies described for real estate – investment property in note 1.

(6)

Primarily include leveraged leases, oil and gas properties and equity method accounted other invested assets. Fair value of leveraged leases is disclosed at their carrying values as fair value is not routinely calculated on these investments. Fair value for oil and gas properties is determined using external appraisals based on discounted cash flow methodology. Inputs used in valuation are primarily comprised of forecasted price curves, planned production, as well as capital expenditures, and operating costs. Fair value of equity method accounted other invested assets is determined using a variety of valuation techniques including discounted cash flows and market comparable approaches. Inputs vary based on the specific investment.

As a result of COVID-19 and the recent economic downturn, significant measurement uncertainty exists in determining the fair value of real estate and other invested assets. For the year ended December 31, 2020, the Company has recognized a reduction in the carrying value of oil and gas investments of $837 based on reasonable estimates and assumptions reflecting both the nature of the assets and currently available information which was subject to significant judgment. For the methodologies used in determining carrying values of the invested assets, refer to note 1.

Transfers between Level 1 and Level 2

The Company records transfers of assets and liabilities between Level 1 and Level 2 at their fair values as at the end of each reporting period. Assets are transferred out of Level 1 when they are no longer transacted with sufficient frequency and volume in an active market. Conversely, assets are transferred from Level 2 to Level 1 when transaction volume and frequency are indicative of an active market. The Company had $nil of assets transferred between Level 1 and Level 2 during the years ended December 31, 2020 and 2019.

For segregated funds net assets, the Company had $nil transfers from Level 1 to Level 2 for the year ended December 31, 2020 (2019 – $nil). The Company had $15 transfers from Level 2 to Level 1 for the year ended December 31, 2020 (2019 – $nil).

Invested assets and segregated funds net assets measured at fair value using significant unobservable inputs (Level 3)

The Company classifies fair values of invested assets and segregated funds net assets as Level 3 if there are no observable markets for these assets or, in the absence of active markets, most of the inputs used to determine fair value are based on the Company’s own assumptions about market participant assumptions. The Company prioritizes the use of market-based inputs over entity-based assumptions in determining Level 3 fair values. The gains and losses in the table below includes the changes in fair value due to both observable and unobservable factors.

 

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The following table presents a roll forward for invested assets, derivatives and segregated funds net assets measured at fair value using significant unobservable inputs (Level 3) for the years ended December 31, 2020 and 2019.

 

For the year ended

December 31, 2020

  Balance,
January 1,
2020
    Total
gains
(losses)
included
in net
income(1)
    Total
gains
(losses)
included
in AOCI(2)
    Purchases     Sales     Settlements    

Transfer

in(3),(4)

   

Transfer

out(3),(4)

    Currency
movement
    Balance,
December 31,
2020
    Change in
unrealized
gains
(losses) on
assets still
held
 

Debt securities

                     

FVTPL

                     

Corporate

  $ 633     $ 4     $     $ 54     $ (272   $ (1   $ 151     $ (50   $ (9   $ 510     $ 105  

Other securitized assets

          (8                       (1     55             (1     45        

AFS

                     

Corporate

    15       (6     2                         5       (13           3        

Real estate – investment property

    11,002       (255           572       (318           47             (66     10,982       (300

Other invested assets

    18,103       (401     (49     3,162       (1,076     (638     92       (3     (141     19,049       (902

Total invested assets

    29,753       (666     (47     3,788       (1,666     (640     350       (66     (217     30,589       (1,097

Derivatives

    1,456       2,953       (18     12             (1,165           342       (137     3,443          2,033  

Segregated funds net assets

    4,512       (6           (84     (149     (26     2       (3     (44     4,202       45  

Total

  $   35,721     $   2,281     $   (65   $   3,716     $   (1,815   $   (1,831   $   352     $   273     $   (398   $   38,234     $ 981  

 

For the year ended
December 31, 2019
  Balance,
January 1,
2019
    Total
gains
(losses)
included
in net
income(1)
    Total
gains
(losses)
included
in AOCI(2)
    Purchases     Sales     Settlements    

Transfer

in(3),(4)

   

Transfer

out(3),(4)

    Currency
movement
    Balance,
December 31,
2019
    Change in
unrealized
gains
(losses)
on assets
still held
 

Debt securities

                     

FVTPL

                     

Other government & agency

  $ 180     $ 1     $     $ 16     $ (18   $     $     $ (178   $ (1   $     $  

Corporate

    784       35             43       (88     (18     514       (604     (33     633       47  

Residential mortgage-backed securities

    7                         (1                 (6                  

AFS

                     

Other government & agency

    37       1             5       (12                 (31                  

Corporate

    122       1             13       (21     (4           (94     (2     15        

Commercial mortgage-backed securities

                      37                         (37                  

Public equities

                     

FVTPL

    3       1,739                   (1,679                       (63           1,510  

Real estate – investment property

    10,761       506             440       (457           15             (263     11,002       468  

Other invested assets

    17,562       (1,028     2       3,401       (144     (1,031     2             (661     18,103       (923

Total invested assets

    29,456       1,255       2       3,955       (2,420     (1,053     531       (950     (1,023     29,753       1,102  

Derivatives

    106       1,884       44       42             (685     135       (34     (36     1,456       1,423  

Segregated funds net assets

    4,447           148             193       (140     (30                 (106     4,512       111  

Total

  $   34,009     $   3,287     $   46     $   4,190     $   (2,560   $   (1,768   $   666     $   (984   $   (1,165   $   35,721     $   2,636  

 

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Table of Contents
(1)

These amounts are included in net investment income on the Consolidated Statements of Income except for the amount related to segregated funds net assets, where the amount is recorded in changes in segregated funds net assets, refer to note 22.

(2)

These amounts are included in AOCI on the Consolidated Statements of Financial Position.

(3)

The Company uses fair values of the assets at the beginning of the year for assets transferred into and out of Level 3 except for derivatives, refer to footnote 4 below.

(4)

For derivatives transfer into or out of Level 3, the Company uses fair value at the end of the year and at the beginning of the year, respectively.

Transfers into Level 3 primarily result from securities that were impaired during the year or securities where a lack of observable market data (versus the previous period) resulted in reclassifying assets into Level 3. Transfers from Level 3 primarily result from observable market data now being available for the entire term structure of the debt security.

Note 4    Derivative and Hedging Instruments

Derivatives are financial contracts, the value of which is derived from underlying interest rates, foreign exchange rates, other financial instruments, commodity prices or indices. The Company uses derivatives including swaps, forward and futures agreements, and options to manage current and anticipated exposures to changes in interest rates, foreign exchange rates, commodity prices and equity market prices, and to replicate permissible investments.

Swaps are over-the-counter (“OTC”) contractual agreements between the Company and a third party to exchange a series of cash flows based upon rates applied to a notional amount. For interest rate swaps, counterparties generally exchange fixed or floating interest rate payments based on a notional value in a single currency. Cross currency swaps involve the exchange of principal amounts between parties as well as the exchange of interest payments in one currency for the receipt of interest payments in another currency. Total return swaps are contracts that involve the exchange of payments based on changes in the values of a reference asset, including any returns such as interest earned on these assets, in return for amounts based on reference rates specified in the contract.

Forward and futures agreements are contractual obligations to buy or sell a financial instrument, foreign currency or other underlying commodity on a predetermined future date at a specified price. Forward contracts are OTC contracts negotiated between counterparties, whereas futures agreements are contracts with standard amounts and settlement dates that are traded on regulated exchanges.

Options are contractual agreements whereby the holder has the right, but not the obligation, to buy (call option) or sell (put option) a security, exchange rate, interest rate, or other financial instrument at a predetermined price/rate within a specified time.

See variable annuity dynamic hedging strategy in the “Risk Management” section of the Company’s 2020 MD&A for an explanation of the Company’s dynamic hedging strategy for its variable annuity product guarantees.

(a) Fair value of derivatives

The pricing models used to value OTC derivatives are based on market standard valuation methodologies and the inputs to these models are consistent with what a market participant would use when pricing the instruments. Derivative valuations can be affected by changes in interest rates, currency exchange rates, financial indices, credit spreads, default risk (including the counterparties to the contract), and market volatility. The significant inputs to the pricing models for most OTC derivatives are inputs that are observable or can be corroborated by observable market data and are classified as Level 2. Inputs that are observable generally include interest rates, foreign currency exchange rates and interest rate curves. However, certain OTC derivatives may rely on inputs that are significant to the fair value that are not observable in the market or cannot be derived principally from, or corroborated by, observable market data and these derivatives are classified as Level 3. Inputs that are unobservable generally include broker quoted prices, volatilities and inputs that are outside of the observable portion of the interest rate curve or other relevant market measures. These unobservable inputs may involve significant management judgment or estimation. Even though unobservable, these inputs are based on assumptions deemed appropriate given the circumstances and consistent with what market participants would use when pricing such instruments. The Company’s use of unobservable inputs is limited and the impact on derivative fair values does not represent a material amount as evidenced by the limited amount of Level 3 derivatives. The credit risk of both the counterparty and the Company are considered in determining the fair value for all OTC derivatives after considering the effects of netting agreements and collateral arrangements.

 

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The following table presents gross notional amount and fair value of derivative instruments by the underlying risk exposure.

 

As at December 31,   2020           2019  
        Notional
amount
    Fair value           Notional
amount
    Fair value  
Type of hedge   Instrument type   Assets     Liabilities           Assets     Liabilities  

Qualifying hedge accounting relationships

             

Fair value hedges

  Interest rate swaps   $ 82     $ 1     $       $ 350     $     $ 5  
  Foreign currency swaps     57             4         86       3       1  

Cash flow hedges

  Foreign currency swaps     1,756       24       468         1,790       39       407  
  Equity contracts     127       6               132       16        

Net investment hedges

  Forward contracts     628       1       10         2,822       7       22  

Total derivatives in qualifying hedge accounting relationships

    2,650       32       482         5,180       65       435  

Derivatives not designated in qualifying hedge accounting relationships

             
  Interest rate swaps     287,182       21,332       12,190         283,172       15,159       8,140  
  Interest rate futures     16,750                     13,069              
  Interest rate options     11,622       663               12,248       423        
  Foreign currency swaps     31,491       838       1,659         26,329       606       1,399  
  Currency rate futures     3,467                     3,387              
  Forward contracts     38,853       3,833       565         33,432       2,337       273  
  Equity contracts     15,738       1,092       66         14,582       853       37  
  Credit default swaps     241       3               502       6        
    Equity futures     10,984                     10,576              

Total derivatives not designated in qualifying hedge accounting relationships

    416,328       27,761       14,480         397,297       19,384       9,849  

Total derivatives

  $   418,978     $   27,793     $   14,962       $   402,477     $   19,449     $   10,284  

The following table presents fair values of derivative instruments by the remaining term to maturity. The fair values disclosed below do not incorporate the impact of master netting agreements. Refer to note 8.

 

    Remaining term to maturity        
As at December 31, 2020  

Less than

1 year

   

1 to 3

years

   

3 to 5

years

   

Over 5

years

    Total  

Derivative assets

  $ 1,656     $ 3,524     $ 1,228     $ 21,385     $ 27,793  

Derivative liabilities

    386       250       555       13,771       14,962  
    Remaining term to maturity        
As at December 31, 2019  

Less than

1 year

   

1 to 3

years

   

3 to 5

years

   

Over 5

years

    Total  

Derivative assets

  $   1,248     $   1,659     $   1,309     $   15,233     $   19,449  

Derivative liabilities

    332       145       218       9,589       10,284  

 

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The following table presents gross notional amount by the remaining term to maturity, total fair value (including accrued interest), credit risk equivalent and risk-weighted amount by contract type.

 

    Remaining term to maturity (notional amounts)           Fair value          

Risk-
weighted
amount(2)

 
As at December 31, 2020   Under 1
year
    1 to 5 years     Over 5 years     Total            Positive     Negative     Net     Credit risk
equivalent(1)
 

Interest rate contracts

                   

OTC swap contracts

  $ 7,567     $ 20,852     $ 110,166     $ 138,585       $ 21,803     $ (12,816   $ 8,987     $ 8,773     $ 1,181  

Cleared swap contracts

    2,314       18,784       127,581       148,679         432       (424     8              

Forward contracts

    11,092       18,355       1,259       30,706         3,739       (462     3,277       603       80  

Futures

    16,750                   16,750                                  

Options purchased

    1,572       3,922       6,128       11,622               664             664       665       93  

Subtotal

    39,295       61,913       245,134       346,342         26,638       (13,702     12,936       10,041       1,354  

Foreign exchange

                   

Swap contracts

    1,670       8,490       23,144       33,304         855       (2,195     (1,340     2,979       327  

Forward contracts

    8,741       34             8,775         95       (113     (18     160       18  

Futures

    3,467                   3,467                                  

Credit derivatives

    192       49             241         3             3              

Equity contracts

                   

Swap contracts

    1,227       289             1,516         43       (51     (8     384       46  

Futures

    10,984                   10,984                                  

Options purchased

    8,168       6,181             14,349               1,051       (15     1,036       5,116       664  

Subtotal including accrued interest

    73,744       76,956       268,278       418,978         28,685       (16,076     12,609       18,680       2,409  

Less accrued interest

                                    892       (1,114     (222            

Total

  $ 73,744     $ 76,956     $ 268,278     $ 418,978             $ 27,793     $   (14,962   $   12,831     $ 18,680     $ 2,409  
    Remaining term to maturity (notional amounts)           Fair value          

Risk-
weighted
amount(2)

 
As at December 31, 2019   Under 1
year
    1 to 5 years     Over 5 years     Total            Positive     Negative     Net     Credit risk
equivalent(1)
 

Interest rate contracts

                   

OTC swap contracts

  $ 5,105     $ 22,288     $ 112,863     $ 140,256       $ 15,627     $ (8,910   $ 6,717     $ 6,891     $ 957  

Cleared swap contracts

    3,932       11,499       127,835       143,266         238       (240     (2            

Forward contracts

    11,709       15,089       1,283       28,081         2,312       (253     2,059       398       53  

Futures

    13,069                   13,069                                  

Options purchased

    1,266       4,454       6,528       12,248               423             423       560       77  

Subtotal

    35,081       53,330       248,509       336,920         18,600       (9,403     9,197       7,849       1,087  

Foreign exchange

                   

Swap contracts

    998       7,519       19,688       28,205         642       (1,864     (1,222     2,515       279  

Forward contracts

    8,173                   8,173         32       (42     (10     138       16  

Futures

    3,387                   3,387                                  

Credit derivatives

    275       227             502         6             6              

Equity contracts

                   

Swap contracts

    1,233       164             1,397         43       (16     27       236       29  

Futures

    10,576                   10,576                                  

Options purchased

    6,604       6,633       80       13,317               821       (20     801       3,418       448  

Subtotal including accrued interest

    66,327       67,873       268,277       402,477         20,144       (11,345     8,799       14,156       1,859  

Less accrued interest

                                    695       (1,061     (366            

Total

  $   66,327     $   67,873     $   268,277     $   402,477             $   19,449     $ (10,284   $   9,165     $   14,156     $   1,859  

 

(1)

Credit risk equivalent is the sum of replacement cost and the potential future credit exposure. Replacement cost represents the current cost of replacing all contracts with a positive fair value. The amounts take into consideration legal contracts that permit offsetting of positions. The potential future credit exposure is calculated based on a formula prescribed by OSFI.

(2)

Risk-weighted amount represents the credit risk equivalent, weighted according to the creditworthiness of the counterparty, as prescribed by OSFI.

The total notional amount of $419 billion (2019 – $402 billion) includes $183 billion (2019 – $128 billion) related to derivatives utilized in the Company’s variable annuity guarantee dynamic hedging and macro equity risk hedging programs. Due to the Company’s variable annuity hedging practices, a large number of trades are in offsetting positions, resulting in materially lower net fair value exposure to the Company than what the gross notional amount would suggest.

 

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Fair value and the fair value hierarchy of derivative instruments

 

As at December 31, 2020   Fair value     Level 1     Level 2     Level 3  

Derivative assets

       

Interest rate contracts

  $ 25,735     $     $ 21,902     $ 3,833  

Foreign exchange contracts

    957             957        

Equity contracts

    1,098             1,051       47  

Credit default swaps

    3             3        

Total derivative assets

  $ 27,793     $     $ 23,913     $ 3,880  

Derivative liabilities

       

Interest rate contracts

  $ 12,652     $     $ 12,271     $ 381  

Foreign exchange contracts

    2,244             2,239       5  

Equity contracts

    66             15       51  

Total derivative liabilities

  $ 14,962     $     $ 14,525     $ 437  
As at December 31, 2019   Fair value     Level 1     Level 2     Level 3  

Derivative assets

       

Interest rate contracts

  $ 17,894     $     $ 15,801     $ 2,093  

Foreign exchange contracts

    680             680        

Equity contracts

    869             821       48  

Credit default swaps

    6             6        

Total derivative assets

  $ 19,449     $     $   17,308     $   2,141  

Derivative liabilities

       

Interest rate contracts

  $ 8,397     $     $ 7,730     $ 667  

Foreign exchange contracts

    1,850             1,849       1  

Equity contracts

    37             20       17  

Total derivative liabilities

  $   10,284     $   –     $ 9,599     $ 685  

Level 3 roll forward information for net derivative contracts measured using significant unobservable inputs is disclosed in note 3(g).

(b) Hedging relationships

The Company uses derivatives for economic hedging purposes. In certain circumstances, these hedges also meet the requirements of hedge accounting. Risk management strategies eligible for hedge accounting are designated as fair value hedges, cash flow hedges or net investment hedges, as described below.

Fair value hedges

The Company uses interest rate swaps to manage its exposure to changes in the fair value of fixed rate financial instruments due to changes in interest rates. The Company also uses cross currency swaps to manage its exposure to foreign exchange rate fluctuations, interest rate fluctuations, or both.

The Company recognizes gains and losses on derivatives and the related hedged items in fair value hedges in investment income. These investment gains (losses) are shown in the following table.

 

For the year ended December 31, 2020   Hedged items in qualifying
fair value hedging
relationships
  Gains (losses)
recognized on
derivatives
    Gains (losses)
recognized for
hedged items
    Ineffectiveness
recognized in
investment
income
 

Interest rate swaps

 

Fixed rate liabilities

  $ 4     $   (2   $   2  

Foreign currency swaps

 

Fixed rate assets

      (2     3       1  

Total

      $ 2     $ 1     $ 3  
For the year ended December 31, 2019   Hedged items in qualifying
fair value hedging
relationships
  Gains (losses)
recognized on
derivatives
    Gains (losses)
recognized for
hedged items
    Ineffectiveness
recognized in
investment
income
 

Interest rate swaps

 

Fixed rate liabilities

  $ 8     $ (6   $ 2  

Foreign currency swaps

 

Fixed rate assets

    (1     2       1  

Total

      $ 7     $ (4   $ 3  

Cash flow hedges

The Company uses interest rate swaps to hedge the variability in cash flows from variable rate financial instruments and forecasted transactions. The Company also uses cross currency swaps and foreign currency forward contracts to hedge the variability from foreign currency financial instruments and foreign currency expenses. Total return swaps are used to hedge the variability in cash flows

 

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associated with certain stock-based compensation awards. Inflation swaps are used to reduce inflation risk generated from inflation-indexed liabilities.

The effects of derivatives in cash flow hedging relationships on the Consolidated Statements of Income and the Consolidated Statements of Comprehensive Income are shown in the following table.

 

For the year ended December 31, 2020   Hedged items in qualifying
cash flow hedging
relationships
  Gains (losses)
deferred in
AOCI on
derivatives
    Gains (losses)
reclassified
from AOCI into
investment
income
    Ineffectiveness
recognized in
investment
income
 

Foreign currency swaps

 

Fixed rate assets

  $ 1     $     $  
 

Floating rate liabilities

      (64     14        
 

Fixed rate liabilities

    (14     (2      

Equity contracts

 

Stock-based compensation

    (2     16        

Total

      $ (79   $ 28     $  
For the year ended December 31, 2019   Hedged items in qualifying
cash flow hedging
relationships
  Gains (losses)
deferred in
AOCI on
derivatives
    Gains (losses)
reclassified
from AOCI into
investment
income
    Ineffectiveness
recognized in
investment
income
 

Foreign currency swaps

 

Fixed rate assets

  $ (2   $ 1     $   –  
 

Floating rate liabilities

    (40       37        
 

Fixed rate liabilities

    (41       (35      

Forward contracts

 

Forecasted expenses

       –       (9      

Equity contracts

 

Stock-based compensation

    35       (9      

Total

      $ (48   $ (15   $  

The Company anticipates that net losses of approximately $11 will be reclassified from AOCI to net income within the next 12 months. The maximum time frame for which variable cash flows are hedged is 16 years.

Hedges of net investments in foreign operations

The Company primarily uses forward currency contracts, cross currency swaps and non-functional currency denominated debt to manage its foreign currency exposures to net investments in foreign operations.

The effects of net investment hedging relationships on the Consolidated Statements of Income and the Consolidated Statements of Other Comprehensive Income are shown in the following table.

 

For the year ended December 31, 2020   Gains (losses)
deferred in AOCI
    Gains (losses)
reclassified from
AOCI into
investment income
    Ineffectiveness
recognized in
investment
income
 

Non-functional currency denominated debt

  $ 161     $     $  

Forward contracts

    (53            

Total

  $ 108     $     $  
For the year ended December 31, 2019   Gains (losses)
deferred in AOCI
    Gains (losses)
reclassified from
AOCI into
investment income
    Ineffectiveness
recognized in
investment
income
 

Non-functional currency denominated debt

  $ 279     $  –     $  –  

Forward contracts

    80              

Total

  $   359     $     $  

(c) Derivatives not designated in qualifying hedge accounting relationships

Derivatives used in portfolios supporting insurance contract liabilities are generally not designated in qualifying hedge accounting relationships because the change in the value of the insurance contract liabilities economically hedged by these derivatives is recorded through net income. Since changes in fair value of these derivatives and related hedged risks are recognized in investment income as they occur, they generally offset the change in hedged risk to the extent the hedges are economically effective. Interest rate and cross currency swaps are used in the portfolios supporting insurance contract liabilities to manage duration and currency risks.

 

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Investment income on derivatives not designated in qualifying hedge accounting relationships

 

For the years ended December 31,   2020     2019  

Interest rate swaps

  $ 2,423     $ 1,483  

Interest rate futures

    894       571  

Interest rate options

    291       96  

Foreign currency swaps

    (55     (242

Currency rate futures

    (47     88  

Forward contracts

       3,785       2,815  

Equity futures

    (1,111     (2,436

Equity contracts

    322       277  

Credit default swaps

    (4     (3

Total

  $ 6,498     $   2,649  

(d) Embedded derivatives

Certain insurance contracts contain features that are classified as embedded derivatives and are measured separately at FVTPL, including reinsurance contracts related to guaranteed minimum income benefits and contracts containing certain credit and interest rate features.

Certain reinsurance contracts related to guaranteed minimum income benefits contain embedded derivatives requiring separate measurement at FVTPL as the financial component contained in the reinsurance contracts does not contain significant insurance risk. As at December 31, 2020, reinsurance ceded guaranteed minimum income benefits had a fair value of $1,007 (2019 – $981) and reinsurance assumed guaranteed minimum income benefits had a fair value of $112 (2019 – $109). Claims recovered under reinsurance ceded contracts offset claims expenses and claims paid on the reinsurance assumed are reported as contract benefits.

The Company’s credit and interest rate embedded derivatives promise to pay the returns on a portfolio of assets to the contract holder. These embedded derivatives contain a credit and interest rate risk that is a financial risk embedded in the underlying insurance contract. As at December 31, 2020, these embedded derivatives had a fair value of $(229) (2019 – $(137)).

Other financial instruments classified as embedded derivatives but exempt from separate measurement at fair value include variable universal life and variable life products’ minimum guaranteed credited rates, no lapse guarantees, guaranteed annuitization options, CPI indexing of benefits, and segregated fund minimum guarantees other than reinsurance ceded/assumed guaranteed minimum income benefits. These embedded derivatives are measured and reported within insurance contract liabilities and are exempt from separate fair value measurement as they contain insurance risk and/or are closely related to the insurance host contract.

 

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Note 5     Goodwill and Intangible Assets

(a) Change in the carrying value of goodwill and intangible assets

The following table presents the change in carrying value of goodwill and intangible assets.

 

As at December 31, 2020   Balance,
January 1
    Net additions/
(disposals)
    Amortization
expense
    Effect of changes
in foreign
exchange rates
    Balance,
December 31
 

Goodwill

  $ 5,743     $ (5   $ n/a     $ (24   $ 5,714  

Indefinite life intangible assets

         

Brand

    779             n/a       (15     764  

Fund management contracts and other(1)

    805       (2     n/a       (7     796  
      1,584       (2     n/a       (22     1,560  

Finite life intangible assets(2)

         

Distribution networks

    801       59       42       (12     806  

Customer relationships

    795             54       (3     738  

Software

    991       262       189       (5     1,059  

Other

    61       (9     4       4       52  
      2,648       312       289       (16     2,655  

Total intangible assets

    4,232       310       289       (38     4,215  

Total goodwill and intangible assets

  $ 9,975     $ 305     $ 289     $ (62   $ 9,929  
As at December 31, 2019   Balance,
January 1
    Net additions/
(disposals)
    Amortization
expense
    Effect of changes
in foreign
exchange rates
    Balance,
December 31
 

Goodwill

  $ 5,864     $ (6   $ n/a     $ (115   $ 5,743  

Indefinite life intangible assets

         

Brand

    819             n/a       (40     779  

Fund management contracts and other(1)

    798       32       n/a       (25     805  
      1,617       32       n/a       (65     1,584  

Finite life intangible assets(2)

         

Distribution networks

    868       6       44       (29     801  

Customer relationships

    860       (2     54       (9     795  

Software

    821       357       168       (19     991  

Other

    67             5       (1     61  
      2,616       361       271       (58     2,648  

Total intangible assets

    4,233       393       271       (123     4,232  

Total goodwill and intangible assets

  $   10,097     $   387     $   271     $   (238   $   9,975  

 

(1)

Fund management contracts were mostly allocated to Canada WAM and U.S. WAM CGUs with the carrying values of $273 (2019 – $273) and $373 (2019 – $380), respectively.

(2)

Gross carrying amount of finite life intangible assets was $1,332 for distribution networks, $1,130 for customer relationships, $2,310 for software and $123 for other (2019 – $1,292, $1,133, $2,239 and $130), respectively.

(b) Goodwill impairment testing

The Company completed its annual goodwill impairment testing in the fourth quarter of 2020 by determining the recoverable amounts of its businesses using valuation techniques discussed below (refer to notes 1(f) and 5(c)). The review indicated that there was no impairment of goodwill in 2020 (2019 – $nil).

 

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The following tables present the carrying value of goodwill by CGU or group of CGUs.

 

As at December 31, 2020

CGU or group of CGUs

  Balance,
January 1,
   

Net additions/
(disposals)

    Effect of
changes in
foreign
exchange
rates
   

Balance,

December 31,

 

Asia

       

Asia Insurance (excluding Japan)

  $ 159     $     $     $ 159  

Japan Insurance

    420             13       433  

Canada Insurance

    1,957             (2     1,955  

U.S. Insurance

    349       (5     (6     338  

Global Wealth and Asset Management

       

Asia WAM

    187             (2     185  

Canada WAM

    1,436                   1,436  

U.S. WAM

    1,235             (27     1,208  

Total

  $ 5,743     $ (5   $ (24   $ 5,714  

As at December 31, 2019

CGU or group of CGUs

  Balance,
January 1,
    Net additions/
(disposals)
    Effect of
changes in
foreign
exchange
rates
    Balance,
December 31,
 

Asia

       

Asia Insurance (excluding Japan)

  $ 165     $   –     $ (6   $ 159  

Japan Insurance

    435             (15     420  

Canada Insurance

      1,962             (5     1,957  

U.S. Insurance

    367             (18     349  

Global Wealth and Asset Management

       

Asia WAM

    196             (9     187  

Canada WAM

    1,436                   –       1,436  

U.S. WAM

    1,303       (6     (62     1,235  

Total

  $ 5,864     $   (6   $   (115   $   5,743  

The valuation techniques, significant assumptions and sensitivities, where applicable, applied in the goodwill impairment testing are described below.

(c) Valuation techniques

When determining if a CGU is impaired, the Company compares its recoverable amount to the allocated capital for that unit, which is aligned with the Company’s internal reporting practices. The recoverable amounts were based on fair value less costs to sell (“FVLCS”) for Asia Insurance (excluding Japan) and Asia WAM. For other CGUs, value-in-use (“VIU”) was used.

Under the FVLCS approach, the Company determines the fair value of the CGU or group of CGUs using an earnings-based approach which incorporates forecasted earnings, excluding interest and equity market impacts and normalized new business expenses multiplied by an earnings-multiple derived from the observable price-to-earnings multiples of comparable financial institutions. The price-to-earnings multiple used by the Company for testing was 10.7 (2019 – 10.3). These FVLCS valuations are categorized as Level 3 of the fair value hierarchy (2019 – Level 3).

Under the VIU approach, used for CGUs with insurance business, an embedded appraisal value is determined from a projection of future distributable earnings derived from both the in-force business and new business expected to be sold in the future, and therefore, reflects the economic value for each CGU’s or group of CGUs’ profit potential under a set of assumptions. This approach requires assumptions including sales and revenue growth rates, capital requirements, interest rates, equity returns, mortality, morbidity, policyholder behaviour, tax rates and discount rates. For non-insurance CGUs, the VIU is based on discounted cash flow analysis which incorporates relevant aspects of the embedded appraisal value approach.

(d) Significant assumptions

To calculate embedded appraisal value, the Company discounted projected earnings from in-force contracts and valued 20 years of new business growing at expected plan levels, consistent with the periods used for forecasting long-term businesses such as insurance. In arriving at its projections, the Company considered past experience, economic trends such as interest rates, equity returns and product mix as well as industry and market trends. Where growth rate assumptions for new business cash flows were used in the embedded appraisal value calculations, they ranged from zero per cent to 10 per cent (2019 – zero per cent to 20 per cent).

Interest rate assumptions are based on prevailing market rates at the valuation date.

 

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Tax rates applied to the projections include the impact of internal reinsurance treaties and amounted to 28.0 per cent, 26.5 per cent and 21.0 per cent (2019 – 28.0 per cent, 26.5 per cent and 21.0 per cent) for the Japan, Canada and U.S. jurisdictions, respectively. Tax assumptions are sensitive to changes in tax laws as well as assumptions about the jurisdictions in which profits are earned. It is possible that actual tax rates could differ from those assumed.

Discount rates assumed in determining the value-in-use for applicable CGUs or group of CGUs ranged from 8.0 per cent to 10.0 per cent on an after-tax basis or 10.0 per cent to 12.5 per cent on a pre-tax basis (2019 – 7.5 per cent to 10.0 per cent on an after-tax basis or 9.4 per cent to 12.5 per cent on a pre-tax basis).

Key assumptions may change as economic and market conditions change, which may lead to impairment charges in the future. Adverse changes in discount rates (including from decline in interest rates) and growth rate assumptions for new business cash flow projections used in the determination of embedded appraisal values or reductions in market-based earnings multiples calculations may result in impairment charges in the future which could be material.

Note 6     Insurance Contract Liabilities and Reinsurance Assets

(a) Insurance contract liabilities and reinsurance assets

Insurance contract liabilities are reported gross of reinsurance ceded and the ceded liabilities are reported separately as reinsurance assets. Insurance contract liabilities include actuarial liabilities, benefits payable, provision for unreported claims and policyholder amounts on deposit. The components of gross and net insurance contract liabilities are shown below.

 

As at December 31,   2020     2019  

Insurance contract liabilities

  $   369,230     $ 336,156  

Benefits payable and provision for unreported claims

    4,837       4,229  

Policyholder amounts on deposit

    11,487       10,776  

Gross insurance contract liabilities

    385,554       351,161  

Reinsurance assets(1)

    (45,769     (41,353

Net insurance contract liabilities

  $ 339,785     $   309,808  

 

(1)

Reinsurance assets of $67 (2019 – $93) are related to investment contract liabilities, refer to note 7(b).

Net insurance contract liabilities represent the amount which, together with estimated future premiums and net investment income, will be sufficient to pay estimated future benefits, policyholder dividends and refunds, taxes (other than income taxes) and expenses on policies in-force net of reinsurance premiums and recoveries.

Net insurance contract liabilities are determined using CALM, as required by the Canadian Institute of Actuaries.

The determination of net insurance contract liabilities is based on an explicit projection of cash flows using current assumptions for each material cash flow item. Investment returns are projected using the current asset portfolios and projected reinvestment strategies.

Each assumption is based on the best estimate, adjusted by a margin for adverse deviation. For fixed income returns, this margin is established by scenario testing a range of prescribed and company-developed scenarios consistent with Canadian Actuarial Standards of Practice. For all other assumptions, this margin is established by directly adjusting the best estimate assumption.

Cash flows used in the net insurance contract liabilities valuation adjust the gross policy cash flows to reflect projected cash flows from ceded reinsurance. The cash flow impact of ceded reinsurance varies depending upon the amount of reinsurance, the structure of reinsurance treaties, the expected economic benefit from treaty cash flows and the impact of margins for adverse deviation. Gross insurance contract liabilities are determined by discounting gross policy cash flows using the same discount rate as the net CALM model discount rate.

The reinsurance asset is determined by taking the difference between the gross insurance contract liabilities and the net insurance contract liabilities. The reinsurance asset represents the benefit derived from reinsurance arrangements in force at the date of the Consolidated Statements of Financial Position.

The period used for the projection of cash flows is the policy lifetime for most individual insurance contracts. For other types of contracts, a shorter projection period may be used, with the contract generally ending at the earlier of the first renewal date on or after the Consolidated Statements of Financial Position date where the Company can exercise discretion in renewing its contractual obligations or terms of those obligations and the renewal or adjustment date that maximizes the insurance contract liabilities. For segregated fund products with guarantees, the projection period is generally set as the period that leads to the largest insurance contract liability. Where the projection period is less than the policy lifetime, insurance contract liabilities may be reduced by an allowance for acquisition expenses expected to be recovered from policy cash flows beyond the projection period used for the liabilities. Such allowances are tested for recoverability using assumptions that are consistent with other components of the actuarial valuation.

 

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(b) Composition

The composition of insurance contract liabilities and reinsurance assets by the line of business and reporting segment is as follows.

Gross insurance contract liabilities

 

    Individual insurance    

Annuities
and
pensions

   

Other
insurance
contract
liabilities(1)

   

Total, net of
reinsurance
ceded

   

Total
reinsurance
ceded

   

Total,
gross of
reinsurance
ceded

 
As at December 31, 2020   Participating     Non-
participating
 

Asia

  $ 55,262     $ 36,930     $ 7,114     $ 3,652     $ 102,958     $ 2,127     $ 105,085  

Canada

    12,796       44,468       18,462       14,620       90,346       443       90,789  

U.S.

    8,422       68,001       16,292       54,224       146,939       42,875       189,814  

Corporate and Other

          (684     34       192       (458     324       (134

Total, net of reinsurance ceded

    76,480       148,715       41,902       72,688       339,785     $ 45,769     $ 385,554  

Total reinsurance ceded

    8,780       19,944       16,065       980       45,769      

Total, gross of reinsurance ceded

  $ 85,260     $ 168,659     $ 57,967     $ 73,668     $ 385,554      
    Individual insurance    

Annuities
and
pensions

   

Other
insurance
contract
liabilities(1)

   

Total, net of
reinsurance
ceded

   

Total
reinsurance
ceded

   

Total,
gross of
reinsurance
ceded

 
As at December 31, 2019   Participating     Non-
participating
 

Asia

  $ 46,071     $ 32,887     $ 5,915     $ 3,064     $ 87,937     $ 1,432     $ 89,369  

Canada

    12,012       39,655       17,871       13,759       83,297       286       83,583  

U.S.

    8,734       66,163       14,763       49,199       138,859       39,411       178,270  

Corporate and Other

          (609     36       288       (285     224       (61

Total, net of reinsurance ceded

    66,817       138,096       38,585       66,310       309,808     $   41,353     $   351,161  

Total reinsurance ceded

    9,869       13,588       16,850       1,046       41,353      

Total, gross of reinsurance ceded

  $   76,686     $   151,684     $   55,435     $   67,356     $   351,161      

 

(1)

Other insurance contract liabilities include group insurance and individual and group health including long-term care insurance.

Separate sub-accounts were established for participating policies in-force at the demutualization of MLI and John Hancock Mutual Life Insurance Company. These sub-accounts permit this participating business to be operated as separate “closed blocks” of participating policies. As at December 31, 2020, $29,480 (2019 – $29,402) of both reinsurance assets and insurance contract liabilities were related to these closed blocks of participating policies.

(c) Assets backing insurance contract liabilities, other liabilities and capital

Assets are segmented and matched to liabilities with similar underlying characteristics by product line and major currency. The Company has established target investment strategies and asset mixes for each asset segment supporting insurance contract liabilities which consider the risk attributes of the liabilities supported by the assets and expectations of market performance. Liabilities with rate and term guarantees are predominantly backed by fixed-rate instruments on a cash flow matching basis for a targeted duration horizon. Longer duration cash flows on these liabilities as well as on adjustable products such as participating life insurance are backed by a broader range of asset classes, including equity and alternative long-duration investments. The Company’s capital is invested in a range of debt and equity investments, both public and private.

Changes in the fair value of assets backing net insurance contract liabilities, that the Company considers to be other than temporary, would have a limited impact on the Company’s net income wherever there is an effective matching of assets and liabilities, as these changes would be substantially offset by corresponding changes in the value of net insurance contract liabilities. The fair value of assets backing net insurance contract liabilities as at December 31, 2020, excluding reinsurance assets, was estimated at $350,264 (2019 – $315,952).

As at December 31, 2020, the fair value of assets backing capital and other liabilities was estimated at $543,273 (2019 – $501,147).

 

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The following table presents the carrying value of assets backing net insurance contract liabilities, other liabilities and capital.

 

    Individual insurance    

Annuities
and pensions

   

Other insurance
contract
liabilities(1)

   

Other
liabilities(2)

   

Capital(3)

   

Total

 
As at December 31, 2020   Participating     Non-
participating
 

Assets

             

Debt securities

  $ 39,523     $ 81,548     $ 20,936     $ 34,725     $ 8,872     $ 33,121     $ 218,725  

Public equities

    12,365       6,971       461       310       402       3,213       23,722  

Mortgages

    3,069       12,536       4,923       8,315       21,338       26       50,207  

Private placements

    5,549       17,276       7,499       9,439       817       176       40,756  

Real estate

    3,385       6,466       1,027       1,697       57       200       12,832  

Other

    12,589       23,918       7,056       18,202       448,014       24,328       534,107  

Total

  $ 76,480     $ 148,715     $ 41,902     $ 72,688     $ 479,500     $ 61,064     $ 880,349  
    Individual insurance    

Annuities
and pensions

   

Other insurance
contract
liabilities(1)

   

Other
liabilities(2)

   

Capital(3)

   

Total

 
As at December 31, 2019   Participating     Non-
participating
 

Assets

             

Debt securities

  $ 34,169     $ 74,113     $ 19,865     $ 31,620     $ 8,828     $ 29,527     $ 198,122  

Public equities

    10,907       6,453       204       253       381       4,653       22,851  

Mortgages

    2,921       12,140       5,203       7,916       21,165       31       49,376  

Private placements

    4,658       16,020       6,957       9,122       1,090       132       37,979  

Real estate

    3,336       6,446       1,082       1,731       113       220       12,928  

Other

    10,826       22,924       5,274       15,668       410,376       22,806       487,874  

Total

  $   66,817     $   138,096     $   38,585     $   66,310     $   441,953     $   57,369     $   809,130  

 

(1)

Other insurance contract liabilities include group insurance and individual and group health including long-term care insurance.

(2)

Other liabilities are non-insurance contract liabilities which include segregated funds, bank deposits, long-term debt, deferred tax liabilities, derivatives, investment contracts, embedded derivatives and other miscellaneous liabilities.

(3)

Capital is defined in note 12.

(d) Significant insurance contract liability valuation assumptions

The determination of insurance contract liabilities involves the use of estimates and assumptions. Insurance contract liabilities have two major components: a best estimate amount and a provision for adverse deviation.

Best estimate assumptions

Best estimate assumptions are made with respect to mortality and morbidity, investment returns, rates of policy termination, operating expenses and certain taxes. Actual experience is monitored to ensure that assumptions remain appropriate and assumptions are changed as warranted. Assumptions are discussed in more detail in the following table.

 

   

Nature of factor and assumption methodology

 

  

Risk management

 

 

Mortality

and

morbidity

  

 

Mortality relates to the occurrence of death. Mortality is a key assumption for life insurance and certain forms of annuities. Mortality assumptions are based on the Company’s internal experience as well as past and emerging industry experience. Assumptions are differentiated by sex, underwriting class, policy type and geographic market. Assumptions are made for future mortality improvements.

 

Morbidity relates to the occurrence of accidents and sickness for insured risks. Morbidity is a key assumption for long-term care insurance, disability insurance, critical illness and other forms of individual and group health benefits. Morbidity assumptions are based on the Company’s internal experience as well as past and emerging industry experience and are established for each type of morbidity risk and geographic market. Assumptions are made for future morbidity improvements.

 

  

 

The Company maintains underwriting standards to determine the insurability of applicants. Claim trends are monitored on an ongoing basis. Exposure to large claims is managed by establishing policy retention limits, which vary by market and geographic location. Policies in excess of the limits are reinsured with other companies.

 

Mortality is monitored monthly and the overall 2020 experience was unfavourable (2019 – unfavourable) when compared to the Company’s assumptions. Morbidity is also monitored monthly and the overall 2020 experience was favourable (2019 – unfavourable) when compared to the Company’s assumptions.

 

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Nature of factor and assumption methodology

 

  

Risk management

 

 

Investment returns

  

 

The Company segments assets to support liabilities by business segment and geographic market and establishes investment strategies for each liability segment. Projected cash flows from these assets are combined with projected cash flows from future asset purchases/sales to determine expected rates of return on these assets for future years. Investment strategies are based on the target investment policies for each segment and the reinvestment returns are derived from current and projected market rates for fixed income investments and a projected outlook for other alternative long-duration assets.

 

Investment return assumptions include expected future asset credit losses on fixed income investments. Credit losses are projected based on past experience of the Company and industry as well as specific reviews of the current investment portfolio.

 

Investment return assumptions for each asset class and geographic market also incorporate expected investment management expenses that are derived from internal cost studies. The costs are attributed to each asset class to develop unitized assumptions per dollar of asset for each asset class and geographic market.

  

 

The Company’s policy of closely matching asset cash flows with those of the corresponding liabilities is designed to mitigate the Company’s exposure to future changes in interest rates. The interest rate risk positions in business segments are monitored on an ongoing basis. Under CALM, the reinvestment rate is developed using interest rate scenario testing and reflects the interest rate risk positions.

 

In 2020, the movement in interest rates negatively (2019 – negatively) impacted the Company’s net income. This negative impact was driven by decreases in risk free interest rates and corporate spreads, as well the impact of swap spreads on policy liabilities.

 

The exposure to credit losses is managed against policies that limit concentrations by issuer, corporate connections, ratings, sectors and geographic regions. On participating policies and some non-participating policies, credit loss experience is passed back to policyholders through the investment return crediting formula. For other policies, premiums and benefits reflect the Company’s assumed level of future credit losses at contract inception or most recent contract adjustment date. The Company holds explicit provisions in actuarial liabilities for credit risk including provisions for adverse deviation.

 

In 2020, credit loss experience on debt securities and mortgages was unfavourable (2019 – favourable) when compared to the Company’s assumptions.

 

Equities, real estate and other alternative long-duration assets are used to support liabilities where investment return experience is passed back to policyholders through dividends or credited investment return adjustments. Equities, real estate, oil and gas and other alternative long-duration assets are also used to support long-dated obligations in the Company’s annuity and pension businesses and for long-dated insurance obligations on contracts where the investment return risk is borne by the Company.

 

In 2020, investment experience on alternative long-duration assets backing policyholder liabilities was unfavourable (2019 – favourable) primarily due to losses in real estate properties, and private equities, timber and agriculture properties as well as in oil and gas properties. In 2020, alternative long-duration asset origination did not exceed (2019 – exceeded) valuation requirements.

 

In 2020, for the business that is dynamically hedged, segregated fund guarantee experience on residual, non-dynamically hedged market risks were unfavourable (2019 – favourable). For the business that is not dynamically hedged, experience on segregated fund guarantees due to changes in the market value of assets under management was also unfavourable (2019 – favourable). This excludes the experience on the macro equity hedges.

 

In 2020, investment expense experience was unfavourable (2019 – unfavourable) when compared to the Company’s assumptions.

 

 

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Nature of factor and assumption methodology

 

  

Risk management

 

 

Policy termination and premium persistency

  

 

Policies are terminated through lapses and surrenders, where lapses represent the termination of policies due to non-payment of premiums and surrenders represent the voluntary termination of policies by policyholders. Premium persistency represents the level of ongoing deposits on contracts where there is policyholder discretion as to the amount and timing of deposits. Policy termination and premium persistency assumptions are primarily based on the Company’s recent experience adjusted for expected future conditions. Assumptions reflect differences by type of contract within each geographic market.

 

  

 

The Company seeks to design products that minimize financial exposure to lapse, surrender and premium persistency risk. The Company monitors lapse, surrender and persistency experience.

 

In aggregate, 2020 policyholder termination and premium persistency experience was unfavourable (2019 – unfavourable) when compared to the Company’s assumptions used in the computation of actuarial liabilities.

 

Expenses and taxes

  

 

Operating expense assumptions reflect the projected costs of maintaining and servicing in-force policies, including associated overhead expenses. The expenses are derived from internal cost studies projected into the future with an allowance for inflation. For some developing businesses, there is an expectation that unit costs will decline as these businesses grow.

 

Taxes reflect assumptions for future premium taxes and other non-income related taxes. For income taxes, policy liabilities are adjusted only for temporary tax timing and permanent tax rate differences on the cash flows available to satisfy policy obligations.

  

 

The Company prices its products to cover the expected costs of servicing and maintaining them. In addition, the Company monitors expenses monthly, including comparisons of actual expenses to expense levels allowed for in pricing and valuation.

 

Maintenance expenses for 2020 were unfavourable (2019 – unfavourable) when compared to the Company’s assumptions used in the computation of actuarial liabilities.

 

The Company prices its products to cover the expected cost of taxes.

 

Policyholder  dividends, experience rating refunds, and other adjustable policy elements

 

  

 

The best estimate projections for policyholder dividends and experience rating refunds, and other adjustable elements of policy benefits are determined to be consistent with management’s expectation of how these elements will be managed should experience emerge consistently with the best estimate assumptions used for mortality and morbidity, investment returns, rates of policy termination, operating expenses and taxes.

  

 

The Company monitors policy experience and adjusts policy benefits and other adjustable elements to reflect this experience.

 

Policyholder dividends are reviewed annually for all businesses under a framework of Board-approved policyholder dividend policies.

 

Foreign currency

  

 

Foreign currency risk results from a mismatch of the currency of liabilities and the currency of the assets designated to support these obligations. Where a currency mismatch exists, the assumed rate of return on the assets supporting the liabilities is reduced to reflect the potential for adverse movements in foreign exchange rates.

 

 

  

 

The Company generally matches the currency of its assets with the currency of the liabilities they support, with the objective of mitigating the risk of loss arising from movements in currency exchange rates.

The Company reviews actuarial methods and assumptions on an annual basis. If changes are made to assumptions (refer to note 6(h)), the full impact is recognized in income immediately.

(e) Sensitivity of insurance contract liabilities to changes in non-economic assumptions

The sensitivity of net income attributed to shareholders to changes in non-economic assumptions underlying insurance contract liabilities is shown below, assuming a simultaneous change in the assumption across all business units. The sensitivity of net income attributed to shareholders to a deterioration or improvement in non-economic assumptions for Long-Term Care (“LTC”) as at December 31, 2020 is also shown below.

In practice, experience for each assumption will frequently vary by geographic market and business, and assumption updates are made on a business/geographic specific basis. Actual results can differ materially from these estimates for a variety of reasons including the interaction among these factors when more than one changes; changes in actuarial and investment return and future investment activity assumptions; changes in business mix, effective tax rates and other market factors; and the general limitations of internal models.

 

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Potential impact on net income attributed to shareholders arising from changes to non-economic assumptions(1)

 

As at December 31,

  Decrease in net income
attributed to shareholders
 
  2020     2019  

Policy related assumptions

   

2% adverse change in future mortality rates(2),(4)

   

Products where an increase in rates increases insurance contract liabilities

  $ (500   $ (500

Products where a decrease in rates increases insurance contract liabilities

    (600     (500

5% adverse change in future morbidity rates (incidence and termination)(3),(4),(5)

      (5,700       (5,100

10% adverse change in future policy termination rates(4)

    (2,600     (2,400

5% increase in future expense levels

    (600     (600

 

(1)

The participating policy funds are largely self-supporting and generate no material impact on net income attributed to shareholders as a result of changes in non-economic assumptions. Experience gains or losses would generally result in changes to future dividends, with no direct impact to shareholders.

(2)

An increase in mortality rates will generally increase policy liabilities for life insurance contracts whereas a decrease in mortality rates will generally increase policy liabilities for policies with longevity risk such as payout annuities.

(3)

No amounts related to morbidity risk are included for policies where the policy liability provides only for claims costs expected over a short period, generally less than one year, such as Group Life and Health.

(4)

The impacts of the adverse sensitivities on LTC for morbidity, mortality and lapse do not assume any partial offsets from the Company’s ability to contractually raise premium rates in such events, subject to state regulatory approval. In practice, the Company would plan to file for rate increases equal to the amount of deterioration resulting from the sensitivities.

(5)

5% deterioration in incidence rates and 5% deterioration in claim termination rates.

Potential impact on net income attributed to shareholders arising from changes to non-economic assumptions for Long-Term Care included in the above table(1),(2)

 

As at December 31,

  

Decrease in net income
attributed to shareholders

 

 
   2020      2019  

Policy related assumptions

     

2% adverse change in future mortality rates

   $ (300    $ (300

5% adverse change in future morbidity incidence rates(3)

       (2,100        (1,900

5% adverse change in future morbidity claims termination rates(3)

     (3,100      (2,800

10% adverse change in future policy termination rates

     (400      (400

5% increase in future expense levels

     (100      (100

 

(1)

The impacts of the adverse sensitivities on LTC for morbidity, mortality and lapse do not assume any partial offsets from the Company’s ability to contractually raise premium rates in such events, subject to state regulatory approval. In practice, the Company would plan to file for rate increases equal to the amount of deterioration resulting from the sensitivities.

(2)

The impact of favourable changes to all the sensitivities is relatively symmetrical.

(3) 

The comparatives for 2019 have been updated to reflect refinements between incidence and termination impacts implemented in 2020.

(f) Provision for adverse deviation assumptions

The assumptions made in establishing insurance contract liabilities reflect expected best estimates of future experience. To recognize the uncertainty in these best estimate assumptions, to allow for possible misestimation of and deterioration in experience and to provide a greater degree of assurance that the insurance contract liabilities are adequate to pay future benefits, the Appointed Actuary is required to include a margin in each assumption.

Margins are released into future earnings as the policy is released from risk. Margins for interest rate risk are included by testing a number of scenarios of future interest rates. The margin can be established by testing a limited number of scenarios, some of which are prescribed by the Canadian Actuarial Standards of Practice, and determining the liability based on the worst outcome. Alternatively, the margin can be set by testing many scenarios, which are developed according to actuarial guidance. Under this approach the liability would be the average of the outcomes above a percentile in the range prescribed by the Canadian Actuarial Standards of Practice.

Specific guidance is also provided for other risks such as market, credit, mortality and morbidity risks. For other risks which are not specifically addressed by the Canadian Institute of Actuaries, a range is provided of five per cent to 20 per cent of the expected experience assumption. The Company uses assumptions within the permissible ranges, with the determination of the level set considering the risk profile of the business. On occasion, in specific circumstances for additional prudence, a margin may exceed the high end of the range, which is permissible under the Canadian Actuarial Standards of Practice. This additional margin would be released if the specific circumstances which led to it being established were to change.

Each margin is reviewed annually for continued appropriateness.

 

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(g) Change in insurance contract liabilities

The change in insurance contract liabilities was a result of the following business activities and changes in actuarial estimates.

 

For the year ended December 31, 2020   Net actuarial
liabilities
    Other
insurance
contract
liabilities(1)
    Net
insurance
contract
liabilities
    Reinsurance
assets
    Gross
insurance
contract
liabilities
 

Balance, January 1

  $ 296,589     $ 13,219     $ 309,808     $ 41,353     $ 351,161  

New policies(2)

    3,166             3,166       481       3,647  

Normal in-force movement(2)

    32,340       1,312       33,652       (3,030     30,622  

Changes in methods and assumptions(2)

    563             563       4,559       5,122  

Reinsurance transactions(3)

    (3,360           (3,360     3,360        

Impact of changes in foreign exchange rates

    (3,890     (154     (4,044     (954     (4,998

Balance, December 31

  $ 325,408     $ 14,377     $ 339,785     $ 45,769     $ 385,554  
For the year ended December 31, 2019   Net actuarial
liabilities
    Other
insurance
contract
liabilities(1)
    Net
insurance
contract
liabilities
    Reinsurance
assets
    Gross
insurance
contract
liabilities
 

Balance, January 1

  $ 272,761     $ 12,968     $ 285,729     $ 42,925     $ 328,654  

New policies(4)

    3,251             3,251       521       3,772  

Normal in-force movement(4)

    30,171       750       30,921       (972     29,949  

Changes in methods and assumptions(4)

    74             74       927       1,001  

Impact of changes in foreign exchange rates

    (9,668     (499     (10,167     (2,048     (12,215

Balance, December 31

  $   296,589     $   13,219     $   309,808     $   41,353     $   351,161  

 

(1)

Other insurance contract liabilities are comprised of benefits payable and provisions for unreported claims and policyholder amounts on deposit.

(2)

In 2020, the $36,982 increase reported as the change in insurance contract liabilities on the Consolidated Statements of Income primarily consists of changes due to normal in-force movement, new policies, associated embedded derivatives and changes in methods and assumptions. These three items in the gross insurance contract liabilities were netted off by an increase of $39,391, of which $37,876 is included in the Consolidated Statements of Income increase in insurance contract liabilities and $1,515 is included in gross claims and benefits. The Consolidated Statements of Income change in insurance contract liabilities also includes the change in embedded derivatives associated with insurance contracts; however, these embedded derivatives are included in other liabilities on the Consolidated Statements of Financial Position.

(3) 

On September 30, 2020, the Company, through its subsidiary John Hancock Life Insurance Company (U.S.A.), entered into a reinsurance agreement with Global Atlantic Financial Group Ltd to reinsure a block of legacy U.S. bank owned life insurance (“BOLI”). Under the terms of the transaction, the Company will maintain responsibility for servicing the policies with no expected impact to the BOLI policyholders. The transaction was structured such that the Company ceded policyholder contract liabilities and transferred invested assets backing these liabilities.

(4)

In 2019, the $33,727 increase reported as the change in insurance contract liabilities on the Consolidated Statements of Income primarily consists of changes due to normal in-force movement, new policies, associated embedded derivatives and changes in methods and assumptions. These three items in the gross insurance contract liabilities were netted off by an increase of $34,721, of which $34,056 is included in the Consolidated Statements of Income increase in insurance contract liabilities and $665 is included in gross claims and benefits. The Consolidated Statements of Income change in insurance contract liabilities also includes the change in embedded derivatives associated with insurance contracts; however, these embedded derivatives are included in other liabilities on the Consolidated Statements of Financial Position.

(h) Actuarial methods and assumptions

A comprehensive review of valuation assumptions and methods is performed annually. The review reduces the Company’s exposure to uncertainty by ensuring assumptions for both asset and liability risks remain appropriate. This is accomplished by monitoring experience and updating assumptions which represent a best estimate of expected future experience, and margins that are appropriate for the risks assumed. While the assumptions selected represent the Company’s current best estimates and assessment of risk, the ongoing monitoring of experience and the changes in economic environment are likely to result in future changes to the actuarial assumptions, which could materially impact the insurance contract liabilities.

Annual review 2020

The completion of the 2020 annual review of actuarial methods and assumptions resulted in an increase in insurance contract liabilities of $563, net of reinsurance, and a decrease in net income attributed to shareholders of $198 post-tax.

 

    Change in insurance contract liabilities,
net of reinsurance
       
For the year ended December 31, 2020   Total     Attributed to
participating
policyholders’
account(1)
    Attributed to
shareholders’
account
    Change in net
income attributed
to shareholders
(post-tax)
 

Canada variable annuity product review

  $ (42   $     $ (42   $ 31  

Mortality and morbidity updates

    (304     (1     (303         232  

Lapses and policyholder behaviour

    893             893       (682

Investment related updates

    (212     (153     (59     31  

Other updates

    228       455       (227     190  

Net impact

  $    563     $     301     $     262     $ (198

 

(1)

The change in insurance contract liabilities, net of reinsurance, attributable to the participating policyholders’ account was driven by refinements to the Company’s valuation models, primarily due to annual updates to reflect market movements in the first half of 2020.

 

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Canada variable annuity product review

The review of the Company’s variable annuity product in Canada resulted in a $31 post-tax gain to net income attributed to shareholders.

The gain was driven by refinements to the segregated fund guaranteed minimum withdrawal benefit valuation models, partially offset by updates to lapse assumptions to reflect emerging experience.

Updates to mortality and morbidity

Mortality and morbidity updates resulted in a $232 post-tax gain to net income attributed to shareholders.

The gain was primarily driven by a review of the Company’s reinsurance arrangements and mortality margins for preferred risk classes in Canada Individual Insurance business, as well as updates to the morbidity assumptions on certain products in Japan. This was partially offset by a charge from the review of mortality assumptions in the U.S. Insurance business, where emerging experience showed higher mortality at older attained ages.

Other updates to mortality and morbidity assumptions were made across several products, largely in Canada, to reflect recent experience resulting in a net post-tax gain to net income attributable to shareholders.

Updates to lapses and policyholder behaviour

Updates to lapses and policyholder behaviour assumptions resulted in a $682 post-tax charge to net income attributed to shareholders.

The Company completed a detailed review of the lapse assumptions for universal life policies in Canada, including both yearly renewable term, and level cost of insurance products. The Company lowered the ultimate lapse assumptions due to the emergence of more recent data, which resulted in a post-tax charge of $504 to net income attributed to shareholders, primarily driven by adverse experience on large policies.

Other updates to lapse and policyholder behaviour assumptions were made across several products to reflect recent experience resulting in a net post-tax charge to net income attributable to shareholders. The primary driver of the charge was adverse lapse experience from retail policies in Japan.

Investment related updates

Updates to investment return assumptions resulted in a $31 post-tax gain to net income attributed to shareholders.

Other updates

Other updates resulted in a $190 post-tax gain to net income attributed to shareholders. This incorporated several positive items including updates to the Company’s U.S. segregated fund guaranteed minimum withdrawal benefit valuation models, as well as updates to the projection of the tax and liability cash flows in the U.S. to align with updated U.S. tax and statutory reporting standard changes, partially offset by refinements to the valuation models, primarily driven by annual updates to reflect market movements in the first half of 2020.

Annual review 2019

The 2019 annual review of actuarial methods and assumptions resulted in an increase in insurance contract liabilities of $74, net of reinsurance, and a decrease in net income attributed to shareholders of $21 post-tax.

 

    Change in insurance contract liabilities,
net of reinsurance
       
For the year ended December 31, 2019   Total     Attributed to
participating
policyholders’
account
    Attributed to
shareholders’
account
    Change in net
income attributed
to shareholders
(post-tax)
 

Long-term care triennial review

  $ 11     $        –     $ 11     $ (8

Mortality and morbidity updates

    25       47       (22     14  

Lapses and policyholder behaviour

    135       17         118       (75

Investment return assumptions

    12       81       (69         70  

Other updates

    (109     (163     54       (22

Net impact

  $      74     $ (18   $ 92     $ (21

Long-term care triennial review

U.S. Insurance completed a comprehensive long-term care (“LTC”) experience study in 2019. The review included all aspects of claim assumptions, the impact of policyholder benefit reductions as well as the progress on future premium rate increases and a review of margins on the business. The impact of the LTC review was approximately net neutral to net income attributed to shareholders.

The experience study showed lower termination rates than expected during the elimination or “qualifying” period (which is the period between when a claim is filed and when benefit payments begin), and favourable incidence as policyholders are filing claims at a lower rate than expected. In addition, policyholders are electing to reduce their benefits in lieu of paying increased premiums. The overall claims experience review led to a post-tax charge to net income attributed to shareholders of approximately $1.9 billion, which includes a gain of approximately $0.2 billion for the impact of benefit reductions.

 

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The experience study included additional claims data due to the natural aging of the block of business. As a result, the Company reduced certain margins for adverse deviations, which resulted in a post-tax gain to net income attributed to shareholders of approximately $0.7 billion.

While the study continues to support the assumptions of both future morbidity and mortality improvement, the Company reduced its morbidity improvement assumption, which resulted in a post-tax charge to net income attributed to shareholders of approximately $0.7 billion.

The review of premium increases assumed in the policy liabilities resulted in a post-tax gain to net income attributed to shareholders of approximately $2.0 billion related to the expected timing and amount of premium increases that are subject to state approval and reflects a 30% margin. The expected premium increases are informed by past approval rates applied to prior state filings that remain outstanding and estimated new requests based on the Company’s 2019 review of morbidity, mortality and lapse assumptions. The Company’s actual experience in obtaining premium increases could be materially different than what it has assumed, resulting in further increases or decreases in policy liabilities, which could be material.

Updates to mortality and morbidity

Mortality and morbidity updates resulted in a $14 post-tax gain to net income attributed to shareholders. This included a review of the Company’s Canada Individual Insurance mortality and reinsurance arrangements.

Updates to lapses and policyholder behaviour

Updates to lapses and policyholder behaviour assumptions resulted in a $75 post-tax charge to net income attributed to shareholders.

The primary driver of the charge was an update to the Company’s lapse assumptions across several term and whole life product lines within the Company’s Canada Individual Insurance business, partially offset by several updates to lapse and premium persistency assumptions in other geographies.

Updates to investment return assumptions

Updates to investment return assumptions resulted in a $70 post-tax gain to net income attributed to shareholders.

The primary driver of the gain was an update to the Company’s senior secured loan default rates to reflect recent experience, as well as its investment and crediting rate strategy for certain universal life products. This was partially offset by updates to certain private equity investment assumptions in Canada.

Other updates

Other updates resulted in a $22 post-tax charge to net income attributed to shareholders.

(i) Insurance contracts contractual obligations

Insurance contracts give rise to obligations fixed by agreement. As at December 31, 2020, the Company’s contractual obligations and commitments relating to insurance contracts are as follows.

 

Payments due by period    Less than
1 year
    

1 to 3

years

    

3 to 5

years

     Over 5 years      Total  

Insurance contract liabilities(1)

   $   10,672      $   9,859      $   15,416      $   791,780      $   827,727  

 

(1)

Insurance contract liability cash flows include estimates related to the timing and payment of death and disability claims, policy surrenders, policy maturities, annuity payments, minimum guarantees on segregated fund products, policyholder dividends, commissions and premium taxes offset by contractual future premiums on in-force contracts. These estimated cash flows are based on the best estimate assumptions used in the determination of insurance contract liabilities. These amounts are undiscounted and reflect recoveries from reinsurance agreements. Due to the use of assumptions, actual cash flows may differ from these estimates. Cash flows include embedded derivatives measured separately at fair value.

(j) Gross claims and benefits

The following table presents a breakdown of gross claims and benefits.

 

For the years ended December 31,   2020     2019  

Death, disability and other claims

  $   18,064     $   15,752  

Maturity and surrender benefits

    8,613       8,433  

Annuity payments

    3,560       4,030  

Policyholder dividends and experience rating refunds

    1,411       1,445  

Net transfers from segregated funds

    (1,515     (1,000

Total

  $ 30,133     $ 28,660  

(k) Reinsurance transactions

On September 30, 2020, the Company, through its subsidiary John Hancock Life Insurance Company (U.S.A.), entered into a reinsurance agreement with Global Atlantic Financial Group Ltd to reinsure a block of legacy U.S. bank owned life insurance (“BOLI”). Under the terms

 

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of the transaction, the Company will maintain responsibility for servicing the policies with no expected impact to the BOLI policyholders. The transaction was structured such that the Company ceded policyholder contract liabilities and transferred invested assets backing these liabilities.

The transaction closed with an effective date of July 1, 2020. The Company recorded an after-tax gain of $262, which includes an increase in reinsurance assets and ceded premiums of $3.4 billion and $3.3 billion, respectively, on the Consolidated Statements of Income.

On September 26, 2018, the Company entered into coinsurance agreements with Reinsurance Group of America (“RGA”) to reinsure a block of legacy U.S. individual pay-out annuities business from John Hancock Life Insurance Company (U.S.A.) (“JHUSA”) with a 100% quota share and John Hancock Life Insurance Company of New York (“JHNY”) with a 90% quota share. Under the terms of the agreements, the Company will maintain responsibility for servicing the policies. The transaction was structured such that the Company ceded policyholder contract liabilities and transferred invested assets backing these liabilities. The JHUSA transaction closed in 2018. The JHNY transaction closed with an effective date of January 1, 2019. The Company recorded an after-tax gain of $18, which includes an increase in reinsurance assets of $132 and ceded premiums of $131 in the Consolidated Statements of Income in 2019.

On October 31, 2018, the Company entered into coinsurance agreements with Jackson National Life Insurance Company (“Jackson”), a wholly owned subsidiary of Prudential plc, to reinsure a block of legacy U.S. group pay-out annuities business from JHUSA with a 100% quota share and from JHNY with a 90% quota share. Under the terms of the agreements, the Company will maintain responsibility for servicing the policies. The transaction was structured such that the Company ceded policyholder contract liabilities and transferred related invested assets backing these liabilities. The JHUSA transaction closed in 2018. The JHNY transaction closed with an effective date of January 1, 2019. The Company recorded an after-tax gain of $31 in 2019, which includes an increase in reinsurance assets of $621, a ceding commission paid of $35 and ceded premiums of $581 in the Consolidated Statements of Income.

Note 7    Investment Contract Liabilities

Investment contract liabilities are contractual obligations that do not contain significant insurance risk. Those contracts are measured either at fair value or at amortized cost.

(a) Investment contract liabilities measured at fair value

Investment contract liabilities measured at fair value include certain investment savings and pension products sold primarily in Hong Kong and mainland China. The following table presents the movement in investment contract liabilities measured at fair value.

 

For the years ended December 31,   2020     2019  

Balance, January 1

  $ 789     $ 782  

New policies

    180       66  

Changes in market conditions

    90       62  

Redemptions, surrenders and maturities

      (108     (86

Impact of changes in foreign exchange rates

    (19     (35

Balance, December 31

  $ 932     $     789  

(b) Investment contract liabilities measured at amortized cost

Investment contract liabilities measured at amortized cost include several fixed annuity products sold in the U.S. and Canada that provide guaranteed income payments for a contractually determined period and are not contingent on survivorship.

The following table presents carrying and fair values of investment contract liabilities measured at amortized cost.

 

    2020           2019  
As at December 31,  

Amortized

cost, gross of
reinsurance
ceded(1)

    Fair value          

Amortized

cost, gross of
reinsurance
ceded(1)

    Fair value  

U.S. fixed annuity products

  $   1,361     $   1,680           $   1,248     $   1,482  

Canadian fixed annuity products

    995       1,086         1,067       1,158  

Investment contract liabilities

  $ 2,356     $ 2,766           $   2,315     $ 2,640  

 

(1)

As at December 31, 2020, investment contract liabilities with carrying value and fair value of $67 and $76, respectively (2019 – $93 and $103, respectively), were reinsured by the Company. The net carrying value and fair value of investment contract liabilities were $2,289 and $2,690 (2019 – $2,222 and $2,537), respectively.

 

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The changes in investment contract liabilities measured at amortized cost was a result of the following business activities.

 

For the years ended December 31,   2020     2019  

Balance, January 1

  $   2,315     $   2,483  

Policy deposits

    202       2  

Interest

    61       62  

Withdrawals

    (194     (182

Fees

    (1     (3

Other

          17  

Impact of changes in foreign exchange rates

    (27     (64

Balance, December 31

  $ 2,356     $ 2,315  

Carrying value of fixed annuity products is amortized at a rate that exactly discounts the projected actual cash flows to the net carrying amount of the liability at the date of issue.

Fair value of fixed annuity products is determined by projecting cash flows according to the contract terms and discounting the cash flows at current market rates adjusted for the Company’s own credit standing. As at December 31, 2020 and 2019, fair value of all investment contract liabilities was determined using Level 2 valuation techniques.

(c) Investment contracts contractual obligations

As at December 31, 2020, the Company’s contractual obligations and commitments relating to the investment contracts are as follows.

 

Payments due by period    Less than
1 year
    

1 to 3

years

    

3 to 5

years

     Over 5
years
     Total  

Investment contract liabilities(1)

   $   297      $   514      $   520      $   4,220      $   5,551  

 

(1)

Due to the nature of the products, the timing of net cash flows may be before contract maturity. Cash flows are undiscounted.

Note 8     Risk Management

The Company’s policies and procedures for managing risks of financial instruments are disclosed in denoted components of the “Risk Management and Risk Factors” section of the MD&A for the year ended December 31, 2020. These disclosures are in accordance with IFRS 7 “Financial Instruments: Disclosures” and an integral part of these Consolidated Financial Statements.

(a) Credit risk

Credit risk is the risk of loss due to inability or unwillingness of a borrower, or counterparty, to fulfill its payment obligations. Worsening regional and global economic conditions, segment or industry sector challenges, or company specific factors could result in defaults or downgrades and could lead to increased provisions or impairments related to the Company’s general fund invested assets, derivative financial instruments and reinsurance assets and an increase in provisions for future credit impairments that are included in actuarial liabilities.

The Company’s exposure to credit risk is managed through risk management policies and procedures which include a defined credit evaluation and adjudication process, delegated credit approval authorities and established exposure limits by borrower, corporate connection, credit rating, industry and geographic region. The Company measures derivative counterparty exposure as net potential credit exposure, which takes into consideration mark-to-market values of all transactions with each counterparty, net of any collateral held, and an allowance to reflect future potential exposure. Reinsurance counterparty exposure is measured reflecting the level of ceded liabilities.

The Company also ensures where warranted, that mortgages, private placements and loans to Bank clients are secured by collateral, the nature of which depends on the credit risk of the counterparty.

An allowance for losses on loans is established when a loan becomes impaired. Allowances for loan losses are calculated to reduce the carrying value of the loans to estimated net realizable value. The establishment of such allowances takes into consideration normal historical credit loss levels and future expectations, with an allowance for adverse deviations. In addition, policy liabilities include general provisions for credit losses from future asset impairments. Impairments are identified through regular monitoring of all credit related exposures, considering such information as general market conditions, industry and borrower specific credit events and any other relevant trends or conditions. Allowances for losses on reinsurance contracts are established when a reinsurance counterparty becomes unable or unwilling to fulfill its contractual obligations. The allowance for loss is based on current recoverable amounts and ceded policy liabilities.

Credit risk associated with derivative counterparties is discussed in note 8(d) and credit risk associated with reinsurance counterparties is discussed in note 8(i).

 

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(i) Credit exposure

The following table presents the gross carrying amount of financial instruments subject to credit exposure, without considering any collateral held or other credit enhancements.

 

As at December 31,   2020     2019  

Debt securities

   

FVTPL

  $   183,061     $ 166,307  

AFS

    35,663       31,815  

Mortgages

    50,207       49,376  

Private placements

    40,756       37,979  

Policy loans

    6,398       6,471  

Loans to Bank clients

    1,976       1,740  

Derivative assets

    27,793       19,449  

Accrued investment income

    2,523       2,416  

Reinsurance assets

    45,836       41,446  

Other financial assets

    6,156       5,628  

Total

  $ 400,369     $   362,627  

As at December 31, 2020, 97% (2019 – 99%) of debt securities were investment grade-rated with ratings ranging between AAA to BBB.

(ii) Credit quality

Credit quality of commercial mortgages and private placements

Credit quality of commercial mortgages and private placements is assessed at least annually by using an internal rating based on regular monitoring of credit-related exposures, considering both qualitative and quantitative factors.

A provision is recorded when the internal risk ratings indicate that a loss represents the most likely outcome. These assets are designated as non-accrual and an allowance is established based on an analysis of the security and repayment sources.

The following table presents the credit quality of commercial mortgages and private placements.

 

As at December 31, 2020   AAA     AA     A     BBB     BB     B and lower     Total  

Commercial mortgages

             

Retail

  $ 110     $ 1,339     $ 4,761     $ 2,242     $ 168     $ 1     $ 8,621  

Office

    66       1,297       5,948       1,174       164       20       8,669  

Multi-family residential

    613       1,675       2,896       582       33             5,799  

Industrial

    25       320       2,353       259       3             2,960  

Other

    238       966       914       984       355       7       3,464  

Total commercial mortgages

    1,052       5,597       16,872       5,241       723       28       29,513  

Agricultural mortgages

                127       77       106             310  

Private placements

    1,061       4,829       15,585       15,825       1,206       2,250       40,756  

Total

  $ 2,113     $ 10,426     $ 32,584     $ 21,143     $   2,035     $ 2,278     $ 70,579  
As at December 31, 2019   AAA     AA     A     BBB     BB     B and lower     Total  

Commercial mortgages

             

Retail

  $ 132     $ 1,374     $ 5,285     $ 2,039     $ 10     $     $ 8,840  

Office

    77       1,540       5,808       1,402       26       18       8,871  

Multi-family residential

    640       1,585       2,397       714       35             5,371  

Industrial

    38       364       1,820       237       10             2,469  

Other

    260       739       976       1,290             8       3,273  

Total commercial mortgages

    1,147       5,602       16,286       5,682       81       26       28,824  

Agricultural mortgages

          27       137       312                   476  

Private placements

    1,098       5,513       14,311       14,139       823       2,095       37,979  

Total

  $   2,245     $   11,142     $   30,734     $   20,133     $   904     $   2,121     $   67,279  

Credit quality of residential mortgages and loans to Bank clients

Credit quality of residential mortgages and loans to Bank clients is assessed at least annually with the loan being performing or non-performing as the key credit quality indicator.

Full or partial write-offs of loans are recorded when management believes that there is no realistic prospect of full recovery. Write-offs, net of recoveries, are deducted from the allowance for credit losses. All impairments are captured in the allowance for credit losses.

 

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The following table presents credit quality of residential mortgages and loans to Bank clients.

 

   

 

2020

             2019  
As at December 31,   Insured     Uninsured     Total           Insured     Uninsured     Total  

Residential mortgages

             

Performing

  $   6,349     $   13,980     $   20,329       $ 6,613     $ 13,411     $ 20,024  

Non-performing(1)

    9       46       55         25       27       52  

Loans to Bank clients

             

Performing

    n/a       1,976       1,976         n/a       1,740       1,740  

Non-performing(1)

      n/a                     n/a              

Total

  $ 6,358     $ 16,002     $ 22,360       $   6,638     $   15,178     $   21,816  

 

(1)

Non-performing refers to assets that are 90 days or more past due.

The carrying value of government-insured mortgages was 13% of the total mortgage portfolio as at December 31, 2020 (2019 – 14%). Most of these insured mortgages are residential loans as classified in the table above.

(iii) Past due or credit impaired financial assets

The Company provides for credit risk by establishing allowances against the carrying value of impaired loans and recognizing impairment losses on AFS debt securities. In addition, the Company reports as impairment losses certain declines in the fair value of debt securities designated as FVTPL which it deems represent an impairment due to non-recoverability of due amount.

The following table presents past due but not impaired and impaired financial assets.

 

    Past due but not impaired        
As at December 31, 2020   Less than
90 days
    90 days
and greater
    Total     Total
impaired
 

Debt securities

       

FVTPL

  $     $     $     $ 54  

AFS

                      1  

Private placements

    30             30       170  

Mortgages and loans to Bank clients

    66             66       69  

Other financial assets

    56       58       114       2  

Total

  $ 152     $ 58     $ 210     $ 296  
    Past due but not impaired        
As at December 31, 2019   Less than
90 days
    90 days
and greater
    Total     Total
impaired
 

Debt securities

       

FVTPL

  $ 11     $     $ 11     $ 167  

AFS

    4       1       5        

Private placements

    215             215       7  

Mortgages and loans to Bank clients

    61             61       59  

Other financial assets

    60       42       102       1  

Total

  $   351     $   43     $   394     $   234  

The following table presents gross carrying value and allowances for loan losses for impaired loans.

 

As at December 31, 2020   Gross
carrying value
    Allowances
for loan losses
    Net carrying
value
 

Private placements

  $ 249     $ 79     $ 170  

Mortgages and loans to Bank clients

    97       28       69  

Total

  $   346     $   107     $   239  
As at December 31, 2019   Gross
carrying value
    Allowances
for loan losses
    Net carrying
value
 

Private placements

  $ 11     $ 4     $ 7  

Mortgages and loans to Bank clients

    75       16       59  

Total

  $   86     $   20     $   66  

 

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The following table presents movement of allowance for loan losses during the year.

 

    2020           2019  
For the years ended December 31,   Private
placements
    Mortgages
and loans to
Bank clients
    Total           Private
placements
    Mortgages
and loans to
Bank clients
    Total  

Balance, January 1

  $ 4     $ 16     $ 20       $   43     $   52     $   95  

Provisions

    94       31       125         35       15       50  

Recoveries

    (6     (6     (12               (46       (46

Write-offs(1)

      (13       (13       (26         (74     (5     (79

Balance, December 31

  $   79     $   28     $   107       $ 4     $ 16     $ 20  

 

(1)

Includes disposals and impact of changes in foreign exchange rates.

(b) Securities lending, repurchase and reverse repurchase transactions

The Company engages in securities lending to generate fee income. Collateral exceeding the market value of the loaned securities is retained by the Company until the underlying security has been returned to the Company. The market value of the loaned securities is monitored daily and additional collateral is obtained or refunded as the market value of the underlying loaned securities fluctuates. As at December 31, 2020, the Company had loaned securities (which are included in invested assets) with a market value of $889 (2019 – $558). The Company holds collateral with a current market value that exceeds the value of securities lent in all cases.

The Company engages in reverse repurchase transactions to generate fee income, to take possession of securities to cover short positions in similar instruments and to meet short-term funding requirements. As at December 31, 2020, the Company had engaged in reverse repurchase transactions of $716 (2019 – $990) which are recorded as short-term receivables. In addition, the Company had engaged in repurchase transactions of $353 as at December 31, 2020 (2019 – $333) which are recorded as payables.

(c) Credit default swaps

The Company replicates exposure to specific issuers by selling credit protection via credit default swaps (“CDS”) to complement its cash debt securities investing. The Company does not write CDS protection more than its government bond holdings. A CDS is a derivative instrument representing an agreement between two parties to exchange the credit risk of a single specified entity or an index based on the credit risk of a group of entities (all commonly referred to as the “reference entity” or a portfolio of “reference entities”), in return for a periodic premium. CDS contracts typically have a five-year term.

The following table presents details of the credit default swap protection sold by type of contract and external agency rating for the underlying reference security.

 

As at December 31, 2020   Notional
amount(1)
    Fair value    

Weighted
average maturity

(in years)(2)

 

Single name CDS(3) – Corporate debt

     

A

  $ 136     $ 2         1  

BBB

    105       1       2  

Total single name CDS

  $ 241     $ 3       1  

Total CDS protection sold

  $ 241     $   3       1  
As at December 31, 2019   Notional
amount(1)
    Fair value    

Weighted
average

maturity

(in years)(2)

 

Single name CDS(3) – Corporate debt

     

AA

  $ 24     $   –       1  

A

    371       5       1  

BBB

    107       1       2  

Total single name CDS

  $ 502     $ 6       1  

Total CDS protection sold

  $   502     $ 6       1  

 

(1)

Notional amounts represent the maximum future payments the Company would have to pay its counterparties assuming a default of the underlying credit and zero recovery on the underlying issuer obligation.

(2)

The weighted average maturity of the CDS is weighted based on notional amounts.

(3)

Standard & Poor’s assigned credit ratings are used where available followed by Moody’s, DBRS, and Fitch. If no external rating is available, an internally developed rating is used.

The Company held no purchased credit protection as at December 31, 2020 and 2019.

 

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(d) Derivatives

The Company’s point-in-time exposure to losses related to credit risk of a derivative counterparty is limited to the amount of any net gains that may have accrued with a counterparty. Gross derivative counterparty exposure is measured as the total fair value (including accrued interest) of all outstanding contracts in a gain position excluding any offsetting contracts in a loss position and the impact of collateral on hand. The Company limits the risk of credit losses from derivative counterparties by: using investment grade counterparties; entering into master netting arrangements which permit the offsetting of contracts in a loss position in the case of a counterparty default; and entering into Credit Support Annex agreements, whereby collateral must be provided when the exposure exceeds a certain threshold. All contracts are held with counterparties rated BBB+ or higher. As at December 31, 2020, the percentage of the Company’s derivative exposure with counterparties rated AA- or higher was 20 per cent (2019 – 23 per cent). The Company’s exposure to credit risk was mitigated by $16,696 fair value of collateral held as security as at December 31, 2020 (2019 – $12,038).

As at December 31, 2020, the largest single counterparty exposure, without considering the impact of master netting agreements or the benefit of collateral held, was $4,110 (2019 – $3,047). The net exposure to this counterparty, after considering master netting agreements and the fair value of collateral held, was $nil (2019 – $nil). As at December 31, 2020, the total maximum credit exposure related to derivatives across all counterparties, without considering the impact of master netting agreements and the benefit of collateral held, was $28,685 (2019 – $20,144).

(e) Offsetting financial assets and financial liabilities

Certain derivatives, securities lent and repurchase agreements have conditional offset rights. The Company does not offset these financial instruments in the Consolidated Statements of Financial Position, as the rights of offset are conditional.

In the case of derivatives, collateral is collected from and pledged to counterparties and clearing houses to manage credit risk exposure in accordance with Credit Support Annexes to swap agreements and clearing agreements. Under master netting agreements, the Company has a right of offset in the event of default, insolvency, bankruptcy or other early termination.

In the case of reverse repurchase and repurchase transactions, additional collateral may be collected from or pledged to counterparties to manage credit exposure according to bilateral reverse repurchase or repurchase agreements. In the event of default by a counterparty, the Company is entitled to liquidate the collateral held to offset against the same counterparty’s obligation.

 

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The following table presents the effect of conditional master netting and similar arrangements. Similar arrangements may include global master repurchase agreements, global master securities lending agreements, and any related rights to financial collateral.

 

          Related amounts not set off in the
Consolidated Statements of
Financial Position
             
As at December 31, 2020   Gross amounts of
financial instruments(1)
    Amounts subject to
an enforceable
master netting
arrangement or
similar agreements
    Financial
and cash
collateral
pledged
(received)(2)
    Net
amount
including
financing
entities(3)
    Net
amounts
excluding
financing
entities
 

Financial assets

         

Derivative assets

  $   28,685     $ (13,243   $ (15,323   $   119     $   119  

Securities lending

    889             (889            

Reverse repurchase agreements

    716             (715     1       1  

Total financial assets

  $   30,290     $ (13,243   $ (16,927   $   120     $   120  

Financial liabilities

         

Derivative liabilities

  $ (16,076   $     13,243     $   2,482     $ (351   $ (71

Repurchase agreements

    (353           353              

Total financial liabilities

  $ (16,429   $ 13,243     $   2,835     $ (351   $ (71
          Related amounts not set off in the
Consolidated Statements of
Financial Position
             
As at December 31, 2019   Gross amounts of
financial instruments(1)
    Amounts subject to
an enforceable
master netting
arrangement or
similar agreements
    Financial
and cash
collateral
pledged
(received)(2)
    Net
amount
including
financing
entities(3)
    Net
amounts
excluding
financing
entities
 

Financial assets

         

Derivative assets

  $    20,144     $ (9,188   $ (10,889   $ 67     $     67  

Securities lending

    558             (558            

Reverse repurchase agreements

    990             (989            1       1  

Total financial assets

  $ 21,692     $ (9,188   $ (12,436   $ 68     $ 68  

Financial liabilities

         

Derivative liabilities

  $ (11,345   $    9,188     $      1,903     $ (254   $ (53

Repurchase agreements

    (333           330       (3     (3

Total financial liabilities

  $ (11,678   $ 9,188     $ 2,233     $ (257   $ (56

 

(1)

Financial assets and liabilities include accrued interest of $892 and $1,114, respectively (2019 – $696 and $1,061, respectively).

(2)

Financial and cash collateral exclude over-collateralization. As at December 31, 2020, the Company was over-collateralized on OTC derivative assets, OTC derivative liabilities, securities lending and reverse purchase agreements and repurchase agreements in the amounts of $1,373, $627, $74 and $nil, respectively (2019 – $1,149, $526, $44 and $nil, respectively). As at December 31, 2020, collateral pledged (received) does not include collateral-in-transit on OTC instruments or initial margin on exchange traded contracts or cleared contracts.

(3)

Includes derivative contracts entered between the Company and its financing trusts which it does not consolidate. The Company does not exchange collateral on derivative contracts entered with these trusts. Refer to note 17.

The Company has certain credit linked note assets and variable surplus note liabilities which have unconditional offset rights. Under the netting agreements, the Company has rights of offset including in the event of the Company’s default, insolvency, or bankruptcy. These financial instruments are offset in the Consolidated Statements of Financial Position.

A credit linked note is a security that allows the issuer to transfer a specific credit risk to the buyer. A surplus note is a subordinated debt obligation that often qualifies as surplus (the U.S. statutory equivalent of equity) by some U.S. state insurance regulators. Interest payments on surplus notes are made after all other contractual payments are made. The following table presents the effect of unconditional netting.

 

As at December 31, 2020   Gross amounts of
financial instruments
    Amounts subject to
an enforceable
netting arrangement
    Net amounts of
financial instruments
 

Credit linked note(1)

  $    932     $ (932   $   –  

Variable surplus note

    (932        932        

 

As at December 31, 2019   Gross amounts of
financial instruments
    Amounts subject to
an enforceable
netting arrangement
    Net amounts of
financial instruments
 

Credit linked note(1)

  $     782     $ (782   $   –  

Variable surplus note

    (782         782        

 

(1)

As at December 31, 2020 and 2019, the Company had no fixed surplus notes outstanding, refer to note 18(g).

 

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(f) Risk concentrations

The Company defines enterprise-wide investment portfolio level targets and limits to ensure that portfolios are diversified across asset classes and individual investment risks. The Company monitors actual investment positions and risk exposures for concentration risk and reports its findings to the Executive Risk Committee and the Risk Committee of the Board of Directors.

 

As at December 31,   2020     2019  

Debt securities and private placements rated as investment grade BBB or higher(1)

    97%       98%  

Government debt securities as a per cent of total debt securities

    37%       37%  

Government private placements as a per cent of total private placements

    11%       12%  

Highest exposure to a single non-government debt security and private placement issuer

  $   1,148     $ 1,083  

Largest single issuer as a per cent of the total equity portfolio

    2%       2%  

Income producing commercial office properties (2020 – 53% of real estate, 2019 – 56%)

  $ 6,745     $ 7,279  

Largest concentration of mortgages and real estate(2) – Ontario Canada (2020 – 28%, 2019 – 27%)

  $   17,367     $   17,038  

 

(1)

Investment grade debt securities and private placements include 40% rated A, 16% rated AA and 16% rated AAA (2019 – 41%, 17% and 16%) investments based on external ratings where available.

(2)

Mortgages and real estate investments are diversified geographically and by property type.

The following table presents debt securities and private placements portfolio by sector and industry.

 

    2020           2019  
As at December 31,   Carrying value     % of total           Carrying value     % of total  

Government and agency

  $ 85,357       33       $ 77,883       33  

Utilities

    47,902       18         44,426       19  

Financial

    35,656       15         31,929       13  

Consumer

    29,684       11         25,931       11  

Energy

    20,963       8         20,196       9  

Industrial

    22,070       9         19,024       8  

Other

    17,850       6         16,712       7  

Total

  $   259,482         100       $   236,101       100  

(g) Insurance risk

Insurance risk is the risk of loss due to actual experience for mortality and morbidity claims, policyholder behaviour and expenses emerging differently than assumed when a product was designed and priced. A variety of assumptions are made related to these experience factors, for reinsurance costs, and for sales levels when products are designed and priced, as well as in the determination of policy liabilities. Assumptions for future claims are generally based on both Company and industry experience, and assumptions for future policyholder behaviour and expenses are generally based on Company experience. Such assumptions require significant professional judgment, and actual experience may be materially different than the assumptions made by the Company. Claims may be impacted unexpectedly by changes in the prevalence of diseases or illnesses, medical and technology advances, widespread lifestyle changes, natural disasters, large-scale man-made disasters and acts of terrorism. Policyholder behaviour including premium payment patterns, policy renewals, lapse rates and withdrawal and surrender activity are influenced by many factors including market and general economic conditions, and the availability and relative attractiveness of other products in the marketplace. Some reinsurance rates are not guaranteed and may be changed unexpectedly. Adjustments the Company seeks to make to Non-Guaranteed elements to reflect changing experience factors may be challenged by regulatory or legal action and the Company may be unable to implement them or may face delays in implementation.

The Company manages insurance risk through global policies, standards and best practices with respect to product design, pricing, underwriting and claim adjudication, and a global underwriting manual. Each business unit establishes underwriting policies and procedures, including criteria for approval of risks and claims adjudication policies and procedures. The current global life retention limit is US$30 for individual policies (US$35 for survivorship life policies) and is shared across businesses. Lower limits are applied in some markets and jurisdictions. The Company aims to further reduce exposure to claims concentrations by applying geographical aggregate retention limits for certain covers. Enterprise-wide, the Company aims to reduce the likelihood of high aggregate claims by operating globally, insuring a wide range of unrelated risk events, and reinsuring some risk.

 

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(h) Concentration risk

The geographic concentration of the Company’s insurance and investment contract liabilities, including embedded derivatives, is shown below. The disclosure is based on the countries in which the business is written.

 

As at December 31, 2020   Gross
liabilities
    Reinsurance
assets
    Net liabilities  

U.S. and Canada

  $   273,848     $ (44,645   $   229,203  

Asia and Other

    114,878       (1,191     113,687  

Total

  $   388,726     $ (45,836   $   342,890  
As at December 31, 2019   Gross
liabilities
    Reinsurance
assets
    Net liabilities  

U.S. and Canada

  $   255,999     $   (40,944   $ 215,055  

Asia and Other

    98,237       (502     97,735  

Total

  $ 354,236     $ (41,446   $   312,790  

(i) Reinsurance risk

In the normal course of business, the Company limits the amount of loss on any one policy by reinsuring certain levels of risk with other insurers. In addition, the Company accepts reinsurance from other reinsurers. Reinsurance ceded does not discharge the Company’s liability as the primary insurer. Failure of reinsurers to honour their obligations could result in losses to the Company; consequently, allowances are established for amounts deemed uncollectible. To minimize losses from reinsurer insolvency, the Company monitors the concentration of credit risk both geographically and with any one reinsurer. In addition, the Company selects reinsurers with high credit ratings.

As at December 31, 2020, the Company had $45,836 (2019 – $41,446) of reinsurance assets. Of this, 94 per cent (2019 – 94 per cent) were ceded to reinsurers with Standard and Poor’s ratings of A- or above. The Company’s exposure to credit risk was mitigated by $27,360 fair value of collateral held as security as at December 31, 2020 (2019 – $26,638). Net exposure after considering offsetting agreements and the benefit of the fair value of collateral held was $18,476 as at December 31, 2020 (2019 – $14,808).

Note 9     Long-Term Debt

(a) Carrying value of long-term debt instruments

 

As at December 31,    Issue date    Maturity date   Par value    2020      2019  

3.050% Senior notes(1),(2)

  

August 27, 2020

  

August 27, 2060

 

US$  1,155

   $   1,460      $  

4.70% Senior notes(1)

  

June 23, 2016

  

June 23, 2046

 

US$  1,000

     1,265        1,290  

5.375% Senior notes(1)

  

March 4, 2016

  

March 4, 2046

 

US$     750

     943        962  

2.396% Senior notes(3)

  

June 1, 2020

  

June 1, 2027

 

US$     200

     254         

2.484% Senior notes(1),(3)

  

May 19, 2020

  

May 19, 2027

 

US$     500

     632         

3.527% Senior notes(1)

  

December 2, 2016

  

December 2, 2026

 

US$     270

     343        350  

4.150% Senior notes(1)

  

March 4, 2016

  

March 4, 2026

 

US$  1,000

     1,267        1,292  

4.90% Senior notes(4)

  

September 17, 2010

  

September 17, 2020

 

US$     500

            649  

Total

                 $   6,164      $   4,543  

 

(1)

These U.S. dollar senior notes have been designated as hedges of the Company’s net investment in its U.S. operations which reduces the earnings volatility that would otherwise arise from the re-measurement of these senior notes into Canadian dollars.

(2)

Issued by MFC during the year, interest is payable semi-annually. The senior notes may be redeemed at the option of MFC in whole, but not in part, on August 27, 2025, and thereafter on every August 27 at a redemption price equal to par, together with accrued and unpaid interest.

(3)

Issued by MFC during the year, interest is payable semi-annually. The senior notes may be redeemed in whole or in part at the option of MFC at any time, at a redemption price equal to the greater of par and a price based on the yield of a corresponding U.S. Treasury bond plus 30 basis points.

(4)

The 4.90% senior notes matured on September 17, 2020.

The cash amount of interest paid on long-term debt during the year ended December 31, 2020 was $229 (2019 – $216). Issue costs are amortized over the term of the debt.

(b) Fair value measurement

Fair value of long-term debt instruments is determined using the following hierarchy:

Level 1 – Fair value is determined using quoted market prices where available.

Level 2 – When quoted market prices are not available, fair value is determined with reference to quoted prices of similar debt instruments or estimated using discounted cash flows based on observable market rates.

The Company measures long-term debt at amortized cost in the Consolidated Statements of Financial Position. As at December 31, 2020, the fair value of long-term debt was $7,042 (2019 – $5,078). Fair value of long-term debt was determined using Level 2 valuation techniques (2019 – Level 2).

 

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(c) Aggregate maturities of long-term debt

 

As at December 31      Less than
1 year
       1 to 3
years
       3 to 5
years
       Over 5
years
       Total  

2020

     $        $   –        $   –        $ 6,164        $   6,164  

2019

         649                              3,894          4,543  

Note 10     Capital Instruments

(a) Carrying value of capital instruments

 

As at December 31,   Issuance date     Earliest par
redemption date
    Maturity date     Par value     2020     2019  

JHFC Subordinated notes(1)

    December 14, 2006       n/a       December 15, 2036     $ 650     $ 647     $ 647  

2.818% MFC Subordinated debentures(2)

    May 12, 2020       May 13, 2030       May 13, 2035     $    1,000       995        

4.061% MFC Subordinated notes(3),(4)

    February 24, 2017       February 24, 2027       February 24, 2032     US$       750       951       969  

2.237% MFC Subordinated debentures(5)

    May 12, 2020       May 12, 2025       May 12, 2030     $ 1,000       996        

3.00% MFC Subordinated notes(6)

    November 21, 2017       November 21, 2024       November 21, 2029     S$ 500       480       481  

3.049% MFC Subordinated debentures(7)

    August 18, 2017       August 20, 2024       August 20, 2029     $ 750       748       747  

3.317% MFC Subordinated debentures(7)

    May 9, 2018       May 9, 2023       May 9, 2028     $ 600       598       598  

3.181% MLI Subordinated debentures(8)

    November 20, 2015       November 22, 2022       November 22, 2027     $ 1,000       999       998  

3.85% MFC Subordinated notes(6)

    May 25, 2016       May 25, 2021       May 25, 2026     S$ 500       481       482  

2.389% MLI Subordinated debentures(8),(9)

    June 1, 2015       January 5, 2021       January 5, 2026     $ 350       350       350  

2.10% MLI Subordinated debentures(10)

    March 10, 2015       June 1, 2020       June 1, 2025     $ 750             750  

2.64% MLI Subordinated debentures(11)

    December 1, 2014       January 15, 2020       January 15, 2025     $ 500             500  

7.375% JHUSA Surplus notes(12)

    February 25, 1994       n/a       February 15, 2024     US$ 450       584       598  

Total

                                  $   7,829     $   7,120  

 

(1)

Issued by Manulife Holdings (Delaware) LLC (“MHDLL”), now John Hancock Financial Corporation (“JHFC”), a wholly owned subsidiary of MFC, to Manulife Finance (Delaware) LLC (“MFLLC”), a subsidiary of Manulife Finance (Delaware) L.P. (“MFLP”). MFLP and its subsidiaries are wholly owned unconsolidated related parties to the Company. The note bears interest at a floating rate equal to the 90-day Bankers’ Acceptance rate plus 0.72%. With regulatory approval, JHFC may redeem the note, in whole or in part, at any time, at par, together with accrued and unpaid interest. Refer to note 17.

(2)

Issued by MFC during the year, interest is payable semi-annually. After May 13, 2030, the interest rate will reset to equal the 90-day Bankers’ Acceptance rate plus 1.82%. With regulatory approval, MFC may redeem the debentures, in whole, or in part, on or after May 13, 2025, at a redemption price together with accrued and unpaid interest. If the redemption date is on or after May 13, 2025, but prior to May 13, 2030, the redemption price shall be the greater of: (i) the Canada yield price as defined in the prospectus; and (ii) par. If the redemption date is on or after May 13, 2030, the redemption price shall be equal to par.

(3)

On the earliest par redemption date, the interest rate will reset to equal the 5-Year US Dollar Mid-Swap Rate plus 1.647%. With regulatory approval, MFC may redeem the debentures, in whole, but not in part, on the earliest par redemption date, at a redemption price equal to par, together with accrued and unpaid interest.

(4) 

Designated as a hedge of the Company’s net investment in its U.S. operations which reduces the earnings volatility that would otherwise arise from the re-measurement of the subordinated notes into Canadian dollars.

(5)

Issued by MFC during the year, interest is payable semi-annually. After May 12, 2025, the interest rate will reset to equal the 90-day Bankers’ Acceptance rate plus 1.49%. With regulatory approval, MFC may redeem the debentures, in whole, or in part, on or after May 12, 2025, at a redemption price equal to par, together with accrued and unpaid interest.

(6)

On the earliest par redemption date, the interest rate will reset to equal the 5-Year Singapore Dollar Swap Rate plus a specified number of basis points. The specified number of basis points is as follows: 3.00% – 83.2 bps, 3.85% – 197 bps. With regulatory approval, MFC may redeem the debentures, in whole, but not in part, on the earliest par redemption date and thereafter on each interest payment date, at a redemption price equal to par, together with accrued and unpaid interest.

(7)

Interest is fixed for the period up to the earliest par redemption date, thereafter, the interest rate will reset to a floating rate equal to the 90-day Bankers’ Acceptance rate plus a specified number of basis points. The specified number of basis points is as follows: 3.049% – 105 bps, 3.317% – 78 bps. With regulatory approval, MFC may redeem the debentures, in whole or in part, on or after the earliest par redemption date, at a redemption price equal to par, together with accrued and unpaid interest.

(8)

Interest is fixed for the period up to the earliest par redemption date, thereafter the interest rate will reset to a floating rate equal to the 90-day Bankers’ Acceptance rate plus a specified number of basis points. The specified number of basis points is as follows: 3.181% – 157 bps, 2.389% – 83 bps. With regulatory approval, MLI may redeem the debentures, in whole or in part, on or after the earliest par redemption date, at a redemption price equal to par, together with accrued and unpaid interest.

(9) 

MLI redeemed in full the 2.389% subordinated debentures at par, on January 5, 2021, the earliest par redemption date.

(10)

MLI redeemed in full the 2.10% subordinated debentures at par, on June 1, 2020, the earliest par redemption date.

(11)

MLI redeemed in full the 2.64% subordinated debentures at par, on January 15, 2020, the earliest par redemption date.

(12)

Issued by John Hancock Mutual Life Insurance Company, now John Hancock Life Insurance Company (U.S.A.). Any payment of interest or principal on the surplus notes requires prior approval from the Department of Insurance and Financial Services of the State of Michigan. The carrying value of the surplus notes reflects an unamortized fair value increment of US$13 (2019 – US$17), which arose as a result of the acquisition of John Hancock Financial Services, Inc. The amortization of the fair value adjustment is recorded in interest expense.

(b) Fair value measurement

Fair value of capital instruments is determined using the following hierarchy:

Level 1 – Fair value is determined using quoted market prices where available.

Level 2 – When quoted market prices are not available, fair value is determined with reference to quoted prices of similar debt instruments or estimated using discounted cash flows based on observable market rates.

 

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The Company measures capital instruments at amortized cost in the Consolidated Statements of Financial Position. As at December 31, 2020, the fair value of capital instruments was $8,295 (2019 – $7,333). Fair value of capital instruments was determined using Level 2 valuation techniques (2019 – Level 2).

Note 11     Share Capital and Earnings Per Share

The authorized capital of MFC consists of:

 

 

an unlimited number of common shares without nominal or par value; and

 

an unlimited number of Class A, Class B and Class 1 preferred shares without nominal or par value, issuable in series.

(a) Preferred shares

The following table presents information about the outstanding preferred shares as at December 31, 2020 and 2019.

 

As at December 31, 2020   Issue date   Annual
dividend rate(1)
     Earliest redemption date(2)   Number of
shares
(in millions)
    Face
amount
    Net amount(3)  
  2020     2019  

Class A preferred shares

            

Series 2

 

February 18, 2005

    4.65   

n/a

    14     $ 350     $ 344     $ 344  

Series 3

 

January 3, 2006

    4.50   

n/a

    12       300       294       294  

Class 1 preferred shares

            

Series 3(4),(5)

 

March 11, 2011

    2.178   

June 19, 2021

    6       158       155       155  

Series 4(6)

 

June 20, 2016

    floating     

June 19, 2021

    2       42       41       41  

Series 5(4),(5)

 

December 6, 2011

    3.891   

December 19, 2021

    8       200       195       195  

Series 7(4),(5)

 

February 22, 2012

    4.312   

March 19, 2022

    10       250       244       244  

Series 9(4),(5)

 

May 24, 2012

    4.351   

September 19, 2022

    10       250       244       244  

Series 11(4),(5)

 

December 4, 2012

    4.731   

March 19, 2023

    8       200       196       196  

Series 13(4),(5)

 

June 21, 2013

    4.414   

September 19, 2023

    8       200       196       196  

Series 15(4),(5)

 

February 25, 2014

    3.786   

June 19, 2024

    8       200       195       195  

Series 17(4),(5)

 

August 15, 2014

    3.80   

December 19, 2024

    14       350       343       343  

Series 19(4),(5),(7)

 

December 3, 2014

    3.675   

March 19, 2025

    10       250       246       246  

Series 21(4),(5)

 

February 25, 2016

    5.60   

June 19, 2021

    17       425       417       417  

Series 23(4),(5)

 

November 22, 2016

    4.85   

March 19, 2022

    19       475       467       467  

Series 25(4),(5)

 

February 20, 2018

    4.70   

June 19, 2023

    10       250       245       245  

Total

                     156     $   3,900     $   3,822     $   3,822  

 

(1)

Holders of Class A and Class 1 preferred shares are entitled to receive non-cumulative preferential cash dividends on a quarterly basis, as and when declared by the Board of Directors.

(2)

Redemption of all preferred shares is subject to regulatory approval. MFC may redeem each series, in whole or in part, at par, on the earliest redemption date or every five years thereafter, except for Class A Series 2, Class A Series 3 and Class 1 Series 4 preferred shares. Class A Series 2 and Series 3 preferred shares are past their respective earliest redemption date and MFC may redeem these shares, in whole or in part, at par at any time, subject to regulatory approval, as noted. MFC may redeem the Class 1 Series 4, in whole or in part, at any time, at $25.00 per share if redeemed on June 19, 2021 and on June 19 every five years thereafter, or at $25.50 per share if redeemed on any other date after June 19, 2016, subject to regulatory approval, as noted.

(3)

Net of after-tax issuance costs.

(4)

On the earliest redemption date and every five years thereafter, the annual dividend rate will be reset to the five-year Government of Canada bond yield plus a yield specified for each series. The specified yield for Class 1 shares is: Series 3 – 1.41%, Series 5 – 2.90%, Series 7 – 3.13%, Series 9 – 2.86%, Series 11 – 2.61%, Series 13 – 2.22%, Series 15 – 2.16%, Series 17 – 2.36%, Series 19 – 2.30%, Series 21 – 4.97%, Series 23 – 3.83% and Series 25 – 2.55%.

(5)

On the earliest redemption date and every five years thereafter, Class 1 preferred shares are convertible at the option of the holder into a new series that is one number higher than their existing series, and the holders are entitled to non-cumulative preferential cash dividends, payable quarterly if and when declared by the Board of Directors, at a rate equal to the three month Government of Canada Treasury bill yield plus the rate specified in footnote 4 above.

(6)

The floating dividend rate for the Class 1 Shares Series 4 equals the three-month Government of Canada Treasury bill yield plus 1.41%.

(7)

MFC did not exercise its right to redeem all or any of the outstanding Class 1 Shares Series 19 on March 19, 2020, the earliest redemption date. The dividend rate was reset as specified in footnote 4 above to an annual fixed rate of 3.675%, for a five-year period commencing on March 20, 2020.

(b) Common shares

The following table presents changes in common shares issued and outstanding.

 

    2020           2019  
For the years ended December 31,  

Number of shares

(in millions)

    Amount          

Number of shares

(in millions)

    Amount  

Balance, January 1

    1,949     $ 23,127         1,971     $   22,961  

Repurchased for cancellation

    (10     (121       (58     (677

Issued under dividend reinvestment plan

                  31       739  

Issued on exercise of stock options and deferred share units

    1       36         5       104  

Total

    1,940     $   23,042         1,949     $ 23,127  

 

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Normal Course Issuer Bid

On March 13, 2020, the Office of the Superintendent of Financial Institutions (“OSFI”) announced measures to support the resilience of financial institutions. Consistent with these measures, OSFI set the expectation for all federally regulated financial institutions that dividend increases and share buybacks should be halted for the time being. Accordingly, the Company has not repurchased its common shares since March 13, 2020.

MFC’s NCIB expired on November 13, 2020. During 2020, MFC purchased and subsequently cancelled 10.2 million (2019 – 57.6 million) of its common shares at an average price of $24.86 (2019 – $23.22) per common share for a total cost of $253 (2019 – $1.3 billion). Of this, the book value of shares purchased was $121 (2019 - $677) which was recorded in common shares, and the excess market value over book value of these shares was $132 (2019 – $662) which was recorded in retained earnings in the Consolidated Statements of Changes in Equity.

Since the commencement of this NCIB on November 14, 2019, MFC purchased for cancellation 16.5 million of its common shares at an average price of $25.26 per share for a total cost of $416.

Dividend Reinvestment Plan

The Company offers a Dividend Reinvestment Program (“DRIP”) whereby shareholders may elect to automatically reinvest dividends in the form of MFC common shares instead of receiving cash. The offering of the program and its terms of execution are subject to the Board of Directors’ discretion.

During 2020, the Company purchased common shares for this program in the open market.

(c) Earnings per share

The following table presents basic and diluted earnings per common share of the Company.     

 

For the years ended December 31,   2020     2019  

Basic earnings per common share

  $         2.94     $         2.77  

Diluted earnings per common share

    2.93       2.77  

The following is a reconciliation of the numbers of shares in the calculation of basic and diluted earnings per share.

 

For the years ended December 31,   2020     2019     

Weighted average number of common shares (in millions)

              1,941           1,958     

Dilutive stock-based awards(1) (in millions)

    2       4     

Weighted average number of diluted common shares (in millions)

    1,943       1,962     

 

(1)

The dilutive effect of stock-based awards was calculated using the treasury stock method. This method calculates the number of incremental shares by assuming the outstanding stock-based awards are (i) exercised and (ii) then reduced by the number of shares assumed to be repurchased from the issuance proceeds, using the average market price of MFC common shares for the year. Excluded from the calculation was a weighted average of 18 million (2019 – 9 million) anti-dilutive stock-based awards.

(d) Quarterly dividend declaration subsequent to year end

On February 10, 2021, the Company’s Board of Directors approved a quarterly dividend of $0.28 per share on the common shares of MFC, payable on or after March 19, 2021 to shareholders of record at the close of business on February 23, 2021.

The Board also declared dividends on the following non-cumulative preferred shares, payable on or after March 19, 2021 to shareholders of record at the close of business on February 23, 2021.

 

Class A Shares Series 2 – $0.29063 per share

 

Class 1 Shares Series 13 – $0.275875 per share

Class A Shares Series 3 – $0.28125 per share

 

Class 1 Shares Series 15 – $0.236625 per share

Class 1 Shares Series 3 – $0.136125 per share

 

Class 1 Shares Series 17 – $0.2375 per share

Class 1 Shares Series 4 – $0.092465 per share

 

Class 1 Shares Series 19 – $0.229688 per share

Class 1 Shares Series 5 – $0.243188 per share

 

Class 1 Shares Series 21 – $0.35 per share

Class 1 Shares Series 7 – $0.2695 per share

 

Class 1 Shares Series 23 – $0.303125 per share

Class 1 Shares Series 9 – $0.271938 per share

 

Class 1 Shares Series 25 – $0.29375 per share

Class 1 Shares Series 11 – $0.295688 per share

   

 

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Note 12     Capital Management

(a) Capital management

The Company monitors and manages its consolidated capital in compliance with the Life Insurance Capital Adequacy Test (“LICAT”) guideline, the capital framework issued by the Office of the Superintendent of Financial Institutions (“OSFI”). Under the capital framework, the Company’s consolidated capital resources, including available capital, surplus allowance, and eligible deposits, are measured against the base solvency buffer, which is the risk-based capital requirement determined in accordance with the guideline.

The Company’s operating activities are primarily conducted within MLI and its subsidiaries. MLI is also regulated by OSFI and is therefore subject to consolidated risk-based capital requirements using the OSFI LICAT framework.

The Company seeks to manage its capital with the objectives of:

 

 

Operating with sufficient capital to be able to honour all commitments to its policyholders and creditors with a high degree of confidence;

 

Retaining the ongoing confidence of regulators, policyholders, rating agencies, investors and other creditors in order to ensure access to capital markets; and

 

Optimizing return on capital to meet shareholders’ expectations subject to constraints and considerations of adequate levels of capital established to meet the first two objectives.

Capital is managed and monitored in accordance with the Capital Management Policy. The policy is reviewed and approved by the Board of Directors annually and is integrated with the Company’s risk and financial management frameworks. It establishes guidelines regarding the quantity and quality of capital, internal capital mobility, and proactive management of ongoing and future capital requirements.

The capital management framework considers the requirements of the Company as a whole as well as the needs of each of the Company’s subsidiaries. Internal capital targets are set above the regulatory requirements, and consider a number of factors, including expectations of regulators and rating agencies, results of sensitivity and stress testing and the Company’s own risk assessments. The Company monitors against these internal targets and initiates actions appropriate to achieving its business objectives.

Consolidated capital, based on accounting standards, is presented in the table below for MFC. For regulatory reporting purposes, LICAT available capital is based on consolidated capital with adjustments for certain deductions, limits and restrictions, as mandated by the LICAT guideline.

Consolidated capital

 

As at December 31,   2020        2019  

Total equity

  $   53,006        $   50,106  

Adjusted for AOCI loss on cash flow hedges

    (229        (143

Total equity excluding AOCI on cash flow hedges

    53,235          50,249  

Qualifying capital instruments

    7,829          7,120  

Consolidated capital

  $ 61,064        $ 57,369  

(b) Restrictions on dividends and capital distributions

Dividends and capital distributions are restricted under the Insurance Companies Act (“ICA”). These restrictions apply to both MFC and its primary operating subsidiary MLI. The ICA prohibits the declaration or payment of any dividend on shares of an insurance company if there are reasonable grounds for believing a company does not have adequate capital and adequate and appropriate forms of liquidity or the declaration or the payment of the dividend would cause the company to be in contravention of any regulation made under the ICA respecting the maintenance of adequate capital and adequate and appropriate forms of liquidity, or of any direction made to the company by OSFI. The ICA also requires an insurance company to notify OSFI of the declaration of a dividend at least 15 days prior to the date fixed for its payment. Similarly, the ICA prohibits the purchase for cancellation of any shares issued by an insurance company or the redemption of any redeemable shares or other similar capital transactions, if there are reasonable grounds for believing that the company does not have adequate capital and adequate and appropriate forms of liquidity or the payment would cause the company to be in contravention of any regulation made under the ICA respecting the maintenance of adequate capital and adequate and appropriate forms of liquidity, or any direction made to the company by OSFI. These latter transactions would require the prior approval of OSFI.

The ICA requires Canadian insurance companies to maintain adequate levels of capital at all times.

Since MFC is a holding company that conducts all of its operations through regulated insurance subsidiaries (or companies owned directly or indirectly by these subsidiaries), its ability to pay future dividends will depend on the receipt of sufficient funds from its regulated insurance subsidiaries. These subsidiaries are also subject to certain regulatory restrictions under laws in Canada, the United States and certain other countries that may limit their ability to pay dividends or make other upstream distributions.

On March 13, 2020, OSFI set the expectation for all federally regulated financial institutions that dividend increases and share buybacks should be halted for the time being. Refer to note 11(b).

Note 13     Revenue from Service Contracts

The Company provides investment management services, administrative services, distribution and related services to proprietary and third-party investment funds, retirement plans, group benefit plans and other arrangements. The Company also provides real estate management services to tenants of the Company’s investment properties.

 

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The Company’s service contracts generally impose single performance obligations, each consisting of a series of similar related services for each customer.

The Company’s performance obligations within service arrangements are generally satisfied over time as the customer simultaneously receives and consumes the benefits of the services rendered, measured using an output method. Fees typically include variable consideration and the related revenue is recognized to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty is subsequently resolved.

Asset-based fees vary with asset values of accounts under management, subject to market conditions and investor behaviors beyond the Company’s control. Transaction processing and administrative fees vary with activity volume, also beyond the Company’s control. Some fees, including distribution fees, are based on account balances and transaction volumes. Fees related to account balances and transaction volumes are measured daily. Real estate management service fees include fixed portions plus recovery of variable costs of services rendered to tenants. Fees related to services provided are generally recognized as services are rendered, which is when it becomes highly probable that no significant reversal of cumulative revenue recognized will occur. The Company has determined that its service contracts have no significant financing components as fees are collected monthly. The Company has no significant contract assets or contract liabilities.

The following tables present revenue from service contracts by service lines and reporting segments as disclosed in note 19.

 

For the year ended December 31, 2020   Asia     Canada     U.S.     Global
WAM
    Corporate
and Other
    Total  

Investment management and other related fees

  $ 171     $ 202     $ 514     $ 2,770     $ (201   $ 3,456  

Transaction processing, administration, and service fees

    239       814       15       2,215       2       3,285  

Distribution fees and other

    227       16       67       718       (52     976  

Total included in other revenue

    637       1,032       596       5,703       (251     7,717  

Revenue from non-service lines

    709       (19     2,115       7       62       2,874  

Total other revenue

  $ 1,346     $ 1,013     $ 2,711     $ 5,710     $ (189   $ 10,591  

Real estate management services included in net investment income

  $ 37     $ 144     $ 143     $     $ 8     $ 332  
For the year ended December 31, 2019   Asia     Canada     U.S.     Global
WAM
    Corporate
and Other
    Total  

Investment management and other related fees

  $   164     $ 161     $   542     $ 2,773     $   (198)     $ 3,442  

Transaction processing, administration, and service fees

    223       827       17       2,048             3,115  

Distribution fees and other

    199       52       72       741       (44     1,020  

Total included in other revenue

    586       1,040       631       5,562       (242     7,577  

Revenue from non-service lines

    629       48       2,023             122       2,822  

Total other revenue

  $   1,215     $   1,088     $   2,654     $   5,562     $ (120   $   10,399  

Real estate management services included in net investment income

  $ 36     $ 160     $ 137     $     $ 9     $ 342  

Note 14     Stock-Based Compensation

(a) Stock options

The Company grants stock options under its Executive Stock Option Plan (“ESOP”) to selected individuals. The options provide the holder the right to purchase MFC common shares at an exercise price equal to the higher of the prior day, prior five-day or prior ten-day average closing market price of the shares on the Toronto Stock Exchange on the date the options are granted. The options vest over a period not exceeding four years and expire not more than 10 years from the grant date. Effective with the 2015 grant, options may only be exercised after the fifth-year anniversary. A total of 73,600,000 common shares have been reserved for issuance under the ESOP.

Options outstanding

 

    2020           2019  
For the years ended December 31,  

Number of
options

(in millions)

    Weighted
average
exercise price
         

Number of
options

(in millions)

    Weighted
average
exercise price
 

Outstanding, January 1

    21     $   20.91         23     $   20.29  

Granted

    5       24.38         3       22.62  

Exercised

    (2     18.17         (4     18.79  

Expired

          24.27               18.88  

Forfeited

          23.73         (1     23.41  

Outstanding, December 31

    24     $ 21.74         21     $ 20.91  

Exercisable, December 31

    6     $ 19.52         5     $ 17.56  

 

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    Options outstanding           Options exercisable  
For the year ended December 31, 2020  

Number of
options

(in millions)

    Weighted average
exercise price
    Weighted average
remaining
contractual life
(in years)
         

Number of
options

(in millions)

    Weighted average
exercise price
    Weighted average
remaining
contractual life
(in years)
 

$12.64—$20.99

    6     $   16.77       3.75         2     $   15.32       1.27  

$21.00—$24.83

    18     $ 23.53       6.90         4     $ 21.85       3.72  

Total

    24     $ 21.74       6.06         6     $ 19.52       2.84  

The weighted average fair value of each option granted in 2020 has been estimated at $3.66 (2019 – $4.57) using the Black-Scholes option-pricing model. The pricing model uses the following assumptions for these options: risk-free interest rate of 1.50% (2019 – 2.50%), dividend yield of 3.50% (2019 – 3.50%), expected volatility of 23% (2019 – 28.0%) and expected life of 8 (2019 – 6.3) years. Expected volatility is estimated by evaluating a number of factors including historical volatility of the share price over multi-year periods.

Compensation expense related to stock options was $14 for the year ended December 31, 2020 (2019 – $11).

(b) Deferred share units

In 2000, the Company granted deferred share units (“DSUs”) to certain employees under the ESOP. These DSUs vest over a three-year period and each DSU entitles the holder to receive one common share on retirement or termination of employment. When dividends are paid on common shares, holders of DSUs are deemed to receive dividends at the same rate, payable in the form of additional DSUs. In 2020, nil DSUs were granted to employees under the ESOP (2019 – nil). The number of DSUs outstanding was 285,000 as at December 31, 2020 (2019 – 298,000).

In addition, for certain employees and pursuant to the Company’s deferred compensation program, the Company grants DSUs under the Restricted Share Units (“RSUs”) Plan which entitle the holder to receive payment in cash equal to the value of the same number of common shares plus credited dividends on retirement or termination of employment. In 2020, the Company granted 28,000 DSUs to certain employees which vest after 36 months (2019 – 46,000). In 2020, 38,000 DSUs (2019 – 49,000) were granted to certain employees who elected to defer receipt of all or part of their annual bonus. These DSUs vested immediately. Also, in 2020, 2,600 DSUs (2019 – 24,000) were granted to certain employees to defer payment of all or part of their RSUs and/or Performance Share Units (“PSUs”). These DSUs also vested immediately.

Under the Stock Plan for Non-Employee Directors, each eligible director may elect to receive his or her annual director’s retainer and fees in DSUs or common shares in lieu of cash. Upon termination of the Board service, an eligible director who has elected to receive DSUs will be entitled to receive cash equal to the value of the DSUs accumulated in his or her account, or at his or her direction, an equivalent number of common shares. The Company is allowed to issue up to one million common shares under this plan after which awards may be settled using shares purchased in the open market.

The fair value of 214,000 DSUs issued during the year was $22.65 per unit as at December 31, 2020 (2019 – 229,000 at $26.36 per unit).

 

For the years ended December 31,

Number of DSUs (in thousands)

  2020        2019  

Outstanding, January 1

    2,395          2,538  

Issued

    214          229  

Reinvested

    145          102  

Redeemed

    (576        (416

Forfeitures and cancellations

    (9        (58

Outstanding, December 31

    2,169          2,395  

Of the DSUs outstanding as at December 31, 2020, 285,000 (2019 – 298,000) entitle the holder to receive common shares, 811,000 (2019 – 1,055,000) entitle the holder to receive payment in cash and 1,073,000 (2019 – 1,042,000) entitle the holder to receive payment in cash or common shares, at the option of the holder.

Compensation expense related to DSUs was $5 for the year ended December 31, 2020 (2019 – $10).

The carrying and fair value of the DSUs liability as at December 31, 2020 was $43 (2019 – $55) and was included in other liabilities.

(c) Restricted share units and performance share units

For the year ended December 31, 2020, 6.7 million RSUs (2019 – 6.5 million) and 1.1 million PSUs (2019 – 1.1 million) were granted to certain eligible employees under MFC’s Restricted Share Unit Plan. The fair value of the RSUs and PSUs granted during the year was $22.65 per unit as at December 31, 2020 (2019 – $26.36 per unit). Each RSU and PSU entitles the holder to receive payment equal to the market value of one common share, plus credited dividends, at the time of vesting, subject to any performance conditions.

RSUs and PSUs granted in February 2020 will vest after 36 months from their grant date and the related compensation expense is recognized over these periods, except where the employee is eligible to retire prior to a vesting date, in which case the cost is recognized over the period between the grant date and the date on which the employee is eligible to retire. Compensation expense related to RSUs and PSUs was $140 and $15, respectively, for the year ended December 31, 2020 (2019 – $128 and $17, respectively).

 

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The carrying and fair value of the RSUs and PSUs liability as at December 31, 2020 was $194 (2019 – $205) and was included in other liabilities.

(d) Global share ownership plan

The Company’s Global Share Ownership Plan allows qualifying employees to apply up to five per cent of their annual base earnings toward the purchase of common shares. The Company matches a percentage of the employee’s eligible contributions up to a maximum amount. The Company’s contributions vest immediately. All contributions are used to purchase common shares in the open market.

Note 15     Employee Future Benefits

The Company maintains defined contribution and defined benefit pension plans and other post-employment plans for employees and agents including registered (tax-qualified) pension plans that are typically funded, as well as supplemental non-registered (non-qualified) pension plans for executives, retiree welfare plans and disability welfare plans that are typically not funded.

(a) Plan characteristics

The Company’s final average pay defined benefit pension plans and retiree welfare plans are closed to new members. All employees may participate in capital accumulation plans including defined benefit cash balance plans, 401(k) plans and/or defined contribution plans, depending on the country of employment.

All pension arrangements are governed by local pension committees or management, but significant plan changes require approval from the Company’s Board of Directors.

The Company’s funding policy for defined benefit pension plans is to make the minimum annual contributions required by regulations in the countries in which the plans are offered. Assumptions and methods prescribed for regulatory funding purposes typically differ from those used for accounting purposes.

The Company’s remaining defined benefit pension and/or retiree welfare plans are in the U.S., Canada, Japan and Taiwan (China). There are also disability welfare plans in the U.S. and Canada.

The largest defined benefit pension and retiree welfare plans are the primary plans for employees in the U.S. and Canada. These are the material plans that are discussed in the balance of this note. The Company measures its defined benefit obligations and fair value of plan assets for accounting purposes as at December 31 each year.

U.S. defined benefit pension and retiree welfare plans

The Company operates a qualified cash balance plan that is open to new members, a closed non-qualified cash balance plan, and a closed retiree welfare plan.

Actuarial valuations to determine the Company’s minimum funding contributions for the qualified cash balance plan are required annually. Deficits revealed in the funding valuations must generally be funded over a period of up to seven years. It is expected that there will be no required funding for this plan in 2020. There are no plan assets set aside for the non-qualified cash balance plan.

The retiree welfare plan subsidizes the cost of life insurance and medical benefits. The majority of those who retired after 1991 receive a fixed-dollar subsidy from the Company based on service. The plan was closed to all employees hired after 2004. While assets have been set aside in a qualified trust to pay future retiree welfare benefits, this funding is optional. Retiree welfare benefits offered under the plan coordinate with the U.S. Medicare program to make optimal use of available federal financial support.

The qualified pension and retiree welfare plans are governed by the U.S. Benefits Committee, while the non-qualified pension plan is governed by the U.S. Non-Qualified Plans Subcommittee.

Canadian defined benefit pension and retiree welfare plans

The Company’s defined benefit plans in Canada include two registered final average pay pension plans, a non-registered supplemental final average pay pension plan and a retiree welfare plan, all of which have been closed to new members.

Actuarial valuations to determine the Company’s minimum funding contributions for the registered pension plans are required at least once every three years. Deficits revealed in the funding valuation must generally be funded over a period of ten years. For 2021, the required funding for these plans is expected to be $2. The non-registered supplemental pension plan is not funded.

The retiree welfare plan subsidizes the cost of life insurance, medical and dental benefits. These subsidies are a fixed-dollar amount for those who retired after April 30, 2013 and have been eliminated for those who retire after 2019. There are no assets set aside for this plan.

The registered pension plans are governed by Pension Committees, while the supplemental non-registered plan is governed by the Board of Directors. The retiree welfare plan is governed by management.

 

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(b) Risks

In final average pay pension plans and retiree welfare plans, the Company generally bears the material risks which include interest rate, investment, longevity and health care cost inflation risks. In defined contribution plans, these risks are typically borne by the employee. In cash balance plans, the interest rate, investment and longevity risks are partially transferred to the employee.

Material sources of risk to the Company for all plans include:

 

 

A decline in discount rates that increases the defined benefit obligations by more than the change in value of plan assets;

 

Lower than expected rates of mortality; and

 

For retiree welfare plans, higher than expected health care costs.

The Company has managed these risks through plan design and eligibility changes that have limited the size and growth of the defined benefit obligations. Investment risks for funded plans are managed by investing significantly in asset classes which are highly correlated with the plans’ liabilities.

In the U.S., delegated committee representatives and management review the financial status of the qualified defined benefit pension plan at least monthly, and steps are taken in accordance with an established dynamic investment policy to increase the plan’s allocation to asset classes which are highly correlated with the plan’s liabilities and reduce investment risk as the funded status improves. As at December 31, 2020, the target asset allocation for the plan was 27% return-seeking assets and 73% liability-hedging assets.

In Canada, internal committees and management review the financial status of the registered defined benefit pension plans on at least a quarterly basis. As at December 31, 2020, the target asset allocation for the plans was 20% return-seeking assets and 80% liability-hedging assets.

(c) Pension and retiree welfare plans

 

     Pension plans            Retiree welfare plans  
For the years ended December 31,    2020      2019            2020      2019  

Changes in defined benefit obligation:

             

Opening balance

   $ 4,817      $ 4,675        $ 645      $ 640  

Current service cost

     41        40                  

Interest cost

     150        182          20        25  

Plan participants’ contributions

            1          3        3  

Actuarial losses (gains) due to:

             

Experience

     2        8          (14      (10

Demographic assumption changes

     (67               (12       

Economic assumption changes

     333        413          49        56  

Benefits paid

     (318      (358        (45      (46

Impact of changes in foreign exchange rates

     (57      (144        (8      (23

Defined benefit obligation, December 31

   $   4,901      $   4,817        $   638      $ 645  
     Pension plans            Retiree welfare plans  
For the years ended December 31,    2020      2019            2020      2019  

Change in plan assets:

             

Fair value of plan assets, opening balance

   $ 4,453      $ 4,187        $ 598      $   610  

Interest income

     140        164          19        25  

Return on plan assets (excluding interest income)

     310        529          33        25  

Employer contributions

     71        75          11        12  

Plan participants’ contributions

            1          3        3  

Benefits paid

     (318      (358        (45      (46

Administration costs

     (7      (9        (2      (2

Impact of changes in foreign exchange rates

     (54      (136        (11      (29

Fair value of plan assets, December 31

   $ 4,595      $ 4,453        $ 606      $ 598  

 

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(d) Amounts recognized in the Consolidated Statements of Financial Position

 

     Pension plans            Retiree welfare plans  
As at December 31,    2020      2019            2020      2019  

Development of net defined benefit liability

             

Defined benefit obligation

   $   4,901      $   4,817        $     638      $     645  

Fair value of plan assets

     4,595        4,453          606        598  

Deficit

     306        364          32        47  

Effect of asset limit(1)

            4                  

Deficit (surplus) and net defined benefit liability (asset)

     306        368          32        47  

Deficit is comprised of:

             

Funded or partially funded plans

     (446      (391        (134      (120

Unfunded plans

     752        759          166        167  

Deficit (surplus) and net defined benefit liability (asset)

   $   306      $ 368        $ 32      $ 47  

 

(1) 

In 2019, the Company recognized an impairment of $4 on the net defined benefit asset for one of its registered pension plans in Canada.

(e) Disaggregation of defined benefit obligation

 

     U.S. plans            Canadian plans  
     Pension plans      Retiree welfare plans            Pension plans      Retiree welfare plans  
As at December 31,    2020      2019      2020      2019            2020      2019      2020      2019  

Active members

   $ 551      $ 550      $ 27      $ 31        $ 211      $ 301      $      $ 25  

Inactive and retired members

     2,528        2,529        445        447          1,611        1,437        166        142  

Total

   $   3,079      $   3,079      $   472      $   478        $   1,822      $   1,738      $   166      $   167  

(f) Fair value measurements

The major categories of plan assets and the allocation to each category are as follows.

 

     U.S. plans(1)            Canadian plans(2)  
     Pension plans      Retiree welfare plans            Pension plans      Retiree welfare plans  
As at December 31, 2020    Fair value      % of total      Fair value      % of total            Fair value      % of total      Fair value      % of total  

Cash and cash equivalents

   $ 17        1%      $ 30        5%        $ 10        1%      $         

Equity securities(3)

     612        20%        49        8%          339        22%                

Debt securities

     2,175        71%        520        86%          1,186        77%                

Other investments(4)

     254        8%        7        1%          2        0%                

Total

   $   3,058        100%      $   606        100%        $   1,537        100%      $   –         
     U.S. plans(1)            Canadian plans(2)  
     Pension plans      Retiree welfare plans            Pension plans      Retiree welfare plans  
As at December 31, 2019    Fair value      % of total      Fair value      % of total            Fair value      % of total      Fair value      % of total  

Cash and cash equivalents

   $ 32        1%      $ 35        6%        $ 12        1%      $   –         

Equity securities(3)

     563        19%        45        8%          311        21%                

Debt securities

     2,155        72%        511        85%          1,123        78%                

Other investments(4)

     255        8%        7        1%          2        0%                

Total

   $ 3,005        100%      $ 598        100%        $ 1,448        100%      $         

 

(1)

All the U.S. pension and retiree welfare plan assets have daily quoted prices in active markets, except for the private equity, timber and agriculture assets. In the aggregate, the latter assets represent approximately 7% of all U.S. pension and retiree welfare plan assets as at December 31, 2020 (2019 – 7%).

(2)

All the Canadian pension plan assets have daily quoted prices in active markets, except for the group annuity contract assets that represent approximately 0.1% of all Canadian pension plan assets as at December 31, 2020 (2019 – 0.1%).

(3)

Equity securities include direct investments in MFC common shares of $1.1 (2019 – $1.3) in the U.S. retiree welfare plan and $nil (2019 – $nil) in Canada.

(4)

Other U.S. plan assets include investment in private equity, timberland and agriculture, and managed futures. Other Canadian pension plan assets include investment in the group annuity contract.

 

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(g) Net benefit cost recognized in the Consolidated Statements of Income

Components of the net benefit cost for the pension plans and retiree welfare plans were as follows.

 

     Pension plans            Retiree welfare
plans
 
For the years ended December 31,    2020      2019            2020      2019  

Defined benefit current service cost

   $   41      $ 40        $      $  

Defined benefit administrative expenses

     7        9          2        2  

Service cost

     48        49          2        2  

Interest on net defined benefit (asset) liability

     10        18          1         

Defined benefit cost

     58        67          3        2  

Defined contribution cost

     84        80                  

Net benefit cost

   $   142      $      147        $     3      $     2  

(h) Re-measurement effects recognized in Other Comprehensive Income

 

     Pension plans            Retiree welfare plans  
For the years ended December 31,    2020      2019            2020      2019  

Actuarial gains (losses) on defined benefit obligations due to:

             

Experience

   $ (2    $ (8      $ 14      $     10  

Demographic assumption changes

     67                     12         

Economic assumption changes

     (333      (413        (49      (56

Return on plan assets (excluding interest income)

         310            529          33            25  

Change in effect of asset limit

     5        5                  

Total re-measurement effects

   $ 47      $ 113        $ 10      $ (21

(i) Assumptions

The key assumptions used by the Company to determine the defined benefit obligation and net benefit cost for the defined benefit pension plans and retiree welfare plans were as follows.

 

    U.S. Plans            Canadian Plans  
    Pension plans     Retiree welfare plans            Pension plans     Retiree welfare plans  
For the years ended December 31,   2020     2019     2020     2019            2020     2019     2020     2019  

To determine the defined benefit obligation at end of year(1):

                 

Discount rate

    2.4%       3.2%       2.4%       3.2%         2.5%       3.1%       2.6%       3.1%  

Initial health care cost trend rate(2)

    n/a       n/a       7.3%       7.5%         n/a       n/a       5.5%       5.6%  

To determine the defined benefit cost for the year(1):

                 

Discount rate

    3.2%       4.3%       3.2%       4.3%         3.1%       3.8%       3.1%       3.8%  

Initial health care cost trend rate(2)

    n/a       n/a       7.5%       7.8%               n/a       n/a       5.6%       5.7%  

 

(1)

Inflation and salary increase assumptions are not shown as they do not materially affect obligations and cost.

(2)

The health care cost trend rate used to measure the U.S. based retiree welfare obligation was 7.3% grading to 4.5% for 2032 and years thereafter (2019 – 7.5% grading to 4.5% for 2032) and to measure the net benefit cost was 7.5% grading to 4.5% for 2032 and years thereafter (2019 – 7.8% grading to 5.0% for 2030). In Canada, the rate used to measure the retiree welfare obligation was 5.5% grading to 4.8% for 2026 and years thereafter (2019 – 5.6% grading to 4.8% for 2026) and to measure the net benefit cost was 5.6% grading to 4.8% for 2026 and years thereafter (2019 – 5.7% grading to 4.8% for 2026).

Assumptions regarding future mortality are based on published statistics and mortality tables. The current life expectancies underlying the values of the obligations in the defined benefit pension and retiree welfare plans are as follows.

 

As at December 31, 2020   U.S.     Canada  

Life expectancy (in years) for those currently age 65

   

Males

    21.9       23.8  

Females

    23.4       25.6  

Life expectancy (in years) at age 65 for those currently age 45

   

Males

    23.3       24.7  

Females

    24.8       26.5  

 

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(j) Sensitivity of assumptions on obligations

Assumptions used can have a significant effect on the obligations reported for defined benefit pension and retiree welfare plans. The potential impact on the obligations arising from changes in the key assumptions is set out in the following table. The sensitivities assume all other assumptions are held constant. In actuality, inter-relationships with other assumptions may exist.

 

As at December 31, 2020   Pension plans     Retiree welfare plans  

Discount rate:

   

Impact of a 1% increase

  $ (467   $ (67

Impact of a 1% decrease

        554           82  

Health care cost trend rate:

   

Impact of a 1% increase

    n/a       20  

Impact of a 1% decrease

    n/a       (17

Mortality rates(1)

   

Impact of a 10% decrease

    143       16  

 

(1)

If the actuarial estimates of mortality are adjusted in the future to reflect unexpected decreases in mortality, the effect of a 10% decrease in mortality rates at each future age would be an increase in life expectancy at age 65 of 0.8 years for U.S. males and females and 0.7 years and 0.8 years for Canadian males and females, respectively.

(k) Maturity profile

The weighted average duration (in years) of the defined benefit obligations is as follows.

 

       Pension plans              Retiree welfare plans  
As at December 31,      2020        2019              2020        2019  

U.S. plans

       9.9          9.3            9.8          9.7  

Canadian plans

       12.5          12.3            14.7          14.3  

(l) Cash flows – contributions

Total cash payments for all employee future benefits, comprised of cash contributed by the Company to funded defined benefit pension and retiree welfare plans, cash payments directly to beneficiaries in respect of unfunded pension and retiree welfare plans, and cash contributed to defined contribution pension plans, are as follows.

 

       Pension plans              Retiree welfare plans  
For the years ended December 31,      2020        2019              2020        2019  

Defined benefit plans

     $   71        $ 75          $   11        $ 12  

Defined contribution plans

       84          80                      

Total

     $   155        $   155          $ 11        $   12  

The Company’s best estimate of expected cash payments for employee future benefits for the year ending December 31, 2021 is $65 for defined benefit pension plans, $85 for defined contribution pension plans and $13 for retiree welfare plans.

Note 16     Income Taxes

(a) Income tax expense

The following table presents income tax expense (recovery) recognized in the Consolidated Statements of Income.

 

For the years ended December 31,   2020        2019  

Current tax

      

Current year

  $ 998        $   1,246  

Adjustments related to prior years

    (83        (74

Total current tax

    915          1,172  

Deferred tax

      

Change related to temporary differences

    253          (454

Effects of changes in tax rates

    27           

Total deferred tax

    280          (454

Income tax expense

  $   1,195        $ 718  

 

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The following table discloses income tax expense (recovery) recognized directly in equity.

 

For the years ended December 31,   2020        2019  

Recognized in other comprehensive income

      

Current income tax expense (recovery)

  $     (92      $ 92  

Deferred income tax expense (recovery)

    87          366  

Total recognized in other comprehensive income

  $ (5      $   458  

Recognized in equity, other than other comprehensive income

      

Current income tax expense (recovery)

  $ 25        $ 5  

Deferred income tax expense (recovery)

    (25        (6

Total income tax recognized directly in equity

  $        $ (1

(b) Current tax receivable and payable

As at December 31, 2020, the Company had approximately $993 and $87 of current tax receivable and current tax payable, respectively (2019 – $600 and $121).

(c) Tax reconciliation

The effective income tax rate reflected in the Consolidated Statements of Income varies from the Canadian tax rate of 26.50 per cent for the year ended December 31, 2020 (2019 – 26.75 per cent) for the items outlined in the following table.

 

For the years ended December 31,   2020        2019  

Income before income taxes

  $   6,770        $   6,220  

Income tax expense at Canadian statutory tax rate

  $ 1,794        $ 1,664  

Increase (decrease) in income taxes due to:

      

Tax-exempt investment income

    (171        (260

Differences in tax rate on income not subject to tax in Canada

    (528        (754

Adjustments to taxes related to prior years

    (96        (106

Tax rate change

    27           

Other differences

    169          174  

Income tax expense

  $ 1,195        $ 718  

(d) Deferred tax assets and liabilities

The following table presents the Company’s deferred tax assets and liabilities reflected on the Consolidated Statement of Financial Position.

 

As at December, 31   2020        2019  

Deferred tax assets

  $     4,842        $     4,574  

Deferred tax liabilities

    (2,614        (1,972

Net deferred tax assets (liabilities)

  $ 2,228        $ 2,602  

The following table presents movement of deferred tax assets and liabilities.

 

As at December 31, 2020   Balance,
January 1,
2020
    Disposals     Recognized
in Income
Statement
    Recognized in Other
Comprehensive
Income
    Recognized
in Equity
    Translation
and Other
    Balance,
December 31,
2020
 

Loss carryforwards

  $ 705     $         –     $ (210   $     $     $ 2     $ 497  

Actuarial liabilities

    8,443                 1,063                     (134     9,372  

Pensions and post-employment benefits

    226                   (10           (1     215  

Tax credits

                                         

Accrued interest

    1                                     1  

Real estate

    (1,046           5       (2     1       9       (1,033

Securities and other investments

    (4,704           (1,254     (59     2       72       (5,943

Sale of investments

    (69           13                         (56

Goodwill and intangible assets

    (876           24                   3       (849

Other

    (78           79       (16     22       17       24  

Total

  $     2,602     $     $ (280   $   (87   $   25     $     (32   $     2,228  

 

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As at December 31, 2019   Balance,
January 1,
2019
    Disposals     Recognized
in Income
Statement
    Recognized in
Other
Comprehensive
Income
    Recognized
in Equity
    Translation
and Other
    Balance,
December 31,
2019
 

Loss carryforwards

  $    1,019     $ (18   $ (278   $     $ (1   $ (17   $ 705  

Actuarial liabilities

    5,466             3,093             (1     (115     8,443  

Pensions and post-employment benefits

    242             4       (20                 226  

Tax credits

    261             (253                 (8      

Accrued interest

    1                                     1  

Real estate

    (959           (110                 23       (1,046

Securities and other investments

    (2,689             (1,863     (347     39       156       (4,704

Sale of investments

    (87           17                   1       (69

Goodwill and intangible assets

    (847           (49                 20       (876

Other

    97       (37     (107     1       (31     (1     (78

Total

  $ 2,504     $   (55   $ 454       $  (366   $         6     $       59     $    2,602  

The total deferred tax assets as at December 31, 2020 of $4,842 (2019 – $4,574) includes $1,005 (2019 – $98) where the Company has suffered losses in either the current or preceding year and where the recognition is dependent on future taxable profits in the relevant jurisdictions and feasible management actions.

As at December 31, 2020, tax loss carryforwards available were approximately $2,479 (2019 – $3,440) of which $2,321 expire between the years 2022 and 2040 while $137 have no expiry date, and capital loss carryforwards available were approximately $21 (2019 – $31) and have no expiry date. A $497 (2019 – $705) tax benefit related to these tax loss carryforwards has been recognized as a deferred tax asset as at December 31, 2020, and a benefit of $99 (2019 – $93) has not been recognized. In addition, the Company has approximately $154 (2019 – $157) of tax credit carryforwards which will expire between the years 2027 and 2029 of which a benefit of $154 (2019 – $157) has not been recognized.

The total deferred tax liability as at December 31, 2020 was $2,614 (2019 – $1,972). This amount includes the deferred tax liability of consolidated entities. The aggregate amount of taxable temporary differences associated with the Company’s own investments in subsidiaries is not included in the Consolidated Financial Statements and was $22,782 (2019 – $19,623).

Note 17     Interests in Structured Entities

The Company is involved with both consolidated and unconsolidated structured entities (“SEs”) which are established to generate investment and fee income. The Company is also involved with SEs that are used to facilitate financing for the Company. These entities may have some or all the following features: control is not readily identified based on voting rights; restricted activities designed to achieve a narrow objective; high amount of leverage; and/or highly structured capital.

The Company only discloses its involvement in significant consolidated and unconsolidated SEs. In assessing the significance, the Company considers the nature of its involvement with the SE, including whether it is sponsored by the Company (i.e. initially organized and managed by the Company). Other factors considered include the Company’s investment in the SE as compared to total investments, its returns from the SE as compared to total net investment income, the SE’s size as compared to total funds under management, and its exposure to any other risks from its involvement with the SE.

The Company does not provide financial or other support to its SEs, when it does not have a contractual obligation to do so.

(a) Consolidated SEs

Investment SEs

The Company acts as an investment manager of timberlands and timber companies. The Company’s general fund and segregated funds invest in many of these companies. The Company has control over one timberland company which it manages, Hancock Victoria Plantations Holdings PTY Limited (“HVPH”). HVPH is a SE primarily because the Company’s employees exercise voting rights over it on behalf of other investors. As at December 31, 2020, the Company’s consolidated timber assets relating to HVPH were $949 (2019 – $936). The Company does not provide guarantees to other parties against the risk of loss from HVPH.

Financing SEs

The Company securitizes certain insured and variable rate commercial and residential mortgages and HELOC. This activity is facilitated by consolidated entities that are SEs because their operations are limited to issuing and servicing the Company’s funding. Further information regarding the Company’s mortgage securitization program is included in note 3.

(b) Unconsolidated SEs

Investment SEs

The following table presents the Company’s investments and maximum exposure to loss from significant unconsolidated investment SEs, some of which are sponsored by the Company. The Company does not provide guarantees to other parties against the risk of loss from these SEs.

 

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     Company’s investment(1)           

Company’s maximum

exposure to loss(2)

 
As at December 31,    2020      2019            2020      2019  

Leveraged leases(3)

   $   3,371      $   3,371        $   3,371      $   3,371  

Timberland companies(4)

       776        752            776        765  

Real estate companies(5)

       497        541            497        541  

Total

   $   4,644      $ 4,664        $   4,644      $   4,677  

 

(1)

The Company’s investments in these unconsolidated SEs are included in invested assets and the Company’s returns from them are included in net investment income and AOCI.

(2)

The Company’s maximum exposure to loss from each SE is limited to amounts invested in each, plus unfunded capital commitments, if any. The Company’s investment commitments are disclosed in note 18. The maximum loss is expected to occur only upon the entity’s bankruptcy/liquidation, or in case a natural disaster in the case of the timber companies.

(3)

These entities are statutory business trusts which use capital provided by the Company and senior debt provided by other parties to finance the acquisition of assets. These assets are leased to third-party lessees under long-term leases. The Company owns equity capital in these business trusts. The Company does not consolidate any of the trusts that are party to the lease arrangements because the Company does not have decision-making power over them.

(4)

These entities own and operate timberlands. The Company invests in their equity and debt. The Company’s returns include investment income, investment advisory fees, forestry management fees and performance advisory fees. The Company does not control these entities because it either does not have the power to govern their financial and operating policies or does not have significant variable returns from them, or both.

(5)

These entities, which include the Manulife U.S. REIT, own and manage commercial real estate. The Company invests in their equity. The Company’s returns include investment income, investment management fees, property management fees, acquisition/disposition fees and leasing fees. The Company does not control these entities because it either does not have the power to govern their financial and operating policies or does not have significant variable returns from them, or both.

Financing SEs

The Company’s interests and maximum exposure to loss from significant unconsolidated financing SEs are as follows.

 

     Company’s interests(1)  
As at December 31,    2020      2019  

Manulife Finance (Delaware), L.P.(2)

   $   931      $   852  

Manulife Financial Capital Trust II(3)

       –        1  

Total

   $   931      $   853  

 

(1)

The Company’s interests include amounts borrowed from the SEs and the Company’s investment in their subordinated capital, and foreign currency and interest swaps with them, if any.

(2)

This entity is a wholly owned partnership used to facilitate the Company’s financing. Refer to notes 10 and 18.

(3)

This entity is an open-ended trust that was used to facilitate the Company’s financing. The Company redeemed all outstanding $1billion principal amount of MFCT II Senior debenture notes, at par, on December 30, 2019. Using these proceeds, the trust redeemed MFCT II Series 1 held by third parties, at par, on December 31, 2019.

(i) Other invested assets

The Company has investment relationships with a variety of other entities, which result from its direct investment in their debt and/or equity and which have been assessed for control. These other entities’ investments include but are not limited to investments in power and infrastructure, oil and gas, private equity, real estate and agriculture, organized as limited partnerships and limited liability companies. Most of these other entities are not sponsored by the Company. The Company’s involvement with these other entities is not individually significant. As such, the Company neither provides summary financial data for these entities nor individually assesses whether they are SEs. The Company’s maximum exposure to losses because of its involvement with these other entities is limited to its investment in them and amounts committed to be invested but not yet funded. The Company records its income from these entities in net investment income and AOCI. The Company does not provide guarantees to other parties against the risk of loss from these other entities.

(ii) Interest in securitized assets

The Company invests in mortgage/asset-backed securities issued by securitization vehicles sponsored by other parties, including private issuers and government sponsored issuers, to generate investment income. The Company does not own a controlling financial interest in any of the issuers. These securitization vehicles are SEs based on their narrow scope of activities and highly leveraged capital structures. Investments in mortgage/asset-backed securities are reported on the Consolidated Statements of Financial Position as debt securities and private placements, and their fair value and carrying value are disclosed in note 3. The Company’s maximum loss from these investments is limited to amounts invested.

Commercial mortgage-backed securities (“CMBS”) are secured by commercial mortgages and residential mortgage-backed securities (“RMBS”) are secured by residential mortgages. Asset-backed securities (“ABS”) may be secured by various underlying assets including credit card receivables, automobile loans and aviation leases. The mortgage/asset-backed securities that the Company invests in primarily originate in North America.

 

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The following table presents investments in securitized holdings by the type and asset quality.

 

    2020           2019  
As at December 31,   CMBS     RMBS     ABS     Total           Total  

AAA

  $   1,438     $   7     $   1,020     $   2,465       $ 2,805  

AA

      –         –         32         32         648  

A

      53         3         605         661         372  

BBB

      –         –         208         208         63  

BB and below

                76       76          

Total company exposure

  $   1,491     $   10     $   1,941     $   3,442       $   3,888  

(iii) Mutual funds

The Company sponsors and may invest in a range of public mutual funds with a broad range of investment styles. As sponsor, the Company organizes mutual funds that implement investment strategies on behalf of current and future investors. The Company earns fees which are at market rates for providing advisory and administrative services to these mutual funds. Generally, the Company does not control its sponsored mutual funds because either the Company does not have power to govern their financial and operating policies, or its returns in the form of fees and ownership interests are not significant, or both. Certain mutual funds are SEs because their decision-making rights are not vested in voting equity interests and their investors are provided with redemption rights.

The Company’s relationships with these mutual funds are not individually significant. As such, the Company neither provides summary financial data for these mutual funds nor individually assesses whether they are SEs. The Company’s interest in mutual funds is limited to its investment and fees earned, if any. The Company’s investments in mutual funds are recorded as part of its investment in public equities within the Consolidated Statements of Financial Position. For information regarding the Company’s invested assets, refer to note 3. The Company does not provide guarantees to other parties against the risk of loss from these mutual funds.

As sponsor, the Company’s investment in (“seed”) startup capital of mutual funds as at December 31, 2020 was $1,428 (2019 – $1,576). The Company’s retail mutual fund assets under management as at December  31, 2020 were $238,068 (2019 – $217,015).

Note 18     Commitments and Contingencies

(a) Legal proceedings

The Company is regularly involved in legal actions, both as a defendant and as a plaintiff. The legal actions where the Company is a party ordinarily relate to its activities as a provider of insurance protection or wealth management products, reinsurance, or in its capacity as an investment adviser, employer, or taxpayer. Other life insurers and asset managers, operating in the jurisdictions in which the Company does business, have been subject to a wide variety of other types of actions, some of which resulted in substantial judgments or settlements against the defendants; it is possible that the Company may become involved in similar actions in the future. In addition, government and regulatory bodies in Canada, the United States, Asia and other jurisdictions where the Company conducts business regularly make inquiries and, from time to time, require the production of information or conduct examinations concerning the Company’s compliance with, among other things, insurance laws, securities laws, and laws governing the activities of broker-dealers.

In June 2018, a class action was initiated against John Hancock Life Insurance Company (U.S.A.) (“JHUSA”) and John Hancock Life Insurance Company of New York (“JHNY”) in the U.S. District Court for the Southern District of New York on behalf of owners of approximately 1,500 Performance Universal Life (“UL”) policies issued between 2003 and 2009 whose policies were subject to a Cost of Insurance (“COI”) increase announced in 2018. In October 2018, a second and almost identical class action was initiated against JHUSA and JHNY in the U.S. District Court for the Southern District of New York. The two cases were determined to be related, and they were consolidated and assigned to the same judge. Discovery has commenced in these cases. No hearings on substantive matters have been scheduled. It is too early to assess the range of potential outcomes for these two related lawsuits. In addition to the consolidated class action, there are seven non-class lawsuits opposing the Performance UL COI increases that also have been filed. Each of the lawsuits, except one, is brought by plaintiffs owning multiple policies and by entities managing them for investment purposes. Two of the non-class lawsuits are pending in New York state court; two of the lawsuits are pending in the U.S. District Court for the Southern District of New York; and three lawsuits are pending in the U.S. District Court for the Central District of California. Whether individually or on a combined basis, it remains premature, given the procedural status of these cases, as well as the relatively early development of parties’ respective legal theories, to suggest a reliable estimate of potential outcomes.

(b) Investment commitments

In the normal course of business, various investment commitments are outstanding which are not reflected in the Consolidated Financial Statements. There were $9,937 (2019 – $8,682) of outstanding investment commitments as at December 31, 2020, of which $638 (2019 – $411) mature in 30 days, $2,634 (2019 – $2,507) mature in 31 to 365 days and $6,665 (2019 – $5,764) mature after one year.

 

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(c) Letters of credit

In the normal course of business, third-party relationship banks issue letters of credit on the Company’s behalf. The Company’s businesses utilize letters of credit for which third parties are the beneficiaries, as well as for affiliate reinsurance transactions between its subsidiaries. As at December 31, 2020, letters of credit for which third parties are beneficiary, in the amount of $103 (2019 – $57), were outstanding.

(d) Guarantees

(i) Guarantees regarding Manulife Finance (Delaware), L.P. (“MFLP”)

MFC has guaranteed the payment of amounts on the $650 subordinated debentures due on December 15, 2041 issued by MFLP, a wholly owned unconsolidated partnership.

(ii) Guarantees regarding The Manufacturers Life Insurance Company

MFC has provided a subordinated guarantee on the day of issuance for the following subordinated debentures issued by MLI: $350 issued on June 1, 2015; and $1,000 issued on November 20, 2015.

The following table presents certain condensed consolidated financial information for MFC and MFLP.

Condensed Consolidated Statements of Income Information

 

For the year ended December 31, 2020   MFC
(Guarantor)
    MLI
consolidated
    Other
subsidiaries of
MFC on a
combined basis
    Consolidation
adjustments
    Total
consolidated
amounts
          MFLP  

Total revenue

  $ 547     $ 78,929     $ 520     $   (1,088   $   78,908       $ 32  

Net income (loss) attributed to shareholders

    5,871       6,179       (500     (5,679     5,871         (1
For the year ended December 31, 2019   MFC
(Guarantor)
    MLI
consolidated
    Other
subsidiaries of
MFC on a
combined basis
    Consolidation
adjustments
    Total
consolidated
amounts
          MFLP  

Total revenue

  $ 371     $   79,711     $       417     $ (929   $ 79,570       $       32  

Net income (loss) attributed to shareholders

      5,602       5,963       (401     (5,562     5,602         (1

Condensed Consolidated Statements of Financial Position

 

As at December 31, 2020   MFC
(Guarantor)
    MLI
consolidated
    Other
subsidiaries of
MFC on a
combined basis
    Consolidation
adjustments
    Total
consolidated
amounts
          MFLP  

Invested assets

  $ 47     $ 410,919     $ 11     $     $ 410,977       $          5  

Total other assets

    64,419       102,439       3       (64,925     101,936           1,166  

Segregated funds net assets

          367,436                   367,436          

Insurance contract liabilities

          385,554                   385,554          

Investment contract liabilities

          3,288                   3,288          

Segregated funds net liabilities

          367,436                   367,436          

Total other liabilities

    12,131       59,683             (749     71,065         936  
As at December 31, 2019   MFC
(Guarantor)
    MLI
consolidated
    Other
subsidiaries of
MFC on a
combined basis
    Consolidation
adjustments
    Total
consolidated
amounts
          MFLP  

Invested assets

  $ 21     $   378,496     $   10     $     $   378,527       $ 6  

Total other assets

      57,474       87,774       3         (57,756     87,495         1,088  

Segregated funds net assets

          343,108                   343,108          

Insurance contract liabilities

          351,161                   351,161          

Investment contract liabilities

          3,104                   3,104          

Segregated funds net liabilities

          343,108                   343,108          

Total other liabilities

    8,357       53,998             (704     61,651         858  

(iii) Guarantees regarding John Hancock Life Insurance Company (U.S.A.) (“JHUSA”)

Details of guarantees regarding certain securities issued or to be issued by JHUSA are outlined in note 23.

 

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(e) Pledged assets

In the normal course of business, the Company pledges its assets in respect of liabilities incurred, strictly for providing collateral to the counterparty. In the event of the Company’s default, the counterparty is entitled to apply the collateral to settle the liability. The pledged assets are returned to the Company if the underlying transaction is terminated or, in the case of derivatives, if there is a decrease in the net exposure due to market value changes.

The amounts pledged are as follows.

 

    2020           2019  
As at December 31,   Debt securities      Other           Debt securities      Other  

In respect of:

           

Derivatives

  $   5,924      $   35       $   4,257      $ 17  

Secured borrowings(1)

           2,790                 

Regulatory requirements

    452        80         433        67  

Repurchase agreements

    353                330         

Non-registered retirement plans in trust

           424                407  

Other

    2        302         3        331  

Total

  $ 6,731      $   3,631       $ 5,023      $   822  

 

(1) 

During the year, the Company pledged its mortgage loans with the Federal Home Loan Bank of Indianapolis (“FHLBI”). Of this amount, $937 is required collateral for the US$500 outstanding borrowing to JHUSA under the FHLBI facility; and $1,853 is excess collateral that can be called back by JHUSA at any time.

(f) Participating business

In some territories where the Company maintains participating accounts, there are regulatory restrictions on the amounts of profit that can be transferred to shareholders. Where applicable, these restrictions generally take the form of a fixed percentage of policyholder dividends. For participating businesses operating as separate “closed blocks”, transfers are governed by the terms of MLI’s and John Hancock Mutual Life Insurance Company’s plans of demutualization.

(g) Fixed surplus notes

A third party contractually provides standby financing arrangements for the Company’s U.S. operations under which, in certain circumstances, funds may be provided in exchange for the issuance of fixed surplus notes. As at December 31, 2020, the Company had no fixed surplus notes outstanding.

Note 19     Segmented Information

The Company’s reporting segments are Asia, Canada, U.S., Global WAM and Corporate and Other. Each reporting segment is responsible for managing its operating results, developing products, defining strategies for services and distribution based on the profile and needs of its business and market. The Company’s significant product and service offerings by the reporting segments are mentioned below.

Wealth and asset management businesses (Global WAM) – include mutual funds and exchange-traded funds, group retirement and savings products, and institutional asset management services across all major asset classes. These products and services are distributed through multiple distribution channels, including agents and brokers affiliated with the Company, independent securities brokerage firms and financial advisors pension plan consultants and banks.

Insurance and annuity products (Asia, Canada and U.S.) – includes a variety of individual life insurance, individual and group long-term care insurance and guaranteed and partially guaranteed annuity products. Products are distributed through multiple distribution channels, including insurance agents, brokers, banks, financial planners and direct marketing. Manulife Bank of Canada offers a variety of deposit and credit products to Canadian customers.

Corporate and Other Segment – comprised of investment performance on assets backing capital, net of amounts allocated to operating segments; costs incurred by the corporate office related to shareholder activities (not allocated to operating segments); financing costs; Property and Casualty (“P&C”) Reinsurance Business; and run-off reinsurance operations including variable annuities and accident and health.

 

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Reporting segments

 

As at and for the year ended December 31, 2020   Asia     Canada     U.S.     Global WAM     Corporate
and Other
    Total  

Revenue

           

Life and health insurance

  $ 17,983     $ 8,833     $ 3,011     $     $ 140     $ 29,967  

Annuities and pensions

    2,496       334       120                   2,950  

Net premium income

    20,479       9,167       3,131             140       32,917  

Net investment income (loss)

    6,630       8,458       17,519       39       2,754       35,400  

Other revenue

    1,346       1,013       2,711       5,710       (189     10,591  

Total revenue

    28,455       18,638       23,361       5,749       2,705       78,908  

Contract benefits and expenses

           

Life and health insurance

    17,997       10,385       16,099             (131     44,350  

Annuities and pensions

    3,430       4,380       2,929       146             10,885  

Net benefits and claims

    21,427       14,765       19,028       146       (131     55,235  

Interest expense

    269       342       54       2       514       1,181  

Other expenses

    5,123       3,141       2,714       4,329       414       15,721  

Total contract benefits and expenses

    26,819       18,248       21,796       4,477       797       72,137  

Income (loss) before income taxes

    1,636       390       1,565       1,272       1,908       6,771  

Income tax recovery (expense)

    (233     (131     (296     (172     (363     (1,195

Net income (loss)

    1,403       259       1,269       1,100       1,545       5,576  

Less net income (loss) attributed to:

           

Non-controlling interests

    250                               250  

Participating policyholders

    (609     64                         (545

Net income (loss) attributed to shareholders

  $ 1,762     $ 195     $ 1,269     $ 1,100     $ 1,545     $ 5,871  

Total assets

  $ 145,801     $ 167,236     $ 288,814     $ 236,593     $ 41,905     $ 880,349  
The following table presents results by reporting segments.            
As at and for the year ended December 31, 2019   Asia     Canada     U.S.     Global WAM     Corporate
and Other
    Total  

Revenue

           

Life and health insurance

  $ 17,107     $ 8,714     $ 6,522     $     $ 112     $ 32,455  

Annuities and pensions

    2,900       361       (138                 3,123  

Net premium income

    20,007       9,075       6,384             112       35,578  

Net investment income (loss)

    7,451       9,446       15,556       33       1,107       33,593  

Other revenue

    1,215       1,088       2,654       5,562       (120     10,399  

Total revenue

    28,673       19,609       24,594       5,595       1,099       79,570  

Contract benefits and expenses

           

Life and health insurance

    17,975       10,572       19,320             (36     47,831  

Annuities and pensions

    3,090       4,312       599       83             8,084  

Net benefits and claims

    21,065       14,884       19,919       83       (36     55,915  

Interest expense

    236       508       43       6       526       1,319  

Other expenses

    5,148       3,237       2,944       4,362       425       16,116  

Total contract benefits and expenses

    26,449       18,629       22,906       4,451       915       73,350  

Income (loss) before income taxes

    2,224       980       1,688       1,144       184       6,220  

Income tax recovery (expense)

    (277     25       (260     (122     (84     (718

Net income (loss)

    1,947       1,005       1,428       1,022       100       5,502  

Less net income (loss) attributed to:

           

Non-controlling interests

    228                         5       233  

Participating policyholders

    (216     (117                       (333

Net income (loss) attributed to shareholders

  $ 1,935     $ 1,122     $ 1,428     $ 1,022     $ 95     $ 5,602  

Total assets

  $   127,367     $   159,042     $   274,993     $   216,348     $   31,380     $   809,130  

 

Geographical location

The results of the Company’s reporting segments differ from its geographical location primarily due to the allocation of Global WAM and Corporate and Other segments into the geographical location to which its businesses relate.

 

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The following table presents results by geographical location.

 

For the year ended December 31, 2020   Asia     Canada     U.S.     Other     Total  

Revenue

         

Life and health insurance

  $ 18,072     $ 8,474     $ 3,012     $ 409     $ 29,967  

Annuities and pensions

    2,496       334       120             2,950  

Net premium income

    20,568       8,808       3,132       409       32,917  

Net investment income (loss)

    7,085       8,531       19,735       49       35,400  

Other revenue

    2,300       2,671       5,600       20       10,591  

Total revenue

  $ 29,953     $ 20,010     $ 28,467     $ 478     $ 78,908  
For the year ended December 31, 2019   Asia     Canada     U.S.     Other     Total  

Revenue

         

Life and health insurance

  $ 17,178     $ 8,388     $ 6,523     $ 366     $ 32,455  

Annuities and pensions

    2,900       361       (138           3,123  

Net premium income

    20,078       8,749       6,385       366       35,578  

Net investment income (loss)

    7,750       9,801       15,816       226       33,593  

Other revenue

    2,100       2,651       5,641       7       10,399  

Total revenue

  $   29,928     $   21,201     $   27,842     $   599     $   79,570  

Note 20    Related Parties

The Company enters into transactions with related parties in the normal course of business and at the terms that would exist in arm’s-length transactions.

(a) Transactions with certain related parties

Transactions with MFLP, a wholly owned unconsolidated partnership, and MFCT, a wholly owned unconsolidated trust, are described in notes 10, 17 and 18. Refer to note 3(a) for additional transactions with related parties.

(b) Compensation of key management personnel

The Company’s key management personnel are those personnel who have the authority and responsibility for planning, directing and controlling the activities of the Company. Directors (both executive and non-executive) and senior management are considered key personnel. A summary of compensation of key management personnel is as follows.

 

For the years ended December 31,   2020        2019  

Short-term employee benefits

  $ 69        $ 67  

Post-employment benefits

    5          5  

Share-based payments

    57          55  

Termination benefits

             8  

Other long-term benefits

    3          2  

Total

  $   134        $   137  

Note 21    Subsidiaries

The following is a list of Manulife’s directly and indirectly held major operating subsidiaries.

 

As at December 31, 2020

(100% owned unless otherwise noted in brackets beside company name)

  Equity
Interest
  Address   Description

The Manufacturers Life Insurance Company

  $  63,379   Toronto, Canada   Leading Canadian-based financial services company that offers a diverse range of financial protection products and wealth management services

Manulife Holdings (Alberta) Limited

  $  23,967   Calgary, Canada   Holding company

John Hancock Financial Corporation

      Boston, U.S.A.   Holding company

The Manufacturers Investment Corporation

      Boston, U.S.A.   Holding company

John Hancock Reassurance Company Ltd.

      Boston, U.S.A.   Captive insurance subsidiary that provides life, annuity and long-term care reinsurance to affiliates

 

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As at December 31, 2020

(100% owned unless otherwise noted in brackets beside company name)

  Equity
Interest
  Address   Description

John Hancock Life Insurance Company (U.S.A.)

      Boston, U.S.A.   U.S. life insurance company licensed in all states, except New York

John Hancock Subsidiaries LLC

      Boston, U.S.A.   Holding company

John Hancock Financial Network, Inc.

      Boston, U.S.A.   Financial services distribution organization

John Hancock Investment Management LLC

      Boston, U.S.A.   Investment advisor

John Hancock Investment Management Distributors LLC

      Boston, U.S.A.   Broker-dealer

Manulife Investment Management (US) LLC

      Boston, U.S.A.   Investment advisor

Hancock Natural Resource Group, Inc.

      Boston, U.S.A.   Manager of globally diversified timberland and agricultural portfolios

John Hancock Life Insurance Company of New York

      New York, U.S.A.   U.S. life insurance company licensed in New York

John Hancock Variable Trust Advisers LLC

      Boston, U.S.A.   Investment advisor for open-end mutual funds

John Hancock Life & Health Insurance Company

      Boston, U.S.A.   U.S. life insurance company licensed in all states

John Hancock Distributors LLC

      Boston, U.S.A.   Broker-dealer

John Hancock Insurance Agency, Inc.

      Boston, U.S.A.   Insurance agency

Manulife Reinsurance Limited

      Hamilton, Bermuda   Provides life and financial reinsurance to affiliates

Manulife Reinsurance (Bermuda) Limited

      Hamilton, Bermuda   Provides life and annuity reinsurance to affiliates

Manulife Bank of Canada

  $  1,686   Waterloo, Canada   Provides integrated banking products and service options not available from an insurance company

Manulife Investment Management Holdings (Canada) Inc.

  $  945   Toronto, Canada   Holding company

Manulife Investment Management Limited

      Toronto, Canada   Provides investment counseling, portfolio and mutual fund management in Canada

First North American Insurance Company

  $  8   Toronto, Canada   Property and casualty insurance company

NAL Resources Management Limited

      Calgary, Canada   Management company for oil and gas properties

Manulife Resources Limited

  $  20   Calgary, Canada   Holds oil and gas properties

Manulife Property Limited Partnership

      Toronto, Canada   Holds oil and gas royalties

Manulife Property Limited Partnership II

  $  479   Toronto, Canada   Holds oil and gas royalties and foreign bonds and equities

Manulife Western Holdings Limited Partnership

      Calgary, Canada   Holds oil and gas properties

Manulife Securities Investment Services Inc.

  $  76   Oakville, Canada   Mutual fund dealer for Canadian operations

Manulife Holdings (Bermuda) Limited

  $  21,794   Hamilton, Bermuda   Holding company

Manufacturers P&C Limited

      St. Michael, Barbados   Provides property and casualty reinsurance

Manulife Financial Asia Limited

      Hong Kong, China   Holding company

Manulife (Cambodia) PLC

      Phnom Penh, Cambodia   Life insurance company

Manulife Myanmar Life Insurance Company Limited

      Yangon, Myanmar   Life insurance company

Manufacturers Life Reinsurance Limited

      St. Michael, Barbados   Provides life and annuity reinsurance to affiliates

Manulife (Vietnam) Limited

      Ho Chi Minh City, Vietnam   Life insurance company

Manulife Investment Fund Management (Vietnam) Company Limited

      Ho Chi Minh City, Vietnam   Fund management company

Manulife International Holdings Limited

      Hong Kong, China   Holding company

Manulife (International) Limited

      Hong Kong, China   Life insurance company

Manulife-Sinochem Life Insurance Co. Ltd. (51%)

      Shanghai, China   Life insurance company

Manulife Investment Management International Holdings Limited

      Hong Kong, China   Holding company

 

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As at December 31, 2020

(100% owned unless otherwise noted in brackets beside company name)

  Equity
Interest
  Address   Description

Manulife Investment Management (Hong Kong) Limited

      Hong Kong, China   Investment management and advisory company marketing mutual funds

Manulife Investment Management (Taiwan) Co., Ltd.

      Taipei, Taiwan (China)   Asset management company

Manulife Life Insurance Company (Japan)

      Tokyo, Japan   Life insurance company

Manulife Investment Management (Japan) Limited

      Tokyo, Japan   Investment management and advisory company and mutual fund business

Manulife Insurance (Thailand) Public Company Limited (85.6%)(1)

      Bangkok, Thailand   Life insurance company

Manulife Asset Management (Thailand) Company Limited (93.5%)(1)

      Bangkok, Thailand   Investment management company

Manulife Holdings Berhad (60.2%)

      Kuala Lumpur, Malaysia   Holding company

Manulife Insurance Berhad (60.2%)

      Kuala Lumpur, Malaysia   Life insurance company

Manulife Investment Management (Malaysia) Bhd (60.2%)

      Kuala Lumpur, Malaysia   Asset management company

Manulife (Singapore) Pte. Ltd.

      Singapore   Life insurance company

Manulife Investment Management (Singapore) Pte. Ltd.

      Singapore   Asset management company

The Manufacturers Life Insurance Co. (Phils.), Inc.

      Makati City, Philippines   Life insurance company

Manulife Chinabank Life Assurance Corporation (60%)

      Makati City, Philippines   Life insurance company

PT Asuransi Jiwa Manulife Indonesia

      Jakarta, Indonesia   Life insurance company

PT Manulife Aset Manajemen Indonesia

      Jakarta, Indonesia   Investment management and investment advisor

Manulife Investment Management (Europe) Limited

  $  37   London, England   Investment management company for Manulife Financial’s international funds

Manulife Assurance Company of Canada

  $  71   Toronto, Canada   Life insurance company

EIS Services (Bermuda) Limited

  $  1,064   Hamilton, Bermuda   Investment holding company

Berkshire Insurance Services Inc.

  $  1,726   Toronto, Canada   Investment holding company

JH Investments (Delaware), LLC

      Boston, U.S.A.   Investment holding company

Manulife Securities Incorporated

  $  133   Oakville, Canada   Investment dealer

Manulife Investment Management (North America) Limited

  $  5   Toronto, Canada   Investment advisor

 

(1)

MFC voting rights percentages are the same as the ownership percentages except for Manulife Insurance (Thailand) Public Company Limited and Manulife Asset Management (Thailand) Company Limited where MFC’s voting rights are 97.0% and 98.7%, respectively.

Note 22    Segregated Funds

The Company manages segregated funds on behalf of policyholders. Policyholders are provided with the opportunity to invest in different categories of segregated funds that respectively hold a range of underlying investments. The Company retains legal title to the underlying investments; however, returns from these investments belong to the policyholders. Accordingly, the Company does not bear the risk associated with these assets outside of guarantees offered on certain variable life and annuity products. The “Risk Management” section of the Company’s 2020 MD&A provides information regarding the variable annuity and segregated fund guarantees.

The composition of net assets by categories of segregated funds was within the following ranges for the years ended December 31, 2020 and 2019.

 

    Ranges in per cent  
Type of fund   2020     2019  

Money market funds

    2% to 3%       2% to 3%  

Fixed income funds

    14% to 16%       14% to 15%  

Balanced funds

    23% to 24%       24% to 25%  

Equity funds

    58% to 60%       58% to 60%  

 

 

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Money market funds consist of investments that have a term to maturity of less than one year. Fixed income funds primarily consist of investments in fixed grade income securities and may contain smaller investments in diversified equities or high-yield bonds. Relative to fixed income funds, balanced funds consist of fixed income securities and a larger equity investment component. The types of equity funds available to policyholders range from low volatility equity funds to aggressive equity funds. Equity funds invest in a varying mix of Canadian, U.S. and global equities.

The underlying investments of the segregated funds consist of both individual securities and mutual funds (collectively “net assets”), some of which may be structured entities. The carrying value and change in segregated funds net assets are as follows. Fair value related information of segregated funds is disclosed in note 3(g).

Segregated funds net assets

 

As at December 31,   2020     2019  

Investments at market value

   

Cash and short-term securities

  $ 4,054     $ 3,364  

Debt securities

    17,913       16,883  

Equities

    14,227       12,989  

Mutual funds

    326,889       304,753  

Other investments

    4,599       4,785  

Accrued investment income

    1,670       1,678  

Other assets and liabilities, net

    (1,543     (975

Total segregated funds net assets

  $ 367,809     $   343,477  

Composition of segregated funds net assets

   

Held by policyholders

  $ 367,436     $ 343,108  

Held by the Company

    373       369  

Total segregated funds net assets

  $   367,809     $ 343,477  

Changes in segregated funds net assets

 

For the years ended December 31,   2020     2019  

Net policyholder cash flow

   

Deposits from policyholders

  $ 38,898     $ 38,561  

Net transfers to general fund

    (1,515     (1,000

Payments to policyholders

    (44,818     (49,372
      (7,435     (11,811

Investment related

   

Interest and dividends

    16,775       18,872  

Net realized and unrealized investment gains (losses)

    24,514       37,643  
      41,289       56,515  

Other

   

Management and administration fees

    (3,942     (3,926

Impact of changes in foreign exchange rates

    (5,580     (10,897
      (9,522     (14,823

Net additions

    24,332       29,881  

Segregated funds net assets, beginning of year

    343,477       313,596  

Segregated funds net assets, end of year

  $   367,809     $   343,477  

Segregated funds assets may be exposed to a variety of financial and other risks. These risks are primarily mitigated by investment guidelines that are actively monitored by professional and experienced portfolio advisors. The Company is not exposed to these risks beyond the liabilities related to guarantees associated with certain variable life and annuity products. Accordingly, the Company’s exposure to loss from segregated fund products is limited to the value of these guarantees.

These guarantees are recorded within the Company’s insurance contract liabilities. Assets supporting these guarantees are recognized in invested assets according to their investment type.

Note 23    Information Provided in Connection with Investments in Deferred Annuity Contracts and SignatureNotes Issued or Assumed by John Hancock Life Insurance Company (U.S.A.)

The following condensed consolidated financial information, presented in accordance with IFRS, and the related disclosure have been included in these Consolidated Financial Statements with respect to JHUSA in compliance with Regulation S-X and Rule 12h-5 of the United States Securities and Exchange Commission (the “Commission”). These financial statements are incorporated by reference in the MFC and its subsidiaries registration statements that are described below and which relate to MFC’s guarantee of certain securities to be issued by its subsidiaries.

 

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JHUSA maintains a book of deferred annuity contracts that feature a market value adjustment, some of which are registered with the Commission. The deferred annuity contracts may contain variable investment options along with fixed investment period options, or may offer only fixed investment period options. The fixed investment period options enable the participant to invest fixed amounts of money for fixed terms at fixed interest rates, subject to a market value adjustment if the participant desires to terminate a fixed investment period before its maturity date. The annuity contract provides for the market value adjustment to keep the parties whole with respect to the fixed interest bargain for the entire fixed investment period. These fixed investment period options that contain a market value adjustment feature are referred to as “MVAs”.

JHUSA may also sell medium-term notes to retail investors under its SignatureNotes program.

Effective December 31, 2009, John Hancock Variable Life Insurance Company (the “Variable Company”) and John Hancock Life Insurance Company (the “Life Company”) merged with and into JHUSA. In connection with the mergers, JHUSA assumed the Variable Company’s rights and obligations with respect to the MVAs issued by the Variable Company and the Life Company’s rights and obligations with respect to the SignatureNotes issued by the Life Company.

MFC fully and unconditionally guaranteed the payment of JHUSA’s obligations under the MVAs and under the SignatureNotes (including the MVAs and SignatureNotes assumed by JHUSA in the merger), and such MVAs and the SignatureNotes were registered with the Commission. The SignatureNotes and MVAs assumed or issued by JHUSA are collectively referred to in this note as the “Guaranteed Securities”. JHUSA is, and each of the Variable Company and the Life Company was, a wholly owned subsidiary of MFC.

MFC’s guarantees of the Guaranteed Securities are unsecured obligations of MFC and are subordinated in right of payment to the prior payment in full of all other obligations of MFC, except for other guarantees or obligations of MFC which by their terms are designated as ranking equally in right of payment with or subordinate to MFC’s guarantees of the Guaranteed Securities.

The laws of the State of New York govern MFC’s guarantees of the SignatureNotes issued or assumed by JHUSA and the laws of the Commonwealth of Massachusetts govern MFC’s guarantees of the MVAs issued or assumed by JHUSA. MFC has consented to the jurisdiction of the courts of New York and Massachusetts. However, because a substantial portion of MFC’s assets are located outside the United States, the assets of MFC located in the United States may not be sufficient to satisfy a judgment given by a federal or state court in the United States to enforce the subordinate guarantees. In general, the federal laws of Canada and the laws of the Province of Ontario, where MFC’s principal executive offices are located, permit an action to be brought in Ontario to enforce such a judgment provided that such judgment is subsisting and unsatisfied for a fixed sum of money and not void or voidable in the United States and a Canadian court will render a judgment against MFC in a certain dollar amount, expressed in Canadian dollars, subject to customary qualifications regarding fraud, violations of public policy, laws limiting the enforcement of creditor’s rights and applicable statutes of limitations on judgments. There is currently no public policy in effect in the Province of Ontario that would support avoiding the recognition and enforcement in Ontario of a judgment of a New York or Massachusetts court on MFC’s guarantees of the SignatureNotes issued or assumed by JHUSA or a Massachusetts court on guarantees of the MVAs issued or assumed by JHUSA.

MFC is a holding company. MFC’s assets primarily consist of investments in its subsidiaries. MFC’s cash flows primarily consist of dividends and interest payments from its operating subsidiaries, offset by expenses and shareholder dividends and MFC stock repurchases. As a holding company, MFC’s ability to meet its cash requirements, including, but not limited to, paying any amounts due under its guarantees, substantially depends upon dividends from its operating subsidiaries.

These subsidiaries are subject to certain regulatory restrictions under laws in Canada, the United States and certain other countries, which may limit their ability to pay dividends or make contributions or loans to MFC. For example, some of MFC’s subsidiaries are subject to restrictions prescribed by the ICA on their ability to declare and pay dividends. The restrictions related to dividends imposed by the ICA are described in note 12.

In the United States, insurance laws in Michigan, New York, and Massachusetts, the jurisdictions in which certain of MFC’s U.S. insurance company subsidiaries are domiciled, impose general limitations on the payment of dividends and other upstream distributions or loans by these insurance subsidiaries. These limitations are described in note 12.

In Asia, the insurance laws of the jurisdictions in which MFC operates either provide for specific restrictions on the payment of dividends or other distributions or loans by subsidiaries or impose solvency or other financial tests, which could affect the ability of subsidiaries to pay dividends in certain circumstances.

There can be no assurance that any current or future regulatory restrictions in Canada, the United States or Asia will not impair MFC’s ability to meet its cash requirements, including, but not limited to, paying any amounts due under its guarantees.

The following condensed consolidated financial information, presented in accordance with IFRS, reflects the effects of the mergers and is provided in compliance with Regulation S-X and in accordance with Rule 12h-5 of the Commission.

 

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Condensed Consolidated Statement of Financial Position

 

As at December 31, 2020   MFC
(Guarantor)
    JHUSA
(Issuer)
    Other
subsidiaries
    Consolidation
adjustments
    Consolidated
MFC
 

Assets

         

Invested assets

  $ 47     $ 112,735     $ 298,524     $ (329   $ 410,977  

Investments in unconsolidated subsidiaries

    64,209       8,078       17,194       (89,481      

Reinsurance assets

          65,731       11,172       (31,067     45,836  

Other assets

    210       25,489       52,648       (22,247     56,100  

Segregated funds net assets

          191,955       178,224       (2,743     367,436  

Total assets

  $ 64,466     $ 403,988     $ 557,762     $ (145,867   $ 880,349  

Liabilities and equity

         

Insurance contract liabilities

  $     $ 167,453     $ 249,909     $ (31,808   $ 385,554  

Investment contract liabilities

          1,208       2,081       (1     3,288  

Other liabilities

    718       25,594       52,761       (22,001     57,072  

Long-term debt

    6,164                         6,164  

Capital instruments

    5,249       584       1,996             7,829  

Segregated funds net liabilities

          191,955       178,224       (2,743     367,436  

Shareholders’ equity

    52,335       17,194       72,120       (89,314     52,335  

Participating policyholders’ equity

                (784           (784

Non-controlling interests

                1,455             1,455  

Total liabilities and equity

  $   64,466     $   403,988     $   557,762     $   (145,867   $   880,349  

Condensed Consolidated Statement of Financial Position

 

As at December 31, 2019   MFC
(Guarantor)
    JHUSA
(Issuer)
    Other
subsidiaries
    Consolidation
adjustments
    Consolidated
MFC
 

Assets

         

Invested assets

  $ 21     $ 107,746     $ 271,100     $ (340   $ 378,527  

Investments in unconsolidated subsidiaries

    57,068       7,467       16,983       (81,518      

Reinsurance assets

          61,310       10,080       (29,944     41,446  

Other assets

    406       20,859       45,111       (20,327     46,049  

Segregated funds net assets

          181,982       162,845       (1,719     343,108  

Total assets

  $ 57,495     $ 379,364     $ 506,119     $   (133,848   $   809,130  

Liabilities and equity

         

Insurance contract liabilities

  $     $ 157,398     $ 224,378     $ (30,615   $ 351,161  

Investment contract liabilities

          1,091       2,014       (1     3,104  

Other liabilities

    537       21,311       48,226       (20,086     49,988  

Long-term debt

    4,543                         4,543  

Capital instruments

    3,277       599       3,244             7,120  

Segregated funds net liabilities

          181,982       162,845       (1,719     343,108  

Shareholders’ equity

    49,138       16,983       64,444       (81,427     49,138  

Participating policyholders’ equity

                (243           (243

Non-controlling interests

                1,211             1,211  

Total liabilities and equity

  $   57,495     $   379,364     $   506,119     $ (133,848   $ 809,130  

 

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Condensed Consolidated Statement of Income

 

For the year ended December 31, 2020   MFC
(Guarantor)
    JHUSA
(Issuer)
    Other
subsidiaries
    Consolidation
adjustments
    Consolidated
MFC
 

Revenue

         

Gross premiums

  $     $ 8,057     $ 34,459     $ (1,108   $   41,408  

Premiums ceded to reinsurers

          (6,585     (3,014     1,108       (8,491

Net premium income

          1,472       31,445             32,917  

Net investment income (loss)

    542       14,204       21,727       (1,073     35,400  

Net other revenue

    5       2,869       12,884       (5,167     10,591  

Total revenue

    547       18,545       66,056       (6,240     78,908  

Contract benefits and expenses

         

Net benefits and claims

          14,804       44,293       (3,862     55,235  

Commissions, investment and general expenses

    17       3,146       13,573       (1,396     15,340  

Other expenses

    434       230       1,880       (982     1,562  

Total contract benefits and expenses

    451         18,180         59,746       (6,240       72,137  

Income (loss) before income taxes

    96       365       6,310             6,771  

Income tax (expense) recovery

    (26     54       (1,223           (1,195

Income (loss) after income taxes

    70       419       5,087             5,576  

Equity in net income (loss) of unconsolidated subsidiaries

    5,801       1,344       1,763       (8,908      

Net income (loss)

  $ 5,871     $ 1,763     $ 6,850     $ (8,908   $ 5,576  

Net income (loss) attributed to:

         

Non-controlling interests

  $     $     $ 250     $     $ 250  

Participating policyholders

                (545           (545

Shareholders

    5,871       1,763       7,145       (8,908     5,871  
    $   5,871     $ 1,763     $ 6,850     $   (8,908   $ 5,576  

Condensed Consolidated Statement of Income

 

For the year ended December 31, 2019   MFC
(Guarantor)
    JHUSA
(Issuer)
    Other
subsidiaries
    Consolidation
adjustments
    Consolidated
MFC
 

Revenue

         

Gross premiums

  $     $ 8,599     $ 33,620     $ (1,160   $   41,059  

Premiums ceded to reinsurers

          (3,575     (3,066     1,160       (5,481

Net premium income

          5,024       30,554             35,578  

Net investment income (loss)

    355         12,128       22,108       (998     33,593  

Net other revenue

    16       2,866       11,447       (3,930     10,399  

Total revenue

    371       20,018       64,109       (4,928     79,570  

Contract benefits and expenses

         

Net benefits and claims

          17,133       41,220       (2,438       55,915  

Commissions, investment and general expenses

    20       3,299       13,938       (1,530     15,727  

Other expenses

    421       206       2,041       (960     1,708  

Total contract benefits and expenses

    441       20,638         57,199       (4,928     73,350  

Income (loss) before income taxes

    (70     (620     6,910             6,220  

Income tax (expense) recovery

    18       347       (1,083           (718

Income (loss) after income taxes

    (52     (273     5,827             5,502  

Equity in net income (loss) of unconsolidated subsidiaries

    5,654       772       499       (6,925      

Net income (loss)

  $   5,602     $ 499     $ 6,326     $   (6,925   $ 5,502  

Net income (loss) attributed to:

         

Non-controlling interests

  $     $     $ 233     $     $ 233  

Participating policyholders

          2       (333     (2     (333

Shareholders

    5,602       497       6,426       (6,923     5,602  
    $ 5,602     $ 499     $ 6,326     $ (6,925   $ 5,502  

 

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Consolidated Statement of Cash Flows

 

For the year ended December 31, 2020  

MFC

(Guarantor)

   

JHUSA

(Issuer)

   

Other

subsidiaries

   

Consolidation

adjustments

   

Consolidated

MFC

 

Operating activities

         

Net income (loss)

  $     5,871     $       1,763     $       6,850     $ (8,908   $       5,576  

Adjustments:

         

Equity in net income of unconsolidated subsidiaries

    (5,801     (1,344     (1,763           8,908        

Increase (decrease) in insurance contract liabilities

          11,937       25,045               36,982  

Increase (decrease) in investment contract liabilities

          48       130             178  

(Increase) decrease in reinsurance assets excluding coinsurance transactions

          (3,133     759             (2,374

Amortization of (premium) discount on invested assets

          54       100             154  

Other amortization

    7       145       504             656  

Net realized and unrealized (gains) losses and impairment on assets

    1       (9,420     (13,102           (22,521

Deferred income tax expense (recovery)

    25       (784     1,039             280  

Stock option expense

          3       11             14  

Cash provided by (used in) operating activities before undernoted items

    103       (731     19,573             18,945  

Dividends from unconsolidated subsidiary

    3,000       411       1,270       (4,681      

Changes in policy related and operating receivables and payables

    91       8,459       (7,447           1,103  

Cash provided by (used in) operating activities

    3,194       8,139       13,396       (4,681     20,048  

Investing activities

         

Purchases and mortgage advances

          (34,392     (77,589             (111,981

Disposals and repayments

          29,635       69,215             98,850  

Changes in investment broker net receivables and payables

          (431     (586           (1,017

Investment in common shares of subsidiaries

    (4,483                 4,483        

Capital contribution to unconsolidated subsidiaries

          (1           1        

Return of capital from unconsolidated subsidiaries

          22             (22      

Notes receivable from parent

                1,501       (1,501      

Notes receivable from subsidiaries

    1,494                   (1,494      

Cash provided by (used in) investing activities

    (2,989     (5,167     (7,459     1,467       (14,148

Financing activities

         

Issue of long-term debt, net

    2,455                         2,455  

Redemption of long-term debt

    (652                       (652

Issue of capital instruments, net

    1,990                         1,990  

Redemption of capital instruments

                (1,250           (1,250

Secured borrowings

          709       667             1,376  

Change in repurchase agreements and securities sold but not yet purchased

                24             24  

Changes in deposits from Bank clients, net

                (579           (579

Lease payments

          (9     (125           (134

Shareholders’ dividends paid in cash

    (2,340                       (2,340

Dividends paid to parent

          (1,270     (3,411     4,681        

Common shares repurchased

    (253                       (253

Common shares issued, net

    36             4,483       (4,483     36  

Contributions from (distributions to) non-controlling interests, net

                (10           (10

Capital contributions by parent

                1       (1      

Return of capital to parent

                (22     22        

Notes payable to parent

                (1,494     1,494        

Notes payable to subsidiaries

    (1,501                 1,501        

Cash provided by (used in) financing activities

    (265     (570     (1,716     3,214       663  

Cash and short-term securities

         

Increase (decrease) during the year

    (60     2,402       4,221             6,563  

Effect of foreign exchange rate changes on cash and short-term securities

    85       (59     (554           (528

Balance, beginning of year

    22       2,564       16,962             19,548  

Balance, end of year

    47       4,907       20,629             25,583  

Cash and short-term securities

         

Beginning of year

         

Gross cash and short-term securities

    22       3,058       17,220             20,300  

Net payments in transit, included in other liabilities

          (494     (258           (752

Net cash and short-term securities, beginning of year

    22       2,564       16,962             19,548  

End of year

         

Gross cash and short-term securities

    47       5,213       20,907             26,167  

Net payments in transit, included in other liabilities

          (306     (278           (584

Net cash and short-term securities, end of year

  $ 47     $ 4,907     $ 20,629     $     $   25,583  

Supplemental disclosures on cash flow information:

         

Interest received

  $ 522     $ 4,334     $ 7,992     $ (1,112   $ 11,736  

Interest paid

    426       109       1,765       (1,112     1,188  

Income taxes paid (refund)

    (2     721       639             1,358  

 

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Consolidated Statement of Cash Flows

 

For the year ended December 31, 2019  

MFC

(Guarantor)

   

JHUSA

(Issuer)

   

Other

subsidiaries

   

Consolidation

adjustments

   

Consolidated

MFC

 

Operating activities

         

Net income (loss)

  $     5,602     $ 499     $ 6,326     $ (6,925   $ 5,502  

Adjustments:

         

Equity in net income of unconsolidated subsidiaries

    (5,654     (772     (499           6,925        

Increase (decrease) in insurance contract liabilities

              11,381           22,346                 33,727  

Increase (decrease) in investment contract liabilities

          51       119             170  

(Increase) decrease in reinsurance assets excluding coinsurance transactions

          (1,236     679             (557

Amortization of (premium) discount on invested assets

          40       77             117  

Other amortization

    5       118       503             626  

Net realized and unrealized (gains) losses and impairment on assets

    (12     (7,105     (13,148           (20,265

Deferred income tax expense (recovery)

    (18     (192     (244           (454

Stock option expense

          (1     12             11  

Cash provided by (used in) operating activities before undernoted items

    (77     2,783       16,171             18,877  

Dividends from unconsolidated subsidiary

    3,000       623       1,123       (4,746      

Changes in policy related and operating receivables and payables

    (39     (146     1,850             1,665  

Cash provided by (used in) operating activities

    2,884       3,260       19,144       (4,746     20,542  

Investing activities

         

Purchases and mortgage advances

          (24,898     (55,712             (80,610

Disposals and repayments

          22,324       43,009             65,333  

Changes in investment broker net receivables and payables

          631       528             1,159  

Investment in common shares of subsidiaries

    (404                 404        

Net cash flows from acquisition and disposal of subsidiaries and businesses

                288             288  

Capital contribution to unconsolidated subsidiaries

          (1           1        

Return of capital from unconsolidated subsidiaries

          177             (177      

Notes receivable from parent

                (157     157        

Notes receivable from subsidiaries

    (1     13             (12      

Cash provided by (used in) investing activities

    (405     (1,754     (12,044     373       (13,830

Financing activities

         

Change in repurchase agreements and securities sold but not yet purchased

                266             266  

Redemption of capital instruments

                (1,500           (1,500

Secured borrowings

                107             107  

Changes in deposits from Bank clients, net

                1,819             1,819  

Lease payments

          (8     (109           (117

Shareholders’ dividends paid in cash

    (1,398                       (1,398

Contributions from (distributions to) non-controlling interests, net

                (22           (22

Common shares repurchased

    (1,339                       (1,339

Common shares issued, net

    104             404       (404     104  

Dividends paid to parent

          (1,123     (3,623     4,746        

Capital contributions by parent

                1       (1      

Return of capital to parent

                (177     177        

Notes payable to parent

                (12     12        

Notes payable to subsidiaries

    157                   (157      

Cash provided by (used in) financing activities

    (2,476     (1,131     (2,846     4,373       (2,080

Cash and short-term securities

         

Increase (decrease) during the year

    3       375       4,254             4,632  

Effect of foreign exchange rate changes on cash and short-term securities

    (2     (128     (336           (466

Balance, beginning of year

    21       2,317       13,044             15,382  

Balance, end of year

    22       2,564       16,962             19,548  

Cash and short-term securities

         

Beginning of year

         

Gross cash and short-term securities

    21       2,783       13,411             16,215  

Net payments in transit, included in other liabilities

          (466     (367           (833

Net cash and short-term securities, beginning of year

    21       2,317       13,044             15,382  

End of year

         

Gross cash and short-term securities

    22       3,058       17,220             20,300  

Net payments in transit, included in other liabilities

          (494     (258           (752

Net cash and short-term securities, end of year

  $ 22     $ 2,564     $ 16,962     $     $     19,548  

Supplemental disclosures on cash flow information:

         

Interest received

  $ 422     $ 4,252     $ 7,823     $ (948   $ 11,549  

Interest paid

    423       83       1,741       (948     1,299  

Income taxes paid (refund)

          (788     892             104  

 

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Note 24     Comparatives

Certain comparative amounts have been reclassified to conform to the current year’s presentation.

 

186   |  2020 Annual Report  |  Notes to Consolidated Financial Statements


Table of Contents

Additional Actuarial Disclosures

Source of Earnings

Manulife uses a Source of Earnings (“SOE”) to identify the primary sources of gains or losses in each reporting period. It is one of the key tools the Company uses to understand and manage its business. The SOE is prepared following OSFI’s regulatory guidelines, and in accordance with educational notes published by the Canadian Institute of Actuaries (“CIA”). The SOE attributes each component of earnings to one of ten categories: expected profit from in-force business, the impact of new business, experience gains or losses (comparing actual to expected outcomes), the impact of management actions and changes in assumptions, earnings on surplus funds, other insurance earnings, Global Wealth and Asset Management earnings, Manulife Bank earnings, unallocated overhead expenses, and income taxes. In aggregate, these elements explain the $5,871 million of net income attributed to shareholders in 2020.

Each of these ten categories is described below:

Expected profit from in-force business represents the formula-driven release of Provisions for Adverse Deviation (“PfADs”) on non-fee income insurance businesses, the expected net income on fee businesses, and the planned margins on one-year renewable businesses such as Group Benefits. PfADs are a requirement of the Canadian Actuarial Standards of Practice, and represent additional amounts held in excess of the expected cost of discharging policy obligations in order to provide a margin of conservatism. These amounts are released over time as the Company is released from the risks associated with the policy obligations.

The increase in 2020 over 2019 was primarily due to in-force business growth in Asia and the U.S.

Impact of new business represents the financial impact of new business written in the period, including acquisition expenses. Writing new business creates economic value, which is offset by PfADs and other limits on capitalization of this economic value in actuarial liabilities.

The new business gain in 2020 declined compared to 2019, driven by lower new business volumes in North America, as well as in Hong Kong and Japan. This was partially offset by favourable new business product mix in Hong Kong and Asia Other.

Experience gains or losses arise from items such as claims, policy persistency, fee income, and expenses, where the actual experience in the current period differs from the expected results assumed in the insurance and investment contract liabilities. It also includes experience gains or losses associated with actual investment returns and movements in investment markets differing from those expected on assets supporting insurance and investment contract liabilities. For most businesses, the expected future investment returns underlying policy valuations are updated quarterly for investment market movements and this impact is also included in experience gains and losses. This component also includes the impact of currency changes to the extent they are separately quantified. Experience gains do not include the impact of management actions or changes in assumptions during the reporting period, which are reported in “Management actions and changes in assumptions”.

The experience losses in 2020 were primarily driven by the unfavourable impact from interest rates movements, as well as the unfavourable investment related experience on general fund liabilities and impacts from gross equity markets exposure, partially offset by favourable policyholder experience. The unfavourable impact of interest rate movements was primarily due to the reduction in risk-free rates and, to a much lesser extent, lower corporate spreads, with spreads for some tenors and ratings being slightly below their respective 2019 levels. The unfavourable investment related experience on general fund liabilities reflected lower-than-expected returns (including fair value changes) on alternative long-duration assets (“ALDA”) primarily driven by investments in oil & gas and real estate, partially offset by the favourable impact of fixed income reinvestment activities.

The experience losses in 2019 were primarily driven by the unfavourable impact from interest rates movements, charges related to changes in the URR, as well as unfavourable policyholder experience, partially offset by favourable investment related experience on general fund liabilities and impacts from gross equity markets exposure. The unfavourable impact of interest rate movements was driven by the narrowing of corporate spreads, the impact of lower risk-free rates and a steepening of the yield curve. The favourable investment related experience on general fund liabilities was driven by fixed income reinvestment activities on the measurement of our policy liabilities, strong returns (including changes in fair value) on ALDA, and strong credit experience.

Management actions and changes in assumptions reflect the income impact of changes to valuation methods and assumptions for insurance and investment contract liabilities and other management-initiated actions in the year that are outside the normal course of business.

The 2020 pre-tax earnings impact of changes in methods and assumptions was a $273 million charge compared to a $61 million charge in 2019. The $273 million charge in 2020 was primarily the result of review of the lapse assumptions for universal life policies in Canada, including both yearly renewable term, and level cost of insurance products, whereby we lowered the ultimate lapse assumptions due to the emergence of more recent data. This was partially offset by favourable mortality and morbidity updates (gains in Canada and Japan, partially offset by losses in the U.S.), as well as updates to the projection of our tax and liability cash flows in the U.S. to align with updated U.S. tax and statutory reporting standard changes. Note 6 of the Consolidated Financial Statements provides additional detail on the changes in actuarial methods and assumptions.

 

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Impacts from material management action items reported in the Corporate segment in 2020 included gains from the sale of bonds designated as available for sale (“AFS”), as well as gains resulting from reinsurance transactions in the U.S., Asia and Canada.

Earnings on surplus funds reflect the actual investment returns on assets supporting the Company’s surplus (shareholders’ equity). These assets comprise a diversified portfolio and returns will vary with the underlying asset categories.

Other represents pre-tax earnings items on insurance business that are not included in any other line of the SOE.

Global Wealth and Asset Management (“Global WAM”) represents pre-tax net income from the Global Wealth and Asset Management segment.

Manulife Bank represents pre-tax net income from Manulife Bank.

Unallocated overhead represents pre-tax unallocated overhead expenses from the Corporate and Other segments.

Income taxes represent tax charges to earnings based on the varying tax rates in the jurisdictions in which Manulife conducts business.

Manulife’s net income attributed to shareholders for the full year 2020 increased to $5,871 million from $5,602 million the previous year.

 

For the year ended December 31, 2020

(C$ millions)

  Asia     Canada     U.S.     Corporate
and Other
    Global
WAM
    Total  

Expected Profit from In-force Business

  $ 1,265     $ 1,011     $ 1,897     $ 108     $       4,281  

Impact of New Business

    713       7       188       1             909  

Experience gains (losses)

    (304     (1,391     (1,000     (6           (2,701

Management actions and changes in assumptions

    (100     134       (29     2,896             2,901  

Earnings on surplus

    238       333       485       (556           500  

Other

    154       (1     24       (11           166  

Insurance

    1,966       93       1,565       2,432             6,056  

Global Wealth and Asset Management

                            1,272       1,272  

Manulife Bank

          213                         213  

Unallocated overhead

                      (524           (524

Income (loss) before income taxes

  $ 1,966     $ 306     $ 1,565     $ 1,908     $ 1,272       7,017  

Income tax (expense) recovery

    (204     (111     (296     (363     (172     (1,146

Net income (loss) attributed to shareholders

  $ 1,762     $ 195     $ 1,269     $ 1,545     $ 1,100       5,871  

For the year ended December 31, 2019

(C$ millions)

  Asia     Canada     U.S.     Corporate
and Other
    Global
WAM
    Total  

Expected Profit from In-force Business

  $ 1,131     $ 1,003     $ 1,798     $ 96     $       4,028  

Impact of New Business

    747       44       205                   996  

Experience gains (losses)

    (29     (214     (1,066     (55           (1,364

Management actions and changes in assumptions

    (13     (193     242       566             602  

Earnings on surplus

    219       342       483       23             1,067  

Other

    157       (3     26       32             212  

Insurance

    2,212       979       1,688       662             5,541  

Global Wealth and Asset Management

                            1,144       1,144  

Manulife Bank

          202                         202  

Unallocated overhead

                      (479           (479

Income (loss) before income taxes

  $ 2,212     $ 1,181     $ 1,688     $ 183     $ 1,144       6,408  

Income tax (expense) recovery

    (277     (59     (260     (88     (122     (806

Net income (loss) attributed to shareholders

  $ 1,935     $ 1,122     $ 1,428     $ 95     $ 1,022       5,602  

Embedded Value

The embedded value (“EV”) as of December 31, 2020 will be disclosed later.

 

188   |  2020 Annual Report  |  Additional Actuarial Disclosures


Table of Contents

Board of Directors

Current as of March 1, 2021

“Director Since” refers to the year of first election to the Board of Directors of The Manufacturers Life Insurance Company.

 

John M. Cassaday

Chairman of the Board

Manulife

Toronto, ON, Canada

Director Since: 1993

  

Nicole Arnaboldi

Corporate Director

Greenwich, CT, U.S.A.

Director Since: 2020

  

Guy L.T. Bainbridge

Corporate Director

Edinburgh, Midlothian,

United Kingdom

Director Since: 2019

 

  

Joseph P. Caron

Corporate Director

West Vancouver, BC, Canada

Director Since: 2010

Susan F. Dabarno

Corporate Director

Bracebridge, ON, Canada

Director Since: 2013

  

Julie E. Dickson

Corporate Director

Ottawa, ON, Canada

Director Since: 2019

  

Sheila S. Fraser

Corporate Director

Ottawa, ON, Canada

Director Since: 2011

  

Roy Gori

President and Chief Executive Officer

Manulife

Toronto, ON, Canada

Director Since: 2017

 

Tsun-yan Hsieh

Chairman

LinHart Group PTE Ltd.

Singapore, Singapore

Director Since: 2011

  

Donald R. Lindsay

President and Chief Executive

Officer

Teck Resources Limited

Vancouver, BC, Canada

Director Since: 2010

  

John R.V. Palmer

Corporate Director

Toronto, ON, Canada

Director Since: 2009

  

C. James Prieur

Corporate Director

Chicago, IL, U.S.A.

Director Since: 2013

Andrea S. Rosen

Corporate Director

Toronto, ON, Canada

Director Since: 2011

  

Leagh E. Turner

President and Chief Operating

Officer

Ceridian HCM Holding Inc.

Toronto, ON, Canada

Director Since: 2020

     

Executive Leadership Team

Current as of March 1, 2021

 

Roy Gori

President and Chief Executive Officer

  

Michael J. Doughty

President and Chief Executive Officer, Manulife Canada

 

  

Steven A. Finch

Chief Actuary

  

James D. Gallagher

General Counsel

Marianne Harrison

President and Chief Executive Officer, John Hancock

 

  

Scott S. Hartz

Chief Investment Officer

  

Rahim Hirji

Chief Risk Officer

  

Naveed Irshad

Head of North American Legacy Business

Rahul M. Joshi

Chief Operations Officer

  

Pamela O. Kimmet

Chief Human Resources Officer

  

Karen A. Leggett

Chief Marketing Officer

  

Paul R. Lorentz

President and Chief Executive Officer, Global Wealth and Asset Management

Anil Wadhwani

President and Chief Executive Officer, Manulife Asia

  

Shamus E. Weiland

Chief Information Officer

  

Philip J. Witherington

Chief Financial Officer

  

 

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Office Listing

 

Corporate Headquarters

 

Manulife Financial Corporation

 

 

200 Bloor Street East

Toronto, ON M4W 1E5

Canada

Tel: +1 416-926-3000

 

Belgium

 

International Group Program – Europe

John Hancock International Services S.A.

 

Avenue de Tervuren 270-272

B-1150 Brussels

Belgium

Tel: +32 02 775 2940

 

Cambodia

 

Manulife (Cambodia) PLC

 

14/F, TK Central

No. 12, Street 289

Sangkat Boeung Kak 1

Khan Toul Kork

Phnom Penh, Cambodia

Tel: 1-800-211-211

 

Canada

 

Canada Head Office

 

500 King Street North

Waterloo, ON N2J 4C6

Canada

Tel: +1 519-747-7000

 

Affinity Markets

 

200 Bloor Street East

Toronto, ON M4W 1E5

Canada

Tel: +1 800-668-0195

 

Group Benefits

 

500 King Street North

Kitchener, ON N2J 4C6

Canada

Tel: +1 519-747-7000

 

Individual Insurance

 

500 King Street North

Waterloo, ON N2J 4C6

Canada

Tel: +1 519-747-7000

 

Manulife Bank of Canada

 

500 King Street North

Waterloo, ON N2J 4C6

Canada

Tel: +1 519-747-7000

 

Manulife Investment Management

 

5th Floor

200 Bloor Street East

Toronto, ON M4W 1E5

Canada

Public Markets

Tel: +1 416-852-2204

 

15th Floor

250 Bloor Street East

Toronto, ON M4W 1E5

Canada

Real Estate

Tel: +1 416-926-5500

 

500 King St North

Waterloo, ON N2J 4C6

Canada

Tel: +1 519-747-7000

 

Manulife Quebec

 

Maison Manuvie

900 de Maisonneuve Ouest

Montréal, QC H3A 0A8

Canada

Tel: +1 514-499-7999

 

Manulife Securities

 

1235 North Service Road West

Oakville, ON L6M 2W2

Canada

Tel: +1 905-469-2100

  

China

 

Manulife-Sinochem Life

Insurance Co., Ltd.

 

6/F, Jin Mao Tower

88 Century Boulevard

Pudong New Area

Shanghai 200121

P.R. China

Tel: +86 21 2069-8888

+86 21 2069-8930

 

Manulife-Teda Fund

Management Co., Ltd.

 

Unit 2-7, 6/F,

China Life Financial Center

No. 23, Zhenzhi Road,

Chaoyang District

Beijing 10026

P.R. China

Tel: +86 10 6657-7777

 

Hong Kong

 

Asia Head Office

 

10/F, The Lee Gardens

33 Hysan Avenue

Causeway Bay, Hong Kong

Tel: +852 2510-5888

 

Manulife Investment Management (Asia), a division of Manulife Investment Management (Hong Kong) Ltd.

 

16/F, The Lee Gardens

33 Hysan Avenue

Causeway Bay, Hong Kong

Tel: +852 2910-2600

 

Manulife (International) Ltd.

 

22/F, Tower A

Manulife Financial Centre

223-231 Wai Yip Street

Kwun Tong, Kowloon

Hong Kong

Tel: +852 2310-5600

 

Manulife Provident Funds

Trust Co., Ltd.

 

22/F, Tower A

Manulife Financial Centre

223-231 Wai Yip Street

Kwun Tong, Kowloon

Hong Kong

Tel: +852 2310-5600

 

Indonesia

 

PT Asuransi Jiwa Manulife

Indonesia

 

Sampoerna Strategic Square

Jl. Jend. Sudirman Kav 45-46

South Tower

Jakarta 12930

Indonesia

Tel: +62 21 2555-7788

 

PT Manulife Aset Manajemen Indonesia

 

Sampoerna Strategic Square

Jl. Jend, Sudirman Kav. 45-46

31/F, South Tower

Jakarta 12930

Indonesia

Tel: +6221 2555-7788

 

Ireland

 

Manulife Investment Management (Ireland) Ltd.

 

Alexandra House

The Sweepstakes

Ballsbridge Park

Merrion Road

Dublin 4

D04 C7H2

Ireland

Tel: +353 87 695-4368

  

Japan

 

Manulife Investment Management

(Japan) Ltd.

 

15/F Marunouchi Trust Tower

North Building

1-6-1 Marunouchi, Chiyoda-ku

Tokyo, Japan 100-0005

Tel: +81 3 6267-1955

 

Manulife Life Insurance Co.

 

30th Floor, Tokyo Opera City

3-20-2 Nishi Shinjuku, Shinjuku-ku

Tokyo, Japan 160-0023

Tel: +81 3 6331-7000

 

Macau

 

Manulife (International) Ltd.

 

Avenida De Almeida Ribeiro No. 61

Circle Square, 14 andar A

Macau

Tel: +853 8398-0388

 

Malaysia

 

Manulife Investment Management (M) Berhad

 

16th Floor, Menara Manulife

No. 6 Jalan Gelenggang

Damansara Heights

50490 Kuala Lumpur, Malaysia

Tel: +60 3 2719-9228

 

Manulife Holdings Berhad

 

Menara Manulife

No. 6 Jalan Gelenggang

Damansara Heights

50490 Kuala Lumpur, Malaysia

Tel: +60 3 2719-9228

 

Myanmar

 

Manulife Myanmar Life Insurance Company Limited

 

16/F Kantharyar Office Tower

Cor. Kan Yeik Thar Road & U Aung Myat Road

Mingalar Taung Nyunt Township

Yangon

Myanmar

Tel: +09 765 467 110

 

Philippines

 

The Manufacturers Life

Insurance Co. (Phils.), Inc.

 

10/F, NEX Tower

6786 Ayala Avenue,

1229 Makati City,

Metro Manila

Philippines

Tel: +632 8884 7000

 

Singapore

 

Manulife Investment Management

(Singapore) Pte. Ltd.

 

8 Cross Street

#15-01 Manulife Tower

Singapore 048424

Tel: +65 6501 5411

 

Manulife (Singapore) Pte Ltd.

 

8 Cross Street

#15-01 Manulife Tower

Singapore 048424

Tel: +65 6501-5411

 

Switzerland

 

Manulife IM (Switzerland) LLC

 

Bahnhofstrasse 52, 8001 Zurich Switzerland

Tel: +41 79 448-3050

 

Taiwan

 

Manulife Investment Management

(Taiwan) Co., Ltd.

 

6/F No., 1 Exchange Square, 89 Songren Road

Taipei 11073,

Northern Taiwan, R.O.C.

Tel: +886 2 2757-5969

  

Thailand

 

Manulife Asset Management

(Thailand) Co., Ltd.

 

18/F Singha Complex

1788 New Petchaburi Road,

Bang Kapi

Huai Khwang, Bangkok 10310

Thailand

Tel: +66 0-2844-0123

 

Manulife Insurance (Thailand)

Public Co., Ltd.

 

18/F Singha Complex,

1788 New Petchaburi Road, Bang Kapi

Huai Khwang, Bangkok 10310

Thailand

Tel: +66 2 033-9000

 

United Kingdom

 

Manulife Investment

Management

(Europe) Ltd.

 

One London Wall

London EC2Y 5EA

United Kingdom

Tel: +44 20 7256 3500

 

United States

 

John Hancock Head Office and John Hancock Investment

Management

 

197 Clarendon Street

Boston, MA 02116-5010

U.S.A.

Tel: +1 617-663-3000

Tel: +1 617-572-6000

 

Hancock Natural Resource

Group

 

197 Clarendon Street,

8th Floor

Boston, MA 02116-5010

U.S.A.

Tel: +1 617-747-1600

 

International Group Program

 

200 Berkeley Street

Boston, MA 02116-5023

U.S.A.

Tel: +1 617-572-6000

 

John Hancock Insurance

 

200 Berkeley Street

Boston, MA 02116-5023

U.S.A.

Tel: +1 617-572-6000

 

Manulife Investment Management

(US) LLC

 

197 Clarendon Street

Boston, MA 02116-5010

U.S.A.

Tel: +1 617-375-1500

 

Vietnam

 

Manulife Investment Fund Management (Vietnam)
Co., Ltd.

 

4/F, Manulife Plaza

75 Hoang Van Thai Street

Tan Phu Ward, District 7

Ho Chi Minh City

Vietnam

Tel: +84 8 5416-6777

 

Manulife (Vietnam) Ltd.

 

Manulife Plaza

75 Hoang Van Thai Street

Tan Phu Ward, District 7

Ho Chi Minh City

Vietnam

Tel: +84 8 5416-6888

 

West Indies

 

Manulife Re

Manulife P&C Limited

 

The Goddard Building

Haggatt Hall

St. Michael, BB-11059

Barbados, West Indies

Tel: +246 228-4910

 

190   |  2020 Annual Report  |  Office Listing


Table of Contents

Glossary of Terms

 

Available-For-Sale (AFS) Financial Assets: Non-derivative financial assets that are designated as available-for-sale or that are not classified as loans and receivables, held-to-maturity investments, or held for trading.

Accumulated Other Comprehensive Income (AOCI): A separate component of shareholders’ equity which includes net unrealized gains and losses on AFS securities, net unrealized gains and losses on derivative instruments designated within an effective cash flow hedge, and unrealized foreign currency translation gains and losses. These items have been recognized in other comprehensive income and may be subsequently reclassified to net income. AOCI also includes remeasurement of pension and other post-employment plans and real estate revaluation reserve. These items are recognized in other comprehensive income and will never be reclassified to net income.

Assets Under Management and Administration (AUMA): A measure of the size of the Company. It is comprised of the non-GAAP measures assets under management (“AUM”), which includes both assets of general account and external client assets for which we provide investment management services, and assets under administration (“AUA”), which includes assets for which we provide administrative services only.

Book Value per Share: Ratio obtained by dividing common shareholders’ equity by the number of common shares outstanding at the end of the period.

Cash Flow Hedges: A hedge of the exposure to variability in cash flows associated with a recognized asset or liability, a forecasted transaction or a foreign currency risk in an unrecognized firm commitment that is attributable to a particular risk and could affect reported net income.

Constant Currency Basis: Amounts stated on a constant currency basis are calculated by applying the most recent quarter’s exchange rates to all prior periods.

Core Earnings (Loss): A measure to help investors better understand the long-term earnings capacity and valuation of the business. Core earnings excludes the direct impact of equity markets and interest rates as well as a number of other items that are considered material and exceptional in nature. While this metric is relevant to how we manage our business and offers a consistent methodology, it is not insulated from macro-economic factors, which can have a significant impact.

Deferred Acquisition Costs (DAC): Costs directly attributable to the acquisition of new business, principally agents’ compensation, which are capitalized on the Company’s Consolidated Statements of Financial Position and amortized into income over a specified period.

Embedded Value: A measure of shareholders’ value embedded in the current balance sheet of the Company, excluding any value associated with future new business.

Guarantee Value: Typically within variable annuity products, the guarantee value refers to the level of the policyholder’s protected account balance which is unaffected by market fluctuations.

Hedging: The practice of making an investment in a market or financial instrument for the purpose of offsetting or limiting potential losses from other investments or financial exposures.

Dynamic Hedging: A hedging technique which seeks to limit an investment’s market exposure by adjusting the hedge as the underlying security changes (hence, “dynamic”).

Macro hedging: An investment technique used to offset the risk of an entire portfolio of assets. A macro hedge reflects a more broad-brush approach which is not frequently adjusted to reflect market changes.

International Financial Reporting Standards (IFRS): Refers to the international accounting standards in Canada, effective January 1, 2011; this was a change from Canadian Generally Accepted Accounting Principles (CGAAP).

Impaired Assets: Mortgages, debt securities and other investment securities in default where there is no longer reasonable assurance of collection.

In-Force: Refers to the policies that are currently active.

Long-Term Care (LTC) Insurance: Insurance coverage available on an individual or group basis to provide reimbursement for medical and other services to the chronically ill, disabled, or mentally challenged.

Life Insurance Capital Adequacy Test (LICAT): The ratio of the available capital of a life insurance company to its required capital, each as calculated under the Office of the Superintendent of Financial Institutions’ (OSFI) published guidelines.

New Business Value (NBV): The change in shareholders’ economic value as a result of sales in the period. NBV is calculated as the present value of shareholders’ interests in expected future distributable earnings, after the cost of capital, on actual new business sold in the period using assumptions that are consistent with the assumptions used in the calculation of embedded value. NBV excludes businesses with immaterial insurance risks, such as Manulife’s wealth and asset management businesses and Manulife Bank.

New Business Strain: The initial expense of writing an insurance policy that is incurred when the policy is written, and has an immediate negative impact on the Company’s financial position. Over the life of the contract, future income (premiums, investment income, etc.) is expected to repay this initial outlay.

Other than Temporary Impairment (OTTI): A write down that is made if the institution does not expect the fair value of the security to recover prior to its maturity or the expected time of sale.

Premiums and Deposits: A measure of top line growth. The Company calculates premiums and deposits as the aggregate of (i) general fund premiums, net of reinsurance, reported as premiums on the Consolidated Statements of Income, (ii) segregated fund deposits, excluding seed money (“deposits from policyholders”), (iii) investment contract deposits, (iv) mutual fund deposits, (v) deposits into institutional advisory accounts, (vi) premium equivalents for “administration services only” group

 

 

LOGO            191


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benefits contracts (“ASO premium equivalents”), (vii) premiums in the Canadian Group Benefits reinsurance ceded agreement, and (viii) other deposits in other managed funds.

Policyholder Experience: The actual cost in a reporting period from contingent events such as mortality, lapse and morbidity compared to the expected cost in that same reporting period using best estimate valuation assumptions.

Provisions for Adverse Deviation (PfAD): The amounts contained in the insurance and investment contract liabilities that represent conservatism against potential future deterioration of best estimate assumptions. These PfADs are released into income over time, and the release of these margins represents the future expected earnings stream.

Insurance and Investment Contract Liabilities: The amount of money set aside today, together with the expected future premiums and investment income, that will be sufficient to provide for future expected policyholder obligations and expenses while also providing some conservatism in the assumptions. Expected assumptions are reviewed and updated annually.

Return on Common Shareholders’ Equity: A profitability measure that presents the net income available to common shareholders as a percentage of the average capital deployed to earn the income.

Sales, Gross Flows and Net Flows are measured according to product type:

Individual Insurance: Sales include 100% of new annualized premiums and 10% of both excess and single premiums. New annualized premiums reflect the annualized premium expected in the first year of a policy that requires premium payments for more than one year. Single premium is the lump sum premium from the sale of a single premium product, e.g. travel insurance. Sales are reported gross before the impact of reinsurance.

Group Insurance: Sales include new annualized premiums and administrative service only premium equivalents on new cases, as well as the addition of new coverages and amendments to contracts, excluding rate increases.

WAM: Sales include all deposits into mutual funds, college savings 529 plans, group pension/ retirement savings products, private wealth and institutional asset management products.

Gross Flows: A measure for WAM businesses and includes all deposits into mutual funds, college savings 529 plans, group pension/retirement savings products, private wealth and institutional asset management products.

Net Flows: A measure for WAM businesses and includes gross flows less redemptions for the mutual funds, college savings 529 plans, group pension/retirement savings products, private wealth and institutional asset management products.

Consolidated Capital: A non-GAAP measure, serves as a foundation of our capital management activities at

the MFC level. For regulatory reporting purposes, the numbers are further adjusted for various additions or deductions to capital as mandated by the guidelines used by OSFI. Consolidated capital is calculated as the sum of: (i) total equity excluding accumulated other comprehensive income (“AOCI”) on cash flow hedges; and (ii) liabilities for capital instruments.

Universal Life Insurance: A form of permanent life insurance with flexible premiums. The customer may vary the premium payment and death benefit within certain restrictions. The contract is credited with a rate of interest based on the return of a portfolio of assets held by the Company, possibly with a minimum rate guarantee, which may be reset periodically at the discretion of the Company.

Variable Annuity: Funds are invested in segregated funds (also called separate accounts in the U.S.) and the return to the contract holder fluctuates according to the earnings of the underlying investments. In some instances, guarantees are provided.

Variable Universal Life Insurance: A form of permanent life insurance with flexible premiums in which the cash value and possibly the death benefit of the policy fluctuate according to the investment performance of segregated funds (or separate accounts).

 

 

192   |  2020 Annual Report  |  Glossary of Terms


Table of Contents

Shareholder Information

 

 

MANULIFE FINANCIAL CORPORATION HEAD OFFICE

200 Bloor Street East

Toronto, ON Canada M4W 1E5

Telephone: 416 926-3000

Website: www.manulife.com

ANNUAL MEETING OF SHAREHOLDERS

Shareholders are invited to attend the annual meeting of Manulife Financial Corporation to be held on May 6, 2021 at 11:00 a.m.

STOCK EXCHANGE LISTINGS

Manulife Financial Corporation’s common shares are listed on:

Toronto Stock Exchange (MFC)

The New York Stock Exchange (MFC)

The Stock Exchange of Hong Kong (945)

Philippine Stock Exchange (MFC)

INVESTOR RELATIONS

Financial analysts, portfolio managers and other investors requiring financial information may contact our Investor Relations department or access our website at www.manulife.com.

Email: investrel@manulife.com

SHAREHOLDER SERVICES

For information or assistance regarding your share account, including dividends, changes of address or ownership, lost certificates, to eliminate duplicate mailings or to receive shareholder material electronically, please contact our Transfer Agents in Canada, the United States, Hong Kong or the Philippines. If you live outside one of these countries, please contact our Canadian Transfer Agent.

Direct Deposit of Dividends

Shareholders resident in Canada, the United States and Hong Kong may have their Manulife common share dividends deposited directly into their bank account. To arrange for this service please contact our Transfer Agents.

Dividend Reinvestment Program

Canadian and U.S. resident common shareholders may purchase additional common shares without incurring brokerage or administrative fees by reinvesting their cash dividend through participation in Manulife’s Dividend Reinvestment and Share Purchase Programs. For more information please contact our stock transfer agents: in Canada – AST Trust Company (Canada); in the United States - American Stock Transfer & Trust Company, LLC

For other shareholder issues please contact Manulife Shareholder Services via e-mail to shareholder_services@manulife.com

More information

Information about Manulife Financial Corporation, including electronic versions of documents and share and dividend information is available online at www.manulife.com

TRANSFER AGENTS

Canada

AST Trust Company (Canada)

P.O. Box 700 Station B

Montreal, QC

Canada H3B 3K3

Toll Free: 1 800 783-9495

Collect: 416 682-3864

E-mail: manulifeinquiries@astfinancial.com

Website: www.astfinancial.com/ca-en

AST Trust Company (Canada) offices are also located in Toronto, Vancouver and Calgary.

United States

American Stock Transfer & Trust Company, LLC

P.O. Box 199036

Brooklyn, NY

United States 11219

Toll Free: 1 800 249-7702

Collect: 416 682-3864

E-mail: manulifeinquiries@astfinancial.com

Website: www.astfinancial.com

Hong Kong

Tricor Investor Services Limited

Level 54, Hopewell Centre

183 Queen’s Road East

Wan Chai, Hong Kong

Telephone: 852 2980-1333

E-mail: is-enquiries@hk.tricorglobal.com

Website: www.tricoris.com

Philippines

Rizal Commercial Banking Corporation

Ground Floor, West Wing,

GPL (Grepalife) Building,

221 Senator Gil Puyat Avenue,

Makati City, Metro Manila, Philippines

Telephone: 632 5318-8567

E-mail: rcbcstocktransfer@rcbc.com

Website: www.rcbc.com/stocktransfer

AUDITORS

Ernst & Young LLP

Chartered Accountants

Licensed Public Accountants

Toronto, Canada

 

 

MFC DIVIDENDS

Common Share Dividends Paid for 2020 and 2019  

 

Per Share

Amount

Canadian ($)

Year 2020   Record Date   Payment Date

Fourth Quarter

 

February 23, 2021

 

March 19, 2021

 

$    0.28

Third Quarter

 

November 23, 2020

 

December 21, 2020

 

$    0.28

Second Quarter

 

August 17, 2020

 

September 21, 2020

 

$    0.28

First Quarter

 

May 19, 2020

 

June 19, 2020

 

$    0.28

Year 2019

           

Fourth Quarter

 

February 25, 2020

 

March 19, 2020

 

$    0.28

Third Quarter

 

November 19, 2019

 

December 19, 2019

 

$    0.25

Second Quarter

 

August 20, 2019

 

September 19, 2019

 

$    0.25

First Quarter

 

May 14, 2019

 

June 19, 2019

 

$    0.25

 

Common and Preferred Share Dividend Dates in 2021*

    

* Dividends are not guaranteed and are subject to approval by the Board of Directors.

    

Record date   Payment date

Common and

Preferred Shares

  Common Shares   Preferred Shares

February 23, 2021

 

March 19, 2021

 

March 19, 2021

May 18, 2021

 

June 21, 2021

 

June 19, 2021

August 17, 2021

 

September 20, 2021

 

September 19, 2021

November 16, 2021

 

December 20, 2021

 

December 19, 2021

 

 

LOGO            193


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LOGO

Ill Manulife Our diverse range of products and services by market
In Canada Annuities ESG fund* Exchange-traded funds (ETFs)* Financial planning & advice* Group life, health & disability insurance Group retirement savings plans* Guaranteed interest certificates (GICs) Individual life, health & travel insurance Individual retirement savings plans* Institutional pooled funds* Mortgage creditor insurance Mutual funds* Outsourced chief investment officer (OCIO)* Retail banking Segregated funds Separately managed accounts (SMAs)* In the U.S. Annuities Closed-end funds* Collective investment trusts (CITs)* Education savings plans (529)* ESG funds* Exchange-traded funds (ETFs)* Financial planning & advice Group retirement savings plans* Individual life insurance Individual Retirement Accounts (IRAs)* Institutional commingled funds* Institutional segregated accounts* Model portfolios* Mutual funds* Outsourced chief investment officer (OCIO)* Separately managed accounts (SMAs)* Target-date funds* In Asia Annuities Creditor insurance Education savings plans ESG fund* Group life & health insurance Group retirement savings plans* Individual life & health insurance Individual retirement savings plans* Investment-linked products Mutual funds* Segregated investment mandates* In Europe Alternative Investment Funds (AIFs) ESG fund* Institutional segregated accounts* Undertakings for the Collective Investment in Transferable Securities (UCITS)* Our investment capabilities Asset allocation & solutions* Infrastructure equity* Liability-driven investing (LDI)* Liquid alternatives* Private equity & credit* Public equity & debt* Real estate equity & debt* Timberland & farmland* ‘Products and services provided by our Global Wealth and Asset Management segment. About Manulife Manulife Financial Corporation is a leading international financial services group that helps people make their decisions easier and lives better. With our global headquarters in Toronto, Canada, we operate as Manulife across our offices in Canada, Asia, and Europe, and primarily as John Hancock in the United States. We provide financial advice, insurance, and wealth and asset management solutions for individuals, groups and institutions. At the end of 2020, we had more than 37,000 employees, over 118,000 agents, and thousands of distribution partners, serving over 30 million customers. As of December 31, 2020, we had $1.3 trillion (US$1.0 trillion) in assets under management and administration, and in the previous 12 months we made $31.6 billion in payments to our customers. Our principal operations are in Asia, Canada and the United States where we have served customers for more than 155 years. We trade as ‘MFC’ on the Toronto, New York, and the Philippine stock exchanges and under ‘945’ in Hong Kong. Learn more by visiting Manulife.com Manulife, Manulife & Stylized M Design, and Stylized M Design are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates, including Manulife Financial Corporation, under license. IR3933E MIX Paper from responsible sources FSC®C132107

Exhibit 99.2

 

  Notice of annual meeting of

  common shareholders

 

 

  You’re invited to attend our 2021 annual meeting

  of common shareholders

  When

   May 6, 2021

   11 a.m. (Eastern time)

 

  How to attend

   Our 2021 annual

   meeting will be held             

   as a live webcast online at

   https://

   web.lumiagm.com/

   463975638.

 

   Shareholders and

   duly appointed

   proxyholders can ask

   questions during the

   meeting. Please read

   the voting section

   starting on page 6

   for detailed information

   about how to attend the

   meeting, vote and

   ask questions. More

   information and updates

   on how to attend the

   meeting will be made

   available on our website

   (https://

   www.manulife.com/en/

   investors/annual-

   meeting.html).

 

 

Four items of business

•  Receiving the consolidated financial statements and auditors’ reports for the year ended December 31, 2020

•  Electing directors

•  Appointing the auditors

•  Having a say on executive pay

 

 
 

Other matters that are properly brought before the meeting will be considered, but we are not aware of any at this time. The annual meeting for The Manufacturers Life Insurance Company will be held at the same time and will also be a live webcast.

 

 
 

Manulife is focused on protecting the health and well-being of our employees, clients and communities. We are actively monitoring COVID-19 developments and the directives from public health and government authorities for group gatherings and physical distancing.

 

This care and concern also extends to our shareholders and policyholders, which is why we have decided to hold our 2021 annual meeting by live webcast instead of in person. We encourage you to vote your shares before the meeting.

 

Anyone can attend the meeting, but you need a control number to vote or ask questions. Please see pages 6 to 10 for detailed information about how to attend the meeting, vote and ask questions.

   
 

 

By order of the board of directors,

 

LOGO

Antonella Deo

Corporate Secretary

 

March 10, 2021

 

   

 

 
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Exhibit 99.3

 

LOGO

Ill Manulife
2021 Management information circular
Manulife Financial Corporation
Annual Meeting
May 6, 2021
Notice of annual meeting of shareholders
Your participation is important.
Please read this document and vote.


Table of Contents

  Notice of annual meeting of

  common shareholders

 

 

  You’re invited to attend our 2021 annual meeting

  of common shareholders

  When

   May 6, 2021

   11 a.m. (Eastern time)

 

  How to attend

   Our 2021 annual

   meeting will be held             

   as a live webcast online at

   https://

   web.lumiagm.com/

   463975638.

 

   Shareholders and

   duly appointed

   proxyholders can ask

   questions during the

   meeting. Please read

   the voting section

   starting on page 6

   for detailed information

   about how to attend the

   meeting, vote and

   ask questions. More

   information and updates

   on how to attend the

   meeting will be made

   available on our website

   (https://

   www.manulife.com/en/

   investors/annual-

   meeting.html).

 

 

Four items of business

•  Receiving the consolidated financial statements and auditors’ reports for the year ended December 31, 2020

•  Electing directors

•  Appointing the auditors

•  Having a say on executive pay

 

 
 

Other matters that are properly brought before the meeting will be considered, but we are not aware of any at this time. The annual meeting for The Manufacturers Life Insurance Company will be held at the same time and will also be a live webcast.

 

 
 

Manulife is focused on protecting the health and well-being of our employees, clients and communities. We are actively monitoring COVID-19 developments and the directives from public health and government authorities for group gatherings and physical distancing.

 

This care and concern also extends to our shareholders and policyholders, which is why we have decided to hold our 2021 annual meeting by live webcast instead of in person. We encourage you to vote your shares before the meeting.

 

Anyone can attend the meeting, but you need a control number to vote or ask questions. Please see pages 6 to 10 for detailed information about how to attend the meeting, vote and ask questions.

   
 

 

By order of the board of directors,

 

LOGO

Antonella Deo

Corporate Secretary

 

March 10, 2021

 

   

 

 


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Message to shareholders

 

LOGO   

John Cassaday

 

Chairman of the Board

Dear fellow shareholders,

On behalf of the board of directors, we are pleased to invite you to the annual meeting of common shareholders of Manulife Financial Corporation on May 6, 2021. We continue to actively monitor COVID-19 developments and the directives from public health and government authorities for group gatherings and social distancing. We have been taking a series of proactive precautionary measures to help protect the health and well-being of our employees, clients and communities. This degree of care and concern extends to all of our shareholders and policyholders, and for that reason we are holding our 2021 annual meeting in virtual format. As a holder of common shares, you will be able to attend and vote your shares at the meeting electronically.

Our 2021 management information circular, which starts on page 3, includes important information about the business of the meeting and the items you will be voting on. Please read the circular before you vote your shares.

 

Manulife’s continuing transformation

As we disclosed last year, Manulife is in the midst of its transformation to a digital, customer-centric market leader. Our CEO, Roy Gori, and his management team have developed a long-term plan with five strategic priorities, fully supported by the board of directors. Despite COVID-19 and the challenging economic environment in 2020, our continued progress against these priorities has enabled us to continue to deliver strong results.

 
 

Manulife’s strategic priorities

• portfolio optimization

• expense efficiency

• accelerating growth

• digital customer leader

• high-performing team.

 

 

In 2020 the board quickly adapted to the new environment and leveraged technology to continue to provide effective oversight and guidance to management during the pandemic, to ensure business continuity and resilience in maintaining our strong organizational culture and the health and safety of our people.

You can read more about Manulife’s accomplishments in 2020 and their impact on our executive pay in the letter from the chair of the management resources and compensation committee beginning on page 41. You will also find a more detailed discussion of the year’s performance in our 2020 annual report at manulife.com.

Engaging with our shareholders

Manulife’s board of directors continues to believe that directly engaging with shareholders and other stakeholders is a critical process for receiving and understanding feedback on subjects that matter most to our stakeholders. In 2020, we continued to spend a considerable amount of time meeting with our shareholders. The discussions covered a broad range of topics, such as governance, board succession, cybersecurity, and the integration of environmental and social considerations into decision-making and executive compensation. Although executive compensation was not a focus for our meetings, we did address our programs and solicit feedback. You will see some changes made to our programs in the following sections that we anticipate will be positively received by our shareholders.

 

2021 Management information circular         1  


Table of Contents

 

Please read the circular and vote your shares

The meeting will be held as a live webcast on May 6, 2021 at 11:00 a.m. (Eastern time). You can find information about how to attend the meeting on page 6.

Your vote is important to us – we encourage you to consider the information set out in the circular and exercise your voting rights. See page 7 for details about how to vote.

The meeting will cover four items of business:

1. receiving our financial statements

2. voting to elect directors

3. voting to appoint the auditors

4. voting to have a ‘say on executive pay’.

You will vote on all items except for the financial statements. The board recommends you vote FOR items 2 to 4.

This circular contains information about these matters, as well as information about our corporate governance practices and executive compensation program. For more information about Manulife, including an overview of the company’s progress in 2020, please see our 2020 annual report – available at manulife.com.

We look forward to welcoming you at the meeting.

 

 

LOGO

John Cassaday

Chairman of the Board of Directors

March 10, 2021

 

 

 

2         Manulife Financial Corporation


Table of Contents

 

About this Management

Information Circular

We’ve sent this management information circular to you because you owned common shares of Manulife Financial Corporation as of the close of business on March 10, 2021. It includes important information about the meeting, the items of business to be covered and how to vote your shares.

You’re entitled to receive notice of and vote these shares at our 2021 annual meeting of common shareholders.

Management is soliciting your proxy for the meeting, which means we’re contacting you to encourage you to vote. This will be done mainly by mail, but you may also be contacted by phone, including in connection with the use of the Broadridge QuickVote service. We have retained Kingsdale Advisors (Kingsdale), and they may assist us with this process. We pay the costs of the engagement with Kingsdale, which we expect to be approximately $45,000.

In this document:

 

we, us, our, company and Manulife mean Manulife Financial Corporation

 

you, your and shareholder refer to holders of Manulife common shares

 

circular means this management information circular

 

meeting means our annual meeting of common shareholders on May 6, 2021

 

common shares or shares means common shares of Manulife Financial Corporation

 

Manufacturers Life means The Manufacturers Life Insurance Company

Information in this circular is as at February 28, 2021 and in Canadian dollars, unless indicated otherwise. Any information contained in, or otherwise accessible through, websites mentioned in this circular does not form a part of this document.

 

For more information

You can find financial information about Manulife in our 2020 annual report, which includes our audited consolidated financial statements and management’s discussion and analysis (MD&A) for the year ended December 31, 2020. The audit committee section of our annual information form has information about the audit committee, including the committee charter.

These documents are available on manulife.com, on SEDAR (sedar.com) and on EDGAR (sec.gov/edgar). You can also ask us for a copy of our 2020 annual report – simply email us at shareholder_services@manulife.com.

 

2021 Management information circular         3  


Table of Contents

 

 

LOGO   Where to find it

 

About the meeting

 

How to attend the meeting as a shareholder

    6  

How to attend the meeting as a guest

    6  

Who can vote

    6  

How to vote

    7  

What the meeting will cover

    11  

About the directors

 

Key things about the board

    15  

Director profiles

    17  

2020 board committee reports

    31  

How we pay our directors

    35  

Executive compensation

 

Message from the Chair

    41  

Compensation discussion and analysis

    43  

Executive summary

    43  

Our compensation philosophy

    46  

Benchmarking against our peers

    48  

Our compensation program and 2020 performance

    50  

Compensation of the named executives

    63  

Share performance

    80  

Executive compensation details

    81  

Summary compensation table

    81  

Equity compensation

    83  

Retirement benefits

    87  

Termination and change in control benefits

    93  
Compensation oversight     98  
How the board oversees executive compensation     98  
Managing compensation risk     100  
The decision-making process     103  
Compensation of employees who have a material impact on risk     105  
Governance at Manulife  
About the Manulife board     109  
Board committees     111  
Board roles and responsibilities     111  
Serving as a director     119  
Serving on other boards     120  
Integrity     120  
Equity ownership     120  
Term limits     120  
Independence     121  
Diversity     121  
Skills and experience     122  
Director development     124  
Assessment     125  
Board succession     126  
Other information  
Environmental, social and governance     127  
Liability insurance     127  
Loans to directors and officers     127  
Directors’ approval     128  

 

LOGO  

  This symbol tells you where

  you can find more information

 

 

4         Manulife Financial Corporation


Table of Contents

 

About the meeting

This year’s annual meeting is on May 6, 2021.

Read this section to find out who can vote, how you can vote and what you will be voting on.

 

Questions?

 

Call our transfer agent in your region if you have any questions about the meeting. Registered holders can also call our transfer agent to get information on options for managing your share account.

Canada   1-800-783-9495
United States   1-800-249-7702
Hong Kong   852-2980-1333
Philippines   632-5318-8567

 

Sign up for e-delivery

 

We want to provide you with information the way you want to receive it. You can choose to receive our
management information circular and certain other shareholder materials online instead of in the
mail.

 

Non-registered (beneficial) shareholders

Visit proxyvote.com and enter the control number from your voting instruction form. Select “sign up”
to go paperless.

 

Registered shareholders and ownership statement holders

Visit ca.astfinancial.com/MFCdigital and follow the instructions.

 

 

LOGO   Where to find it

           
 

How to attend the meeting as a shareholder

 

6

  

    How to vote

  

7

   

How to attend the meeting as a guest

 

6

  

    What the meeting will cover

  

11

   

Who can vote

 

6

         

 

2021 Management information circular         5  


Table of Contents

 

How to attend the meeting as a shareholder

 

 

On the day of the meeting:

1.  Log in: https://web.lumiagm.com/463975638. The link will be accessible one hour before the meeting start time to allow you to test your connection

 

 

2.  Click “I have a control number”

3.  Enter your control number (on the proxy form included with the meeting materials)

   
   

More information and updates on how to attend the meeting will be made available on our website (https://www.manulife.com/en/investors/annual-meeting.html).

   

 

 

4.  Enter your password: “manulife2021” (case sensitive)

Shareholders and their duly appointed proxyholders will be able to ask questions and vote during the meeting. For more information about how to vote during the meeting and asking questions, please see pages 7 to 9. Questions should be of interest to all shareholders, not personal in nature. If your question relates to a personal matter, we will contact you after the meeting to follow up on your question. If we cannot answer a question during the meeting because of timing or technical limitations, we will respond in writing as soon as practical after the meeting.

How to attend the meeting as a guest

 

Anyone can attend the meeting as a guest:

 

1.  Log in: https://web.lumiagm.com/463975638.

2.  Click “I am a guest” and then complete the required fields.

   
   

Guests may attend the meeting but cannot vote or ask questions.

   

To access the meeting online either as a shareholder or a guest you will need the latest versions of Chrome, Safari, Edge or Firefox. Please do not use Internet Explorer. You should log in early to ensure your browser is compatible. Internal network security protocols including firewalls and VPN connections may block access to the Lumi platform. If you are experiencing any difficulty connecting or watching the meeting, ensure your VPN setting is disabled or use a computer on a network not restricted by the security settings of your organization.

Who can vote

 

If you held Manulife common shares as of 5 p.m. (Eastern time) on March 10, 2021 (the record date), you’re entitled to receive notice of and vote at our 2021 annual meeting. We had 1,941,892,044 common shares outstanding as of this date and each share carries one vote.

 

   
   

About quorum

Before the meeting can go ahead, at least two shareholders have to be present at the meeting, in person or by proxy.

   

 

We must receive a simple majority of votes cast for an item to be approved.

Voting restrictions

Shares beneficially owned by the following entities and persons cannot be voted (except in circumstances approved by the Minister of Finance (Canada)):

 

 

the Government of Canada or any of its political subdivisions or agencies

 

the government of a province or any of its political subdivisions or agencies

 

the government of a foreign country or any foreign government’s political subdivisions or agencies

 

any person who has acquired more than 10% of any class of shares of Manulife.

Also, if any person, an entity controlled by any person, or any person together with an entity that person controls, beneficially owns more than 20% of the shares that can be voted, that person or entity cannot vote unless the Minister of Finance (Canada) allows it.

We are not aware of any person who beneficially owns or exercises control or direction (directly or indirectly) over more than 10% of the voting rights attached to Manulife common shares.

 

 

6         Manulife Financial Corporation


Table of Contents

About the Meeting

 

How to vote

There are two ways to vote – by proxy before the meeting, or online during the meeting. How you vote depends on whether you’re a registered shareholder, an ownership statement holder or a non-registered (beneficial) shareholder.

Shareholders are encouraged to vote their shares and submit proxies before the meeting.

 

         

 

 

LOGO

 

 

See page 10 for important details about voting by proxy.

                  

Registered shareholders and ownership statement holders

(your package includes a proxy form)

 

You’re a registered shareholder if you have a share certificate in your name or your shares are recorded electronically in the Direct Registration System (DRS) maintained by our transfer agent.

 

You’re an ownership statement holder if you hold a share ownership statement that was issued when Manufacturers Life demutualized.

 
                 
       

Vote by proxy

You or your authorized representative must sign the proxy form. If you’re a corporation or other legal entity, your authorized representative must sign the form.

 

LOGO      

  You can vote your shares in one of four ways:
  LOGO  

On the internet – Go to the website indicated on your proxy form. You will need the personal identification/control number on the form.

 
  LOGO  

By phone (Canada and U.S. only) – Call the toll-free number on the proxy form and follow the instructions. You will need the personal identification/control number on the form.

 
  LOGO  

By mail – Complete your proxy form and return it in the envelope provided.

 
  LOGO  

On your smartphone – Use the QR code found on your proxy form.

 
 

Your proxy must be received by 5 p.m. (Eastern time) on May 4, 2021 for your vote to be counted. If you’re mailing your proxy form, be sure to allow enough time for the envelope to be delivered. The deadline for the deposit of proxies can be waived by the Chairman at his discretion, without notice.

 

If the meeting is adjourned, your proxy must be received by 5 p.m. (Eastern time) two business days before the meeting is reconvened.

 
                 
       

Vote online during

the meeting

You will find your control number on the proxy form included with your meeting materials.

 

You will need your control number to be able to vote or ask questions at the meeting.

 

LOGO      

 

On the day of the meeting:

 

1.  Log in: https://web.lumiagm.com/463975638. The link will be accessible one hour before the meeting start time to allow you to test your connection.

 

2.  Click “I have a control number”

 

3.  Enter your control number (on the proxy form included with the meeting materials)

 

4.  Enter your password: “manulife2021” (case sensitive)

 

5.  Follow the instructions to cast your vote.

 

If you have already voted by proxy, your vote at the meeting, if properly cast, will automatically revoke your previous vote.

 
                      

 

2021 Management information circular         7  


Table of Contents

 

               

Registered shareholders and ownership statement holders

(continued)

   
         

Changing your vote

You can revoke your proxy form if you change your mind about how you want to vote your shares.

 

 

LOGO   

 

 

Sending new voting instructions with a later date will revoke the instructions you previously submitted.

 

You can send a new proxy on the internet, by phone or by mail, by following the instructions above. Or send a notice in writing, signed by you or your authorized representative to: Corporate Secretary, Manulife Financial Corporation, 200 Bloor Street East, Toronto, Canada M4W 1E5.

 

Your new proxy must be received by 5 p.m. (Eastern time) on May 4, 2021 for your vote to be counted. If you’re mailing your new proxy form, be sure to allow enough time for the envelope to be delivered.

 

If the meeting is adjourned, your proxy must be received by 5 p.m. (Eastern time) two business days before the meeting is reconvened.

 

If you miss the deadline, you can only revoke your proxy by giving a notice in writing to the Chairman before the meeting begins. The notice must be signed by you or your authorized representative.

 
                         
         
LOGO   See page 10 for important details about voting by proxy.              

Non-registered (beneficial) shareholders

(your package includes a voting instruction form)

 

You’re a non-registered shareholder if you hold your shares through an intermediary (a bank, trust company, securities broker or other financial institution). This means the shares are registered in your intermediary’s name and you’re the beneficial shareholder.

 
                 
       

Vote by proxy

You or your authorized representative must sign the voting instruction form.

If you’re a corporation or other legal entity, your authorized representative must sign the form.

 

LOGO      

  You can give your voting instructions in one of four ways:  
  LOGO  

On the internet – Go to the website indicated on your voting instruction form and follow the instructions on screen.

 
  LOGO  

By phone (Canada and U.S. only) – Call the toll-free number on your voting instruction form and follow the instructions.

 
  LOGO  

By mail – Complete your voting instruction form and return it in the envelope provided.

 
  LOGO  

On your smartphone – Use the QR code found on your voting instruction form.

 
     

Your intermediary must receive your voting instructions with enough time to act on your instructions. Check the form for the deadline for submitting your voting instructions. If you’re mailing your voting instruction form, be sure to allow enough time for the envelope to be delivered. The deadline for the deposit of proxies can be waived by the Chairman at his discretion, without notice.

 
                      

 

8         Manulife Financial Corporation


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About the Meeting

 

       

Non-registered (beneficial) shareholders

(continued)

   
                 

Vote online during the meeting

You must appoint yourself (or another person) as proxyholder.

 

Then you or the person you appoint must contact AST to get a control number.

 

You need a control number to be able to vote or ask questions at the meeting.

 

LOGO      

 

First, appoint yourself as proxyholder by printing your name in the space provided on the voting instruction form. You can also appoint someone else to be your proxyholder (see page 10 for more information).

 

Sign and return the form in the envelope provided but do not fill in your voting instructions because you will vote online during the meeting. Your intermediary must receive your instructions with enough time to act on your instructions. Check the form for the deadline for submitting your voting instruction form. If you’re mailing your voting instruction form, be sure to allow enough time for the envelope to be delivered.

 

You can also appoint yourself or another person by going to the website indicated on the voting instruction form and following the instructions.

 

After your intermediary has processed your instructions, contact AST Trust Company (Canada) (AST) by 5 p.m. (Eastern time) on May 4, 2021 at 1-866-751-6315 (within North America) or (212) 235-5754 (outside of North America) or online at https://lp.astfinancial.com/control-number-request-en.html to get a control number. If you appointed someone else to be your proxyholder, that person must contact AST to get a control number.

 

On the day of the meeting:

1.  Log in: https://web.lumiagm.com/463975638. The link will be accessible one hour before the meeting start time to allow you to test your connection.

2.  Click “I have a control number”

3.  Enter your control number

4.  Enter your password: “manulife2021” (case sensitive)

5.  Follow the instructions to cast your vote. If you have already voted by proxy, your vote at the meeting, if properly cast, will automatically revoke your previous vote.

 
                 
       

Changing your vote

You can revoke your voting instruction form if you change your mind about how you want to vote your shares.

 

LOGO      

 

Follow the instructions on your voting instruction form, or contact your intermediary for more information.

 

Your intermediary must receive your voting instructions with enough time to act on your instructions. Check the form for the deadline for submitting your voting instructions. If you’re mailing your voting instruction form, be sure to allow enough time for the envelope to be delivered. The deadline for the deposit of proxies may be waived or extended by the Chairman at his discretion, without notice.

 
                      

 

2021 Management information circular         9  


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More about voting by proxy

 

Voting by proxy is the easiest way to vote. It means you’re giving someone else (your proxyholder) the authority to attend the meeting and vote for you according to your instructions.

 

Roy Gori, President and Chief Executive Officer or, failing him, John M. Cassaday, Chairman (with full power of substitution) have agreed to act as Manulife proxyholders to vote your shares at the meeting according to your instructions.

 

If you do not name a different proxyholder when you sign your form, you’re authorizing Mr. Gori or Mr. Cassaday to act as your proxyholder to vote for you at the meeting according to your instructions.

   

 

    

   

About confidentiality and voting results

Our transfer agent independently counts and tabulates the votes to maintain confidentiality. A proxy form or voting instruction form is only referred to us if it’s clear that a shareholder wants to communicate with the board or management, the validity of the form is in question, or the law requires it.

 

After the meeting the voting results will be posted on manulife.com, on SEDAR (sedar.com) and on EDGAR (sec.gov/edgar).

   

 

    

If you do not indicate on the form how you want to vote your shares, Mr. Gori or Mr. Cassaday will vote:

 

 

FOR the election of the 14 nominated directors in this circular

 

FOR the appointment of Ernst & Young LLP as auditors

 

FOR the advisory vote on our approach to executive compensation

You can also appoint someone else to be your proxyholder – that individual does not need to be a Manulife shareholder. Print the person’s name in the blank space provided on the proxy form or voting instruction form. Remember to tell them that they must follow the instructions on pages 7 and 8 and vote your shares according to your instructions for your vote to count. If you do not specify how you want to vote your shares, your proxyholder can vote your shares using their best judgment.

If there are amendments to the items to be voted on or any other matters that are properly brought before the meeting or any adjournment, your proxyholder can vote your shares as they see fit.

 

Questions?

 

Call the transfer agent in your region if you have any questions or to ask for a new proxy form (see page 5 for details).

 

 

10     Manulife Financial Corporation


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About the Meeting

 

What the meeting will cover

The meeting will cover four items of business.

1. Financial statements (manulife.com)

Our 2020 consolidated financial statements and the auditors’ reports on those financial statements will be presented at the meeting. You can find a copy in our 2020 annual report on manulife.com.

2. Electing directors (see page 14)

You will elect 14 directors to serve on our board until either the end of next year’s annual meeting of shareholders, or earlier if they leave the board. All 14 nominated directors currently serve on the board. You can read about the nominated directors beginning on page 14. The board recommends that you vote FOR the election of each nominated director.

3. Appointing the auditors

Ernst & Young LLP (Ernst & Young) (or a predecessor) have acted as external auditors to Manulife or an entity within the Manulife group of entities since 1905. The audit committee has recommended that the board re-appoint them as our auditors for fiscal 2021 to serve until the end of our next annual meeting.

We maintain independence from the external auditors through audit committee oversight, a robust regulatory framework in Canada, including the requirement to rotate the lead audit partner at least every five years, and Ernst & Young’s own internal independence procedures. The audit committee also conducts a formal review of the external auditors every year and a more comprehensive review every five years. The next comprehensive review is scheduled for 2024. We also plan to initiate a tendering process for overall governance purposes once the initial adoption of IFRS 17 Insurance Contracts is complete in 2024. Given the complexities associated with IFRS 17, the audit committee does not feel it would be prudent to initiate a tendering process before adoption and the first annual audit cycle is complete.

The table below lists the services Ernst & Young provided to Manulife and its subsidiaries in the last two fiscal years and the fees they charged each year:

 

(in millions)    2020      2019  
Audit fees      $30.7        $29.7  
Includes the audit of our financial statements as well as the financial statements of our subsidiaries, segregated funds, audits of statutory filings, prospectus services, report on internal controls, reviews of quarterly reports and regulatory filings
Audit-related fees      $3.5        $3.0  
Includes consultation concerning financial accounting and reporting standards not classified as audit, due diligence in connection with proposed or consummated transactions and assurance services to report on internal controls for third parties
Tax fees     

 

$1.0

 

 

 

    

 

$0.4

 

 

 

Includes tax compliance, tax planning and tax advice services
All other fees     

 

$0.2

 

 

 

    

 

$0.2

 

 

 

Includes other advisory services
Total      $35.4        $33.3  

 

2021 Management information circular         11  


Table of Contents

 

Our auditor independence policy requires the audit committee to pre-approve all audit and permitted non-audit services (including the fees and conditions) the external auditor provides.

 

If a new service is proposed during the year that is outside the pre-approved categories or budget, it must be pre-approved by the audit committee, or by a member that the committee has appointed to act on its behalf.

 

The board recommends that you vote FOR the appointment of Ernst & Young as auditors.

 

4. Having a say on executive pay

 

(see page 40)

The board believes that executive compensation programs must be sound, fair and competitive with the market and support our strategy and progress.

   

 

    

   

Audit committee review

The audit committee conducts a formal review of the external auditors every year, and a more comprehensive review every five years. These reviews are based on recommendations by the Chartered Professional Accountants of Canada (CPA Canada) and the Canadian Public Accountability Board to assist the audit committee in their oversight duties.

 

A comprehensive review was conducted in 2019, covering the five-year period ended December 31, 2018. The 2020 review included an evaluation of the engagement partner and team, their independence, objectivity and the quality of communication and audit work performed.

 

   

    

 

The board recognizes the increased scrutiny of executive compensation generally and believes that shareholders should have the opportunity to fully understand our compensation objectives, philosophy and principles, and have a say on our approach to executive compensation. As a result, we’re asking you to vote on the following resolution:

Resolved, on an advisory basis and not to diminish the role and responsibilities of the board of directors, that the shareholders accept the approach to executive compensation disclosed in the management information circular delivered in advance of the 2021 annual meeting of common shareholders of Manulife Financial Corporation.

This is an advisory vote, so the results are not binding. The board will, however, take the results into account, together with feedback received from other shareholder engagement activities, when making decisions about compensation policies, procedures and executive pay in the future.

We discuss our executive compensation program and the impact our performance had on executive compensation for 2020 in detail starting on page 40. This disclosure has been approved by the board on the recommendation of the management resources and compensation committee.

The board recommends that you vote FOR our approach to executive compensation.

 

12     Manulife Financial Corporation


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About the Meeting

 

Last year shareholders voted 93.05% in favour of our approach to executive compensation. If a significant number of shareholders oppose the resolution, the board will engage with shareholders (especially those who are known to have voted against it) to understand their concerns and will continue to review our approach to executive compensation in the context of those concerns.

We encourage any shareholders who are thinking of voting against the resolution to contact the board to discuss their specific issues or concerns (see page 109 for details about how to contact the board and page 118 for details about our shareholder engagement activities).

 

 

About shareholder proposals and proxy access

 

Shareholder proposals

We must receive shareholder proposals for our 2022 annual meeting by 5 p.m. (Eastern time) on December 10, 2021 to consider including them in next year’s management information circular. Submissions must be in writing and meet the requirements of the Insurance Companies Act (Canada), which you can find online at
http://laws-lois.justice.gc.ca.

 

Proxy access

We must receive nominations under our proxy access policy for our 2022 annual meeting by 5 p.m. (Eastern time) on December 10, 2021 to consider including them in next year’s management information circular (see page 119 for more information on our proxy access policy).

 

Send your proposal or nomination notice to:

Corporate Secretary

Manulife Financial Corporation

200 Bloor Street East

Toronto, Ontario M4W 1E5

Canada

email: corporate_governance@manulife.com

 

2021 Management information circular         13  


Table of Contents

 

About the directors

Read about the nominated directors before you vote your shares.

This year, 14 directors have been nominated for election to the board for a one-year term. All nominated directors were elected at our 2020 meeting, except Nicole Arnaboldi (appointed in June 2020) and Leagh Turner (appointed in November 2020).

This group of directors has the mix of skills, experience and qualifications necessary for proper oversight and effective decision-making.

 

Appropriate size    Independent
 

 

14

  

 

All

directors is within an appropriate range for    directors are independent, except the CEO, and

healthy debate end effective decision-making

 

  

all board committee members are independent

 

 
    
Qualified and financially literate    Age
 

 

All

  

 

65

directors bring a mix of the competencies and experience necessary for effective oversight, and all are financially literate

 

   is the average age of the directors
 
    
Diverse   
 

 

46%

  

 

50%

of the independent directors are women

 

  

of the board committee chairs are women

 

  

One of the independent directors (8%) is a member of a racially/ethnically diverse group

 

 


Appropriate tenure

 

       LOGO

8.4 years

 

is the average tenure of the independent directors

The board has a 12-year term limit. The board chair can serve a term of five years, regardless of the number of years served as a director.

 

 

LOGO   Where to find it

             
 

Key things about the board

 

15

    

2020 board committee reports

    

31

Director profiles

 

17

    

How we pay our directors

    

35

 

14     Manulife Financial Corporation


Table of Contents

About the Directors

 

Key things about the board

Oversight during the pandemic

Our board continued to provide effective oversight and guidance to management during the pandemic, increasing the frequency and depth of their involvement and interactions with management and maintaining their strong relationship. This included:

 

in addition to regularly scheduled meetings, frequent briefings with management, written updates and informal communications, and monthly update calls in months that did not have a regularly scheduled meeting, to ensure that the board had a clear line of sight into the company’s pandemic response

 

leveraging technology to continue to interact with each other and management during board sessions, and gathering ongoing director feedback to confirm continued effectiveness and that all directors’ voices were heard

 

taking advantage of scheduling flexibility to refine meeting scheduling, allowing for more discussion and stand-alone sessions on topics of strategic importance

 

continued focus on board succession by identifying, appointing and onboarding two new directors with expertise in wealth and asset management and technology and driving transformative organizational change – areas critical to Manulife’s ongoing growth

 

holding more frequent one-on-one sessions between the Chairman and directors to ensure consistent connection.

Diversity

 

We promote diversity on our board and have a long-standing board diversity policy that covers age, gender, ethnicity, disability, sexual orientation and geographic representation. The board has an objective that at least 30% of the independent directors should be women – a goal we’ve met since 2013 – and aims to achieve gender parity among the independent directors – a goal we achieved in 2020.

See page 121 for more about diversity.

   
        

 

46% of this year’s nominated independent directors are women

 

50% of the board committee chairs are women

 

One of the nominated independent directors (8%) is a member of a racially/ethnically diverse group

   
   

Majority voting

Shareholders can vote for, or withhold their vote from, each director. Directors who receive more withhold than for votes must submit their resignation.

The corporate governance and nominating committee will review the details surrounding the resignation and report to the board. The board will accept the resignation unless there are exceptional circumstances. The board will decide whether to accept the resignation within 90 days of the meeting and a news release will be issued disclosing the resignation or the reasons why the resignation was not accepted. The director will not participate in these deliberations. The resignation will be effective when it is accepted by the board.

This policy applies only in uncontested elections, where the number of nominated directors is the same as the number of directors to be elected.

Term limits

Independent directors can serve on the board for up to 12 years to balance the benefit of experience with the need for new perspectives. We introduced this policy in 2013, and at the same time eliminated the mandatory retirement age of 72. See page 120 for more information. The board chair can be in the role for a full five-year term regardless of the number of years the individual has been a director.

 

2021 Management information circular         15  


Table of Contents

 

2020 attendance

The table below shows the number of board and committee meetings held in 2020 and overall attendance. Quorum for board meetings is a majority of the directors and directors are expected to attend all meetings of the board and the committees they’re members of, unless there are extenuating circumstances. All nominated directors who were on the board at the time attended our 2020 annual meeting of shareholders. In the COVID-19 environment, the board and management met virtually, using technology that allowed for full and effective participation. The board took advantage of scheduling flexibility to break up meeting dates, allowing for more discussion and stand-alone sessions on topics of strategic importance. The board also held monthly update calls to keep directors informed between regularly scheduled meetings.

 

  

 

   Number of
meetings
     Overall meeting
attendance
 
Board      9        100%  
Audit committee      6        100%  
Corporate governance and nominating committee      5        100%  
Management resources and compensation committee      6        100%  
Risk committee      6        100%  

Equity ownership

 

The director profiles that follow include the value of each director’s equity ownership. We calculated the value of equity ownership by multiplying the number of their common shares and deferred share units (DSUs) by $25.37, the closing price of our common shares on the TSX on February 26, 2021.    
   

Directors receive at least 50% of the annual board retainer in equity, and the director equity ownership requirement is six times the mandatory equity portion of the annual board retainer.

   
   
We require all directors except Mr. Gori to own common shares, preferred shares and/or DSUs with a total market value of at least six times the mandatory equity portion of the annual board retainer. Mr. Gori has separate equity ownership requirements as President and CEO, which he meets (see page 102).

Directors are expected to meet their equity ownership requirements within six years of joining the board. The minimum as of February 26, 2021 was $780,127.50 (US$615,000, using an exchange rate of US$1.00 = $1.2685). Fluctuations in foreign exchange rates will cause variances in the minimum ownership requirements.

 

16     Manulife Financial Corporation


Table of Contents

About the Directors

 

Director profiles

 

LOGO   

John M. Cassaday (Chairman)

 

Toronto, ON, Canada/Age 67/Independent

 

   

Key competencies and experience

  
 

•  Talent management/Executive compensation

  

• Public company executive/Director

 

•  Technology/Operations

  

• Digital transformation/Sales/Marketing

 

 

Mr. Cassaday has strong business and senior executive experience and also serves on other public company boards. This experience qualifies him to serve as the chair of Manulife’s board.

 

John Cassaday was appointed as Chairman of the Board on May 4, 2018. Mr. Cassaday was previously President and Chief Executive Officer of Corus Entertainment Inc., a position he held since its inception in 1999 until his retirement on March 31, 2015. Prior to Corus, Mr. Cassaday was Executive Vice President of Shaw Communications, President and Chief Executive Officer of CTV Television Network and President of Campbell Soup Company in Canada and the United Kingdom. Mr. Cassaday also serves on the board of Irving Oil Ltd. (non-public company).

 

Mr. Cassaday is a Fellow of the Institute of Corporate Directors, has an MBA from the Rotman School of Management at the University of Toronto as well as an Honorary Doctor of Laws from the University of Toronto, and is a Member of the Order of Canada.

 

2020 meeting attendance

As Chairman, Mr. Cassaday is not a member of the audit, management resources and compensation or risk committees but attends at the invitation of the respective committee chair.

 

 

 

 

 

  

Director since

April 1993

 

 

 

Term limit:

2023

 

 

2020 votes for: 97.30%

 

 

Public company boards (last five years)

 

•  Sleep Country Canada Holdings Inc., 2015-present

•  Sysco Corporation, 2004-present

•  Spin Master Corp., 2015-2018

•  Gibraltar Growth Corporation,
2015-2017

Board   9 of 9        100

 

Board committees

      

• Audit

  6 of 6        100

• Corporate governance and nominating

  5 of 5        100

• Management resources and compensation

  6 of 6        100

• Risk

  6 of 6        100

Equity ownership (as at February 26, 2021 and February 28, 2020)

 

Year   Common
shares
    DSUs     Total common
shares and DSUs
    Total value     Meets equity
ownership guideline
 
2021     21,840       220,520       242,360       $6,148,673       Yes  
2020     21,840       193,518       215,358       $4,858,476       Yes  
Change     0       27,002       27,002      
                  

 

LOGO  

 

 

    See page 35 for information about equity ownership  

 

2021 Management information circular         17  


Table of Contents

 

 

LOGO   

Nicole S. Arnaboldi

 

Greenwich, CT, U.S.A./Age 62/Independent

 

   

Key competencies and experience

 
   

•  Finance/Accounting

 

• Talent management/Executive compensation

   

•  Insurance/Reinsurance/Investment management

 

• Asia experience

   

•  Risk management

 

• Public company executive/Director

   

 

Ms. Arnaboldi’s extensive experience at a major financial institution, specifically in the asset management field, qualify her to serve on our board and as a member of the risk committee and the management resources and compensation committee.

 

Nicole Arnaboldi is a former senior executive at Credit Suisse, a global financial services company, and its predecessor Donaldson, Lufkin and Jenrette Securities Corporation, holding a number of senior roles in their wealth and asset management businesses, including Senior Advisor, and prior to that, Vice Chairman, Credit Suisse Asset Management.

 

Ms. Arnaboldi is a member of the boards of Commonfund and Merit Hill Capital (non-public companies). She also serves on various Harvard University advisory boards, including for HarvardX and Harvard Law School.

 

Ms. Arnaboldi holds a Bachelor of Arts from Harvard College, and a JD and an MBA from Harvard University.

 

2020 meeting attendance

 

 

 

 

 

  

Director since

June 2020

 

 

Term limit:

2033

 

 

Public company boards (last five years)

 

• None

Board   7 of 7        100

 

Board committees (June – Dec)

      

• Management resources and compensation

  3 of 3        100

• Risk committee

  4 of 4        100

Equity ownership (as at February 26, 2021)

 

Year

 

Common

shares

   

DSUs

   

Total common

shares and DSUs

   

Total value

   

Meets equity

ownership guideline

 
2021     6,500       7,601       14,101     $ 357,742       No  

 

Ms. Arnaboldi joined the board on June 9, 2020. Under the director equity ownership requirements, she is expected to meet the equity ownership requirements within six years of joining the board.

 

                  

 

LOGO  

 

 

    See page 35 for information about equity ownership  

 

18     Manulife Financial Corporation


Table of Contents

About the Directors

 

 

LOGO   

Guy L.T. Bainbridge

 

Edinburgh, Midlothian, United Kingdom/Age 60/Independent

 

   

Key competencies and experience

  
 

•  Finance/Accounting

  

• Risk management

 

•  Insurance/Reinsurance/Investment management

  

• Asia experience

 

 

Mr. Bainbridge’s extensive financial and audit experience qualify him to serve on our board and as a member of the audit committee and the corporate governance and nominating committee.

 

Guy Bainbridge is a former partner with KPMG LLP. He has acted as the key audit leader of several of the UK and world’s largest financial institutions and served on KPMG’s UK and Europe boards.

 

Mr. Bainbridge also serves as the audit committee chair of each of Yorkshire Building Society and ICE Clear Europe Limited (non-public companies). Mr. Bainbridge is a member of the Institute of Chartered Accountants in England and Wales and holds a Master of Arts from the University of Cambridge.

 

2020 meeting attendance

 

 

 

 

  

Director since

August 2019

 

 

Term limit:

2032

 

 

2020 votes for: 99.81%

 

 

Public company boards (last five years)

 

• None

Board   9 of 9        100

 

Board committees

      

• Audit

  6 of 6        100

• Corporate governance and nominating

  5 of 5        100

Equity ownership (as at February 26, 2021 and February 28, 2020)

 

Year   Common
shares
    DSUs     Total common
shares and DSUs
    Total value     Meets equity
ownership guideline
 
2021     0       9,782       9,782       $248,169       No  
2020     0       2,124       2,124       $47,917       No  
Change     0       7,658       7,658      

 

Mr. Bainbridge joined the board on August 7, 2019. Under the director equity ownership requirements, he is expected to meet the equity ownership requirements within six years of joining the board.

 

                  

 

LOGO  

 

 

    See page 35 for information about equity ownership  

 

2021 Management information circular         19  


Table of Contents

 

 

LOGO   

Joseph P. Caron

 

West Vancouver, BC, Canada/Age 73/Independent

 

   

Key competencies and experience

  
 

•  Talent management/Executive compensation

•  Asia experience

  

• Government relations/Public policy/Regulatory

• Public company executive/Director

 

 

Mr. Caron brings business, government and international experience to the board, providing a well rounded perspective that positions him well to serve on our board, and as a member of the audit committee and the corporate governance and nominating committee.

 

Joseph Caron is the former Principal and Founder of Joseph Caron Incorporated, a consulting business established in 2010 to provide strategic counsel to Asian businesses seeking to grow in Canada and Canadian businesses and organizations focused on development in Asia. His experience includes four years with the international consulting firm HB Global Advisors Corporation (2010 to 2013), and almost four decades with the Government of Canada where he served in a number of key diplomatic posts, including Ambassador to the People’s Republic of China (2001 to 2005), Ambassador to Japan (2005 to 2008) and High Commissioner to the Republic of India (2008 to 2010).

 

Mr. Caron holds a Bachelor of Arts in Political Science from the University of Ottawa. He holds honorary degrees from York University and Meiji Gakuin University, and has been named a Distinguished Fellow of the Asia Pacific Foundation and an Honorary Research Associate of the University of British Columbia’s Institute of Asian Research.

 

2020 meeting attendance

 

 

 

 

  

Director since

October 2010

 

 

Term limit:

2023

 

 

2020 votes for: 99.23%

 

 

Public company boards (last five years)

 

• Westport Innovations Inc., 2013-2016

Board   9 of 9        100

 

Board committees

      

• Audit

  6 of 6        100

• Corporate governance and nominating

  5 of 5        100

Equity ownership (as at February 26, 2021 and February 28, 2020)

 

Year   Common
shares
    DSUs     Total common
shares and DSUs
    Total value     Meets equity
ownership guideline
 
2021     8,836       65,822       74,658       $1,894,073       Yes  
2020     8,836       54,810       63,646       $1,435,854       Yes  
Change     0       11,012       11,012      
                  

 

LOGO  

 

 

    See page 35 for information about equity ownership  

 

20     Manulife Financial Corporation


Table of Contents

About the Directors

 

 

LOGO   

Susan F. Dabarno

 

Bracebridge, ON, Canada/Age 68/Independent

 

   

Key competencies and experience

  
 

•  Finance/Accounting

  

• Asia experience

 

•  Insurance/Reinsurance/Investment management

  

• Public company executive/Director

 

•  Talent management/Executive compensation

  

• Digital transformation/Sales/Marketing

 

•  Technology/Operations

  
 

 

Ms. Dabarno brings extensive global wealth management and financial services experience to the board and her roles in various executive capacities and accounting background qualify her to serve on our board, and as a member of the risk committee and the management resources and compensation committee.

 

Susan Dabarno has been a corporate director since 2011. She has extensive wealth management and distribution expertise and served from 2009 to 2010 as Executive Chair, and from 2003 to 2009 as President and Chief Executive Officer, of Richardson Partners Financial Limited, an independent wealth management services firm. Before joining Richardson Partners Financial Limited, Ms. Dabarno was President and Chief Operating Officer at Merrill Lynch Canada Inc.

 

She is a former director of the Toronto Waterfront Revitalization Corporation (government funded organization) and Bridgepoint Health Foundation (not-for-profit).

 

Ms. Dabarno is a Fellow of Chartered Professional Accountants (FCPA) and holds a Class II Diploma from McGill University.

 

2020 meeting attendance

 

 

 

 

 

  

Director since

March 2013

 

 

Term limit:

2025

 

 

2020 votes for: 99.79%

 

 

Public company boards (last five years)

 

• Cenovus Energy Inc., 2017-2021

Board   9 of 9        100

 

Board committees (Jan – June)

      

• Management resources and compensation

  3 of 3        100

• Risk

  2 of 2        100

 

Board committees (June – Dec)

         

• Audit

  4 of 4        100   

• Corporate governance and nominating

  3 of 3        100   

On June 9, 2020 Susan Dabarno resigned from the management resources and compensation committee and risk committee and was appointed to the audit committee and corporate governance and nominating committee. On February 28, 2021 Susan Dabarno resigned from the audit committee and corporate governance and nominating committee and was appointed to the management resources and compensation committee and risk committee.

 

  

Equity ownership (as at February 26, 2021 and February 28, 2020)

 

Year

 

Common

shares

   

DSUs

   

Total common

shares and DSUs

   

Total value

   

Meets equity

ownership guideline

 
2021     45,250       20,374       65,624       $1,664,881       Yes  
2020     45,250       12,082       57,332       $1,293,410       Yes  
Change     0       8,292       8,292      
                  

 

LOGO  

 

 

    See page 35 for information about equity ownership  

 

2021 Management information circular         21  


Table of Contents

 

 

LOGO   

Julie E. Dickson

 

Ottawa, ON, Canada/Age 63/Independent

 

   

Key competencies and experience

  
 

•  Finance/Accounting

  

• Risk management

 

•  Insurance/Reinsurance/Investment management

  

• Government relations/Public policy/Regulatory

 

 

Ms. Dickson’s extensive financial, risk and regulatory experience qualify her to serve on our board and as a member of the risk committee and the management resources and compensation committee.

 

Julie Dickson is a former Superintendent of Financial Institutions, Canada, Canada’s main financial services regulator. She currently serves on the Canadian Public Accountability Board, and the boards of the Dubai Financial Services Authority and the Global Risk Institute.

 

Ms. Dickson is an Officer of the Order of Canada and holds a Bachelor of Arts from the University of New Brunswick and a Masters of Economics from Queen’s University.

 

2020 meeting attendance

 

 

 

 

  

Director since August 2019

 

 

Term limit:

2032

 

 

2020 votes for: 99.82%

 

 

Public company boards (last five years)

 

• None

Board   9 of 9        100

 

Board committees

      

• Management resources and compensation

  6 of 6        100

• Risk

  6 of 6        100

Equity ownership (as at February 26, 2021 and February 28, 2020)

 

Year

 

Common

shares

   

DSUs

   

Total common

shares and DSUs

   

Total
value

   

Meets equity

ownership guideline

 
2021     0       19,565       19,565       $496,364       No  
2020     0       4,249       4,249       $95,857       No  
Change     0       15,316       15,316      

 

Ms. Dickson joined the board on August 7, 2019. Under the director equity ownership requirements, she is expected to meet the equity ownership requirements within six years of joining the board.

 

                  

 

LOGO  

 

 

    See page 35 for information about equity ownership  

 

22     Manulife Financial Corporation


Table of Contents

About the Directors

 

 

LOGO   

Sheila S. Fraser

 

Ottawa, ON, Canada/Age 70/Independent

 

   

Key competencies and experience

  
 

•  Finance/Accounting

•  Risk management

•  Talent management/Executive compensation

  

• Government relations/Public policy/Regulatory

• Public company executive/Director

 

 

Ms. Fraser’s extensive professional experience and her contributions to the accounting and auditing profession qualify her to serve on our board, as a member of the corporate governance and nominating committee and as chair of the audit committee. Her other board experience and international work provide an added perspective to her board and committee work.

 

Sheila Fraser is currently a corporate director. Ms. Fraser served as Auditor General of Canada from 2001 to 2011 and, prior to joining the Office of the Auditor General in 1999 as Deputy Auditor General, she was a partner at Ernst & Young LLP for 18 years.

 

Ms. Fraser’s contributions to the accounting and auditing profession include her former role as a Trustee of the International Financial Reporting Standards (IFRS) Foundation and her current role as a Director on the Canadian Public Accountability Board. She has also chaired two committees of the International Organization of Supreme Audit Institutions as well as the Public Sector Accounting Board of the Canadian Institute of Chartered Accountants and was a member of the International Federation of Accountants-International Public Sector Accounting Standards Board.

 

Ms. Fraser also serves on the board of the International Federation of Accountants (IFAC). She holds a Bachelor of Commerce from McGill University, is an Officer of the Order of Canada and is a Fellow of the Institute of Chartered Professional Accountants of Ontario and the Ordre des comptables professionnels agréés du Québec.

 

2020 meeting attendance

 

 

 

 

 

  

Director since

November 2011

 

 

Term limit:

2024

 

 

2020 votes for: 98.75%

 

 

Public company boards (last five years)

 

• Bombardier Inc.,
2012-2017

Board   9 of 9        100

 

Board committees

      

• Audit (chair)

  6 of 6        100

• Corporate governance and nominating

  5 of 5        100

Equity ownership (as at February 26, 2021 and February 28, 2020)

 

Year   Common
shares
    DSUs     Total common
shares and DSUs
    Total value     Meets equity
ownership guideline
 
2021     580       78,217       78,797       $1,999,080       Yes  
2020     580       65,082       65,662       $1,481,335       Yes  
Change     0       13,135       13,135      
                  

 

LOGO  

 

 

    See page 35 for information about equity ownership  

 

2021 Management information circular         23  


Table of Contents

 

 

LOGO  

Roy Gori (President and Chief Executive Officer)

 

Toronto, ON, Canada/Age 51/Not independent (management)

 

   

Key competencies and experience

 
   

•  Finance/Accounting

 

• Technology/Operations

   

•  Insurance/Reinsurance/Investment management

 

• Asia experience

   

•  Risk management

 

• Public company executive/Director

   

•  Talent management/Executive compensation

 

• Digital transformation/Sales/Marketing

   

 

Roy Gori is the President and Chief Executive Officer of Manulife, Canada’s largest insurance company, and one of the largest insurance and asset management companies in the world. Appointed in 2017, Roy’s early tenure as CEO has been marked by the introduction of a clear strategy and values that build on Manulife’s strong foundations to include sharper focus on the customer and a shift to digital innovation, in line with the company’s mission to make customers’ decisions easier, and lives better.

 

As a champion for diversity and inclusion, Roy is the Chair of Manulife’s Diversity, Equity and Inclusion Council. He is also a passionate advocate for health and wellness, promoting the benefits of behavioural insurance through award-winning products like Manulife Vitality and Manulife MOVE.

 

Roy joined Manulife as President and Chief Executive Officer for Asia in 2015. In that role, he was responsible for operations in 12 markets across Asia, driving Manulife’s rapidly growing business in the region. Roy started his career at Citibank in 1989, where he held progressively senior roles and was finally responsible for the company’s Asia Pacific retail business, which included its insurance and wealth management business.

 

Roy holds a Bachelor of Economics and Finance from The University of New South Wales, and an MBA from the University of Technology, Sydney. He serves on the Board of the Business Council of Canada and is a member of the Geneva Association. A native Australian, Roy has worked and lived in Sydney, Singapore, Thailand, and Hong Kong, and is now based in Toronto.

  

Director since

October 2017

 

 

Term limit:

applies to independent directors only

 

 

2020 votes for: 99.50%

 

 

Public company boards (last five years)

 

• None

2020 meeting attendance

 

Board   9 of 9        100

 

Board committees

      

Mr. Gori is not a member of any of the board committees but

attends at the invitation of the Chairman and/or committee chair

          

Equity ownership

As CEO, Mr. Gori has separate equity ownership requirements, which he meets.

You can read more about this on page 102.

 

24     Manulife Financial Corporation


Table of Contents

About the Directors

 

 

LOGO   

Tsun-yan Hsieh

 

Singapore, Singapore/Age 68/Independent

 

   

Key competencies and experience

  
 

•  Finance/Accounting

•  Talent management/Executive compensation

•  Technology/Operations

•  Asia experience

  

• Government relations/Public policy/Regulatory

• Public company executive/Director

• Digital transformation/Sales/Marketing

 

 

Mr. Hsieh’s extensive management leadership, management consulting and academic experience, combined with his Asia perspective, qualifies him to serve on our board, and as a member of the audit committee and the corporate governance and nominating committee.

 

Tsun-yan Hsieh is Chairman of LinHart Group PTE Ltd., a firm he founded in 2010 to provide leadership services internationally.

 

Mr. Hsieh, a resident of Singapore, has extensive consulting experience in business strategy, leadership development and corporate transformation. Mr. Hsieh joined McKinsey & Company in 1980 and was elected a director from 1990 to 2008, when he retired. During his tenure, he served as Managing Director of Canada and ASEAN practices and led McKinsey’s Organization and Leadership Practice globally.

 

Mr. Hsieh is a director on the following non-public boards: LinHart Group PTE Ltd., Manulife US Real Estate Management Pte Ltd., Dyson Holdings Pte. Ltd., the Singapore Institute of Management and the National University of Singapore (NUS) Business School. He also serves as Provost Chair Professor at the NUS Business School and the Lee Kuan Yew School of Public Policy.

 

Mr. Hsieh has a Bachelor of Science in Mechanical Engineering from the University of Alberta and an MBA from Harvard Business School.

 

2020 meeting attendance

 

 

 

 

 

 

  

Director since October 2011

 

 

Term limit:

2024

 

 

2020 votes for: 99.76%

 

 

Public company boards (last five years)

 

• Singapore Airlines,
2012-present

Board   9 of 9        100

 

Board committees

      

• Management resources and compensation

  6 of 6        100

• Risk

  6 of 6        100

On February 28, 2021 Tsun-yan Hsieh resigned from the management resources and compensation committee and risk committee and was appointed to the audit committee and corporate governance and nominating committee.

 

  

Equity ownership (as at February 26, 2021 and February 28, 2020)

 

Year

 

Common

shares

   

DSUs

   

Total common

shares and DSUs

   

Total value

   

Meets equity

ownership guideline

 
2021     0       127,583       127,583       $3,236,781       Yes  
2020     0       105,801       105,801       $2,386,871       Yes  
Change     0       21,782       21,782      
                  

 

LOGO  

 

 

 

    See page 35 for information about equity ownership  

 

2021 Management information circular         25  


Table of Contents

 

 

LOGO   

Donald R. Lindsay

 

Vancouver, BC, Canada/Age 62/Independent

 

   

Key competencies and experience

  
 

•  Finance/Accounting

•  Risk management

•  Talent management/Executive compensation

  

• Technology/Operations

• Asia experience

• Public company executive/Director

 

 

Mr. Lindsay’s CEO and international business experience, and nearly two decades of experience in senior executive roles in investment and corporate banking and global financial services, qualify him to serve on our board, as a member of the risk committee and as chair of the management resources and compensation committee.

 

Donald Lindsay is President and CEO of Teck Resources Limited, Canada’s largest diversified mining, mineral processing and metallurgical company, a position he has held since 2005.

 

Mr. Lindsay’s experience includes almost two decades with CIBC World Markets Inc., where he ultimately served as President after periods as Head of Investment and Corporate Banking and Head of the Asia Pacific Region.

 

Mr. Lindsay is currently serving a three-year term as Chair of the Business Council of Canada. He earned a Bachelor of Science in Mining Engineering from Queen’s University and holds an MBA from Harvard Business School.

 

2020 meeting attendance

 

 

 

 

 

  

Director since

August 2010

 

 

Term limit:

2023

 

 

2020 votes for: 98.18%

 

 

Public company boards (last five years)

 

• Teck Resources Limited, 2005-present

 

Board

 

 

9 of 9

    

 

 

 

100

 

 

Board committees

      

• Management resources and compensation (chair)

  6 of 6        100

• Risk

  6 of 6        100

Equity ownership (as at February 26, 2021 and February 28, 2020)

 

Year   Common
shares
    DSUs     Total common
shares and DSUs
    Total value     Meets equity
ownership guideline
 
2021     20,000       85,593       105,593       $2,678,894       Yes  
2020     20,000       72,017       92,017       $2,075,904       Yes  
Change     0       13,576       13,576      
                  

 

LOGO  

 

 

    See page 35 for information about equity ownership  

 

26     Manulife Financial Corporation


Table of Contents

About the Directors

 

 

LOGO   

John R.V. Palmer

 

Toronto, ON, Canada/Age 77/Independent

 

   

Key competencies and experience

  
 

•  Finance/Accounting

•  Risk management

•  Talent management/Executive compensation

•  Asia experience

  

• Government relations/Public policy/Regulatory

• Public company executive/Director

 

 

Mr. Palmer’s experience with regulators in different jurisdictions, including seven years as Superintendent of Financial Institutions, Canada, and his accounting background qualify him to serve on our board, and as a member of the audit committee and the corporate governance and nominating committee.

 

John Palmer was Chairman and a founding director of the Toronto Leadership Centre, an organization focused on leadership in financial supervision, until June 2018. Mr. Palmer was the Superintendent of Financial Institutions, Canada from 1994 to 2001, following his career at KPMG LLP (Canada) where he held senior positions, including Managing Partner and Deputy Chairman. He was also the Deputy Managing Director of the Monetary Authority of Singapore and has advised other regulators including the Australian Prudential Regulation Authority.

 

He serves on the boards of the following non-public companies: Sageco Advisory Services Inc. and Tenaugust Properties Inc.

 

Mr. Palmer holds a Bachelor of Arts from the University of British Columbia. He is a Fellow of the Institutes of Chartered Professional Accountants of Ontario and British Columbia, and a Member of the Order of Canada.

 

2020 meeting attendance

 

 

 

 

 

  

Director since November 2009

 

 

Term limit:

2022

 

 

2020 votes for: 99.24%

 

 

Public company boards (last five years)

 

• Fairfax Financial Holdings Limited, 2012-2019

 

Board

 

 

9 of 9

    

 

 

 

100

 

 

Board committees (Jan – May)

      

• Audit

  2 of 2        100

• Corporate governance and nominating

  2 of 2        100

 

Board committees (May – Dec)

      

• Management resources and compensation

  4 of 4        100

• Risk

  4 of 4        100

On May 7, 2020 John Palmer resigned from the audit committee and corporate governance and nominating committee and was appointed to the management resources and compensation committee and risk committee. On February 28, 2021 John Palmer resigned from the management resources and compensation committee and risk committee and was appointed to the audit committee and corporate governance and nominating committee.

 

  

Equity ownership (as at February 26, 2021 and February 28, 2020)

 

Year   Common
shares
    DSUs     Total common
shares and DSUs
    Total value     Meets equity
ownership guideline
 
2021     0       110,059       110,059       $2,792,197       Yes  
2020     0       96,398       96,398       $2,174,739       Yes  
Change     0       13,661       13,661      
                  

 

LOGO  

 

    See page 35 for information about equity ownership  

 

2021 Management information circular         27  


Table of Contents

 

 

LOGO   

C. James Prieur

 

Chicago, IL, U.S.A./Age 69/Independent

 

   

Key competencies and experience

  
 

•  Finance/Accounting

•  Insurance/Reinsurance/Investment management

•  Risk management

  

• Talent management/Executive compensation

• Technology/Operations

• Asia experience

• Public company executive/Director

 

 

Mr. Prieur’s strong financial background and his wealth of senior executive experience in the insurance business in Canada, the U.S. and globally qualify him to serve on our board, as a member of the management resources and compensation committee and as chair of the risk committee.

 

James Prieur has been a corporate director since 2011 and, prior to that time, Mr. Prieur served as Chief Executive Officer and director of CNO Financial Group, Inc. from 2006 until his retirement in 2011. CNO Financial Group is a life insurance holding company focused on the senior middle income market in the U.S. Prior to joining CNO Financial Group, Mr. Prieur was President and Chief Operating Officer of Sun Life Financial, Inc. from 1999 to 2006 where he had previously led operations in Asia, Canada, U.S., and the UK.

 

He serves on the board of the Alberta Investment Management Corporation, a Crown corporation of the Province of Alberta, and is a member of the President’s Circle of the Chicago Council on Global Affairs, a not-for-profit organization.

 

Mr. Prieur is a Chartered Financial Analyst and holds an MBA from the Richard Ivey School at Western University and a Bachelor of Arts from the Royal Military College of Canada.

 

2020 meeting attendance

 

 

 

 

 

  

Director since
January 2013

 

 

Term limit:

2025

 

 

2020 votes for: 99.78%

 

 

Public company boards (last five years)

 

• Ambac Financial Group, Inc., 2016-present

Board   9 of 9        100
Board committees       

• Management resources and compensation

  6 of 6        100

• Risk (chair)

  6 of 6        100

Equity ownership (as at February 26, 2021 and February 28, 2020)

 

Year

 

Common

shares

   

DSUs

   

Total common

shares and DSUs

   

Total value

   

Meets equity

ownership guideline

 
2021     145,000       110,445       255,445       $6,480,640       Yes  
2020     145,000       86,929       231,929       $5,232,318       Yes  
Change     0       23,516       23,516      
                  

 

LOGO  

 

    See page 35 for information about equity ownership  

 

28     Manulife Financial Corporation


Table of Contents

About the Directors

 

 

LOGO   

Andrea S. Rosen

 

Toronto, ON, Canada/Age 66/Independent

 

   

Key competencies and experience

  
 

•  Finance/Accounting

•  Risk management

•  Insurance/Reinsurance/Investment management

  

• Talent management/Executive compensation

• Public company executive/Director

 

 

Ms. Rosen’s experience as a global financial services executive with particular experience in investment banking, wholesale and retail banking, risk management, human resources management and executive compensation qualify her to serve on our board, as a member of the audit committee and as chair of the corporate governance and nominating committee.

 

Andrea Rosen has been a corporate director since 2006. Prior to January 2005, her experience includes more than a decade with TD Bank Financial Group, where she ultimately served as Vice Chair, TD Bank Financial Group and President of TD Canada Trust. Earlier in her career, she held progressively senior positions at Wood Gundy Inc. and was Vice President at Varity Corporation.

 

She serves on the board of the Institute of Corporate Directors (not-for-profit).

 

Ms. Rosen has an LLB from Osgoode Hall Law School, an MBA from the Schulich School of Business at York University and a Bachelor of Arts from Yale University.

 

2020 meeting attendance

 

 

 

 

 

  

Director since

August 2011

 

 

Term limit:

2024

 

 

2020 votes for: 99.27%

 

 

Public company boards (last five years)

 

• Ceridian HCM Holding Inc., 2018-present

• Element Fleet Management Corp. 2019-present

• Emera Inc., 2007-present

Board   9 of 9        100

 

Board committees

      

• Audit

  6 of 6        100

• Corporate governance and nominating (chair)

  5 of 5        100
      
      

Equity ownership (as at February 26, 2021 and February 28, 2020)

 

Year   Common
shares
    DSUs     Total common
shares and DSUs
    Total value     Meets equity
ownership guideline
 
2021     11,500       128,781       140,281       $3,558,929       Yes  
2020     11,500       104,167       115,667       $2,609,448       Yes  
Change     0       24,614       24,614      
                  

 

LOGO  

 

    See page 35 for information about equity ownership  

 

2021 Management information circular         29  


Table of Contents

 

 

LOGO   

Leagh E. Turner

 

Toronto, ON, Canada/Age 49/Independent

 

   

Key competencies and experience

  
 

•  Risk management

•  Talent management/Executive compensation

•  Technology/Operations

  

• Asia experience

• Public company executive/Director

• Digital transformation/Sales/Marketing

 

 

Ms. Turner’s extensive executive experience in the technology sector and leadership expertise leveraging people, process and technology to drive organizational transformation qualify her to serve on our board and as a member of the risk committee and the management resources and compensation committee.

 

Leagh Turner is a seasoned global executive in the technology sector currently holding the position of President and Chief Operating Officer for Ceridian HCM Holding Inc., a global human capital management software company. She also serves as a director of Plan International Canada. Ms. Turner is a strong advocate for the advancement of women in leadership and has been recognized twice on the WXN (Women’s Executive Network) Canada’s Top 100 Most Powerful Women list.

 

Ms. Turner holds a Bachelor of Arts from the University of Western Ontario.

 

2020 meeting attendance

 

 

 

 

  

Director since November 2020

 

 

Term limit:

2033

 

 

Public company boards (last five years)

 

• None

Board   1 of 1        100

 

Board committees

      

• Management resources and compensation

  1 of 1        100

• Risk committee

  1 of 1        100
      

Equity ownership (as at February 26, 2021)

 

Year

 

Common

shares

   

DSUs

   

Total common

shares and DSUs

    Total
value
   

Meets equity

ownership guideline

 
2021     0       824       824     $ 20,905       No  

 

Ms. Turner joined the board on November 10, 2020. Under the director equity ownership requirements, she is expected to meet the equity ownership requirements within six years of joining the board.

 

                  

 

LOGO  

 

    See page 35 for information about equity ownership  

 

30     Manulife Financial Corporation


Table of Contents

About the Directors

 

2020 board committee reports

Corporate governance and nominating committee

 

     
 

Andrea S. Rosen – Chair

 

Guy L.T. Bainbridge

 

Joseph P. Caron

 

John M. Cassaday

 

Susan F. Dabarno

 

Sheila S. Fraser

 

All members of the corporate governance and nominating committee are independent. The Chairman is also a member. There is cross-membership between the corporate governance and nominating committee and the audit committee.

 

The committee met five times in 2020. It has approved this report and is satisfied that it has carried out all of the responsibilities required by the committee charter.

     

 

Key responsibilities   Key activities
Managing board renewal and succession, including identifying the necessary competencies, expertise, skills, background and personal qualities for potential candidates, identifying qualified candidates, maintaining an evergreen list of qualified candidates and reviewing committee membership  

•  Completed a strategic review of board succession and diversity strategy.

•  Maintained and regularly refined the evergreen list of potential director candidates.

•  Led searches to identify new director candidates in line with the board’s overall needs and diversity policy, and led the vetting process.

•  Approved and recommended the board approve the appointment of two directors.

•  Reviewed the characteristics, experience and expertise necessary for prospective directors to align with Manulife’s ambitions for the future.

•  Oversaw the board’s diversity policy.

•  Reviewed committee membership and recommended committee appointments for new directors.

Developing effective corporate governance policies and procedures, including subsidiary governance and environmental, social and governance (ESG) issues  

•  Reviewed reports on ESG strategy, trends, risks and opportunities, including a review of the company’s climate change strategy.

•  Reviewed ESG reporting and recommended enhancements to the company’s 2019 Sustainability Report, including key performance indicators such as gender pay equity disclosure, employee turnover and employee engagement, and reviewed stakeholder feedback on the report.

•  Reviewed the details of, and compliance with, board and committee charters and mandates of board and committee chairs, directors and the CEO.

•  Considered all significant changes in director status and confirmed no adverse impact.

•  Provided effective oversight during the pandemic, including by monitoring corporate governance developments, assessing current practices against emerging best practices and other requirements, and enhancing practices for the virtual environment.

•  Reviewed reports on the company’s virtual annual meeting of shareholders, designed to allow shareholder participation in the pandemic environment.

•  Reviewed reports on subsidiary governance and the company’s subsidiary governance framework.

•  Reviewed reports on shareholder feedback.

Developing and overseeing the processes for assessing board, committee, board chair, committee chair and individual director effectiveness, including director peer assessments  

•  Refreshed and implemented the assessment process for the board, the chair of the board, the committees and chairs of each committee, including peer assessments.

•  Reviewed and recommended that the board confirm the independence of the directors.

•  Assessed the board’s relationship with management.

Overseeing the director orientation and education program  

•  Enhanced the new director orientation program, facilitating efficient onboarding of directors to allow for effective oversight in the pandemic environment.

•  Considered the relevant topics and developed the agenda for the director education program.

Overseeing director compensation  

•  Monitored developments in director compensation, ensuring compensation continues to be appropriate when benchmarked against companies of similar complexity.

The committee meets without management present at each meeting. The committee reviewed director compensation in 2020 and confirmed that no changes to the current fee structure were required for 2021. The committee did not retain a consultant or incur any fees for compensation matters in 2020.

 

2021 Management information circular         31  


Table of Contents

 

Audit committee

 

     
 

Sheila S. Fraser – Chair

 

Guy L.T. Bainbridge

 

Joseph P. Caron

 

Susan F. Dabarno

 

Andrea S. Rosen

 

The audit committee and the board have determined that all members of the committee are independent, financially literate and that Guy Bainbridge, Susan Dabarno, Sheila Fraser and Andrea Rosen qualify as audit committee financial experts under the Sarbanes-Oxley Act of 2002. All of the members also meet additional independence standards for audit committees under applicable U.S. and Canadian laws and securities exchange rules. The committee also serves as the conduct review committee. There is cross-membership between the audit committee and the corporate governance and nominating committee, and the committee holds a joint meeting with the risk committee at least once a year.

 

The committee met six times in 2020, including one joint meeting with the risk committee. It has approved this report and is satisfied that it has carried out all of the responsibilities required by the committee charter.

     

 

Key responsibilities   Key activities
Overseeing the quality and integrity of financial information, including the effectiveness of our systems of internal control over financial reporting  

• Reviewed significant accounting and actuarial practices and policies (and areas where judgment was applied), financial disclosure (and recommended them to the board for approval), and management’s report on the effectiveness of internal controls over financial reporting.

• Received frequent updates on the impacts of the pandemic on financial reporting and internal control matters.

• Reviewed key policy decisions related to the implementation of IFRS 17.

• Reviewed critical audit matters and key audit matters communicated by the external auditors.

Overseeing the performance, qualifications and independence of our external auditors  

• Considered auditor tenure and the engagement of the external auditors.

• Conducted the annual review of Ernst & Young, including the engagement partner and audit team, their independence, objectivity and quality of audit work performed, and recommended their reappointment as auditors to the board for approval.

• Reviewed and approved or pre-approved the auditor independence policy, the scope of the annual audit plan and all related services and fees, recurring audit and non-audit services for the coming year, and audit and non-audit services proposed during the year outside of previous approvals.

Overseeing our compliance program, including compliance with legal and regulatory requirements and the effectiveness of our compliance practices  

• Oversaw compliance with applicable laws and regulations, including the anti-money laundering/anti-terrorist financing program.

• Reviewed reports and received frequent updates on litigation and legislative and regulatory developments, including developments implemented in response to the pandemic.

Overseeing our finance, actuarial, internal audit and global compliance functions  

• Reviewed reports, opinions and recommendations from the Chief Actuary, Chief Financial Officer (CFO), Chief Auditor and Global Compliance Chief.

• Reviewed the annual report of the independent actuarial peer reviewer.

• Reviewed and approved the internal audit plan and reviewed periodic reports on internal audit activities and audit results.

• Reviewed the company’s financial plan.

• Reviewed reports on capital targets and ratios.

• Reviewed and approved the mandates of the Global Compliance Chief, Chief Auditor, CFO and Chief Actuary and the global compliance, internal audit, finance and actuarial functions, and reviewed the performance evaluation and assessed the effectiveness of each.

Developing our ethical standards and policies on managing conflicts of interest, protecting confidential information and monitoring customer complaints  

• Reviewed the code of business conduct and ethics and the procedures relating to conflicts of interest and restricting the use of confidential information.

• Reviewed reports on compliance with the code and Ethics Hotline activities.

• Oversaw procedures for handling complaints.

Monitoring arrangements with related parties and transactions that could have a material impact on our stability or solvency  

• Provided oversight of transactions with related parties, a group that includes directors and senior officers as defined by the Insurance Companies Act (Canada), including through the committee-approved related party transactions policy, which includes established procedures to ensure the disclosure and review of related party transactions and that apply to a broad range of transactions with related parties, from the provision of products or services to a related party to the purchase of assets or services from a related party.

• Reviewed reports on the company’s related party procedures and effectiveness of the procedures to identify material related party transactions and ensure any related party transactions comply with all requirements.

The committee meets without management present at each meeting. The committee also met in private with Ernst & Young, the independent actuarial peer reviewer, the CFO, Chief Risk Officer, Chief Actuary, Chief Auditor, Chief Information Officer, Chief Information Risk Officer and Global Compliance Chief throughout the year.

 

32     Manulife Financial Corporation


Table of Contents

About the Directors

 

Management resources and compensation committee

 

     
 

Donald R. Lindsay – Chair

 

Nicole S. Arnaboldi

 

Julie E. Dickson

 

Tsun-yan Hsieh

 

John R.V. Palmer

 

C. James Prieur

 

Leagh E. Turner

 

All members of the management resources and compensation committee are independent and meet the additional independence standards set out in our director independence policy in compliance with applicable securities exchange rules. A majority of the members have finance, talent management and executive compensation, and risk management experience. There is cross-membership between the management resources and compensation committee and the risk committee.

 

The committee met six times in 2020. It has approved this report and is satisfied that it has carried out all of the responsibilities required by the committee charter.

     

 

Key responsibilities   Key activities
Overseeing global human resources strategy, policies and programs  

• Reviewed the 2020 compensation program and recommended the 2021 compensation program to the board for approval.

• Reviewed in-depth reports on the impact of the pandemic on human resources strategy, employees and compensation programs.

• Monitored employee engagement, including the results of the global employee engagement survey.

• Reviewed the compensation programs, including base pay, incentives, pension and benefit plans, and made recommendations to the board.

• Received frequent updates on the company’s response to the pandemic in relation to the health and well-being of employees and the transition to the work from home environment.

• Reviewed reports on talent management and diversity.

• Reviewed updates to the global compensation policy and reports on sales compensation governance.

• Oversaw the review of compensation of employees who have a material impact on our risk exposure.

Developing and maintaining succession plans for the CEO and other senior executives  

• Completed a strategic review of the CEO and senior executive roles, including succession planning for those roles.

Reviewing senior executive appointments before recommending them to the board for approval  

• Provided oversight of the vetting process for executive appointments, reviewed several executive appointments and recommended to the board for approval.

Reviewing and recommending compensation performance goals and objectives for the CEO and other senior executives, assessing the performance of the CEO and other senior executives in light of their performance goals and objectives and recommending their compensation  

• Reviewed and approved the CEO’s annual objectives, assessed the CEO’s performance and integrity and made compensation recommendations for approval by the board.

• Reviewed the performance assessment, compensation recommendations and assessment of integrity for the members of the executive leadership team and the head of each oversight function and approved their annual objectives.

• Reviewed and approved changes to the company’s compensation peer group.

• Considered the feedback from shareholder engagement meetings regarding compensation programs.

Overseeing compensation plans and ensuring the compensation program aligns with risk management policies and practices and corporate strategy  

• Reviewed reports on the alignment of compensation programs with sound risk management principles and established risk appetite.

• Reviewed reports on compensation for employees who have a material impact on our risk exposure.

Overseeing governance of employee pension plans  

• Oversaw the company’s global retirement and global benefits programs.

The committee meets without management present at each meeting. The committee also works with a consulting firm to receive independent advice on compensation matters, and has retained Korn Ferry Hay Group, Inc. (Korn Ferry) as its independent advisor since November 2019. The committee chair approves all work carried out by the independent advisor. The committee met in private with Korn Ferry throughout the year. Please see page 98 for more about the independent advisor.

 

2021 Management information circular         33  


Table of Contents

 

Risk committee

 

     
 

C. James Prieur – Chair

 

Nicole S. Arnaboldi

 

Julie E. Dickson

 

Tsun-yan Hsieh

 

Donald R. Lindsay

 

John R.V. Palmer

 

Leagh E. Turner

 

All members of the risk committee are independent and a majority are knowledgeable about risk management and risk disciplines. There is cross-membership between the risk committee and the management resources and compensation committee, and the committee holds a joint meeting with the audit committee at least once a year.

 

The committee met six times in 2020, including one joint meeting with the audit committee. It has approved this report and is satisfied that it has carried out all of the responsibilities required by the committee charter.

     

 

Key responsibilities   Key activities
Identifying and assessing our principal risks and overseeing the programs, procedures and controls in place to manage them  

• Reviewed reports from the Chief Risk Officer on risk appetite, risk limits, principal risk exposures, stress tests and emerging risks and policies, procedures and controls in place to manage principal risks.

• Received frequent updates on emerging risks related to the pandemic and management’s mitigation efforts.

• Reviewed reports from the Chief Auditor on the adequacy and effectiveness of the procedures and controls to manage the principal risks.

• Reviewed reports on capital targets and ratios.

• Reviewed the company’s information services risk management program, including reports on cyber security risks, mitigation and resilience, and engaged in discussions regarding the effectiveness of the program and controls for addressing the related risks.

• Monitored updates from business segments on the key risks and risk management strategies.

Developing, overseeing and reviewing our enterprise risk management framework, risk appetite and risk limits  

• Considered the appropriate balance of risk and return, and reviewed the risk appetite and risk limits and recommended to the board for approval.

Reviewing the risk impact of the business plan and new business initiatives, including consistency with our risk appetite and related risk management and controls  

• Reviewed the risk impact of the strategic plan, including consistency with the approved risk appetite and related risk management and controls.

Aligning our compensation programs with sound risk management principles and our established risk appetite  

• Reviewed reports on the alignment of compensation programs with sound governance principles and established risk appetite.

Overseeing the risk management function  

• Implemented an independent review of the design effectiveness of the company’s risk management function and reviewed the report of the independent consultant engaged to perform the review.

• Reviewed and approved the mandates of the Chief Risk Officer and the risk management function, and reviewed the performance evaluation and assessed the effectiveness of each.

• Reviewed and approved the budget, structure, skills and resources of the risk management function.

Overseeing our compliance with risk management policies  

• Reviewed and approved changes to the risk policy framework and related enterprise policies.

The committee meets without management present at each meeting. The committee also met in private with the Chief Risk Officer, Chief Information Officer, Chief Information Risk Officer, Chief Auditor, Global Compliance Chief, CFO, and the Chief Actuary throughout the year.

 

34     Manulife Financial Corporation


Table of Contents

About the Directors

 

How we pay our directors

 

We structure director compensation with three goals in mind:

• to reflect directors’ responsibilities, time commitment and expected contribution

• to align directors’ interests with those of our shareholders

• to be competitive with global financial institutions that are comparable to us in scope and complexity.

 

The table on page 37 shows the director fee schedule for services provided to Manulife and Manufacturers Life in 2020. Fees are divided equally between the two companies.

 

Directors do not receive stock options or participate in a pension plan or an equity-based compensation plan, other than receiving deferred share units. Mr. Gori does not receive director compensation because he is compensated in the role of President and CEO.

   
   
        

Key features of the director compensation structure:

• Directors are paid a single annual retainer. Meeting fees and the travel allowance have been eliminated.

• Committee chairs receive an additional retainer to recognize the additional responsibilities and workload required by this leadership role.

• Directors must receive at least 50% of their board retainer in equity, even after they have met their equity ownership requirement.

• The director equity ownership requirement is six times the mandatory equity portion of the annual board retainer. Directors are expected to meet this requirement within six years of joining the board.

 

   
   

In 2018, the board, working with an independent consultant, completed an extensive review of director compensation, and introduced a new flat fee structure and new director equity ownership requirements to align with best practices and reduce compensation volatility and complexity. The changes went into effect on January 1, 2019. The corporate governance and nominating committee reviewed director compensation in 2020 and confirmed that compensation continues to be appropriate when benchmarked against companies of similar complexity.

About equity ownership

Directors are required to own equity in Manulife so their interests are aligned with the interests of our shareholders. Directors can count Manulife common shares, preferred shares or deferred share units towards meeting the ownership guidelines. Directors can beneficially own the shares or exercise control or direction over them.

We require all directors except Mr. Gori to own common shares, preferred shares and/or deferred share units with a total market value of at least six times the mandatory equity portion of the annual board retainer (US$615,000). Mr. Gori has separate equity ownership requirements as President and CEO, which he meets. You can read more about this on page 102.

See pages 17 to 30 for information about each nominated director’s equity ownership. Directors receive a minimum of 50% of their board retainer in equity and are expected to meet their equity ownership requirements within six years of joining the board. All directors who have served six years or more meet or exceed their equity ownership requirement.

 

2021 Management information circular         35  


Table of Contents

 

About deferred share units

Deferred share units are notional shares that have the same value as Manulife common shares and earn additional units as dividend equivalents at the same rate as dividends paid on our common shares.

Deferred share units vest in full on the grant date, but directors can only redeem their deferred share units for cash or shares after they leave the board (on the anniversary of their departure for U.S. directors or within one year of leaving the board for all other directors). Deferred share units can only be transferred when a director dies.

We calculate the number of deferred share units to be granted by dividing the dollar value to be received by the closing price of our common shares on the TSX on the last trading day before the grant date. Directors receive additional units as dividend equivalents when dividends are paid on our common shares. Deferred share units are granted to directors under the stock plan for non-employee directors – please see page 86 for more information.

Outstanding share-based awards

The table below shows the market value of deferred share units that have vested but not paid out as at December 31, 2020. Directors received these deferred share units as part of their compensation. These are valued using the closing price of our common shares on the TSX on December 31, 2020.

 

(as at December 31, 2020)   Share-based
awards held
     Share price     

Market or payout value of

vested share-based awards

not paid out or distributed

Rona Ambrose

 

 

24,318

 

  

 

$22.65

 

  

 

$550,802.70

 

Nicole Arnaboldi

 

 

7,601

 

  

 

$22.65

 

  

 

$172,162.65

 

Guy Bainbridge

 

 

9,782

 

  

 

$22.65

 

  

 

$221,562.30

 

Joseph Caron

 

 

65,822

 

  

 

$22.65

 

  

 

$1,490,868.30

 

John Cassaday

 

 

220,520

 

  

 

$22.65

 

  

 

$4,994,778.00

 

Susan Dabarno

 

 

20,374

 

  

 

$22.65

 

  

 

$461,471.10

 

Julie Dickson

 

 

19,565

 

  

 

$22.65

 

  

 

$443,147.25

 

Sheila Fraser

 

 

78,217

 

  

 

$22.65

 

  

 

$1,771,615.05

 

Tsun-yan Hsieh

 

 

127,583

 

  

 

$22.65

 

  

 

$2,889,754.95

 

Donald Lindsay

 

 

85,593

 

  

 

$22.65

 

  

 

$1,938,681.45

 

John Palmer

 

 

110,059

 

  

 

$22.65

 

  

 

$2,492,836.35

 

James Prieur

 

 

110,445

 

  

 

$22.65

 

  

 

$2,501,579.25

 

Andrea Rosen

 

 

128,781

 

  

 

$22.65

 

  

 

$2,916,889.65

 

Leagh Turner

 

 

824

 

  

 

$22.65

 

  

 

$18,663.60

 

Lesley Webster

 

 

63,231

 

  

 

$22.65

 

  

 

$1,432,182.15

 

 

36     Manulife Financial Corporation


Table of Contents

About the Directors

 

Director compensation

DIRECTOR FEES

 

(US$)        
Annual retainers     

 

 

 

 

 

Board member    $ 205,000  
Chairman    $ 400,000  
Vice chair of the board1 (paid in addition to the annual board member retainer and any other retainers that apply)    $ 50,000  
Observer to subsidiary board (requested from time to time, may be paid an additional retainer and/or meeting fee at the board’s discretion)      Variable  
Committee chair retainers     

 

 

 

 

 

• Audit committee

• Management resources and compensation committee

• Risk committee

• Corporate governance and nominating committee

   $

$

$

$

40,000

40,000

40,000

40,000

 

 

 

 

 

1 

There is currently no vice chair of the board.

 

2021 Management information circular         37  


Table of Contents

 

2020 DIRECTOR COMPENSATION

The table below shows the compensation paid to the independent directors in 2020 for services provided to Manulife, Manufacturers Life and any Manulife subsidiary. Amounts are paid in U.S. dollars and were converted to Canadian dollars using the opening Bank of Canada exchange rate on the business day before each quarterly payment date:

 

 

US$1.00 = $1.4166 on March 30, 2020

 

US$1.00 = $1.3654 on June 29, 2020

 

US$1.00 = $1.3380 on September 29, 2020

 

US$1.00 = $1.2787 on December 30, 2020.

 

 

 

   Annual fees         

 

 
  

 

   Annual retainer        Committee Chair retainer        Subsidiary board fees          

 

 
Rona Ambrose      $188,292.49          $0.00                  

 

 

 

 

 

Nicole Arnaboldi      $151,211.17          $0.00                  

 

 

 

 

 

Guy Bainbridge      $276,683.38          $0.00                  

 

 

 

 

 

Joseph Caron      $276,683.38          $0.00                  

 

 

 

 

 

John Cassaday      $539,870.00          $0.00                  

 

 

 

 

 

Susan Dabarno      $276,683.38          $0.00                  

 

 

 

 

 

Julie Dickson      $276,683.38          $0.00                  

 

 

 

 

 

Sheila Fraser      $276,683.38          $53,987.00                  

 

 

 

 

 

Tsun-yan Hsieh      $276,683.38          $0.00          $97,997.76         

 

 

 

 

 

Thomas Jenkins      $101,193.44          $0.00                  

 

 

 

 

 

Donald Lindsay      $276,683.38          $53,987.00                  

 

 

 

 

 

John Palmer      $276,683.38          $0.00                  

 

 

 

 

 

James Prieur      $276,683.38          $53,987.00                  

 

 

 

 

 

Andrea Rosen      $276,683.38          $53,987.00                  

 

 

 

 

 

Leagh Turner      $37,135.46          $0.00                  

 

 

 

 

 

Lesley Webster      $101,193.44          $0.00                  

 

 

 

 

 

Pro-rated fees

Fees shown in the 2020 director compensation table were pro-rated as a result of the following:

 

 

Ronalee Ambrose resigned from the board on August 31, 2020.

 

Nicole Arnaboldi joined the board on June 9, 2020.

 

Thomas Jenkins resigned from the board on May 7, 2020, and a $5,000 donation was made to The Princess Margaret Cancer Foundation on his behalf.

 

Leagh Turner joined the board on November 10, 2020.

 

Lesley Webster resigned from the board on May 7, 2020 and a $5,000 donation was made to NewYork-Presbyterian Hospital on her behalf.

 

38     Manulife Financial Corporation


Table of Contents

About the Directors

 

Total director compensation is capped at US$4 million ($5.37 million): US$2 million ($2.68 million) each for Manulife and Manufacturers Life. Canadian amounts have been calculated using the Bank of Canada annual exchange rate for 2020 of US$1.00 = $1.3415. Total compensation paid in 2020 was below the capped amount.

 

 

 

   All other compensation     Total compensation        Allocation of annual fees  
  

 

     

 

      

 

       Fees earned (cash)        Share-based awards  
 

 

           $188,292.49          $94,146.25          $94,146.25  
 

 

           $151,211.17          $0.00          $151,211.17  
 

 

           $276,683.38          $138,341.69          $138,341.69  
 

 

           $276,683.38          $138,341.69          $138,341.69  
 

 

           $539,870.00          $269,935.00          $269,935.00  
 

 

           $276,683.38          $138,341.69          $138,341.69  
 

 

           $276,683.38          $0.00          $276,683.38  
 

 

           $330,670.38          $165,335.19          $165,335.19  
 

 

           $374,681.14          $97,997.76          $276,683.38  
 

 

     $5,000.00       $106,193.44          $64,893.07          $36,300.38  
 

 

           $330,670.38          $165,335.19          $165,335.19  
 

 

           $276,683.38          $138,341.69          $138,341.69  
 

 

           $330,670.38          $0.00          $330,670.38  
 

 

           $330,670.38          $0.00          $330,670.38  
 

 

           $37,135.46          $18,567.73          $18,567.73  
 

 

     $5,000.00       $106,193.44          $55,596.72          $50,596.72  

 

     TOTAL       $4,209,675.51       

 

 

 

    

 

 

 

Subsidiary board fees

One of our directors received fees for services he provided to a subsidiary in 2020 through our subsidiary governance oversight program:

 

 

Tsun-yan Hsieh served on the board of Manulife US Real Estate Management Pte Ltd., and received fees for his services as shown in the table above.

Allocation of annual fees

Directors must decide, before the start of the new fiscal year, if they want to receive all or part of their compensation in equity instead of cash:

 

 

Fees earned is the amount received in cash.

 

Share-based awards is the amount received as equity.

 

2021 Management information circular         39  


Table of Contents

 

Executive compensation

Executive compensation is designed to contribute to our long-term sustainable growth by rewarding executives for strong performance in executing our business strategy.

 

 

LOGO

 

 

    Where to find it

 

 

 

 

40     Manulife Financial Corporation


Table of Contents

Executive Compensation

 

Message from the Chair

 

LOGO

 

  

Don Lindsay

 

Chair of the Management Resources and Compensation Committee

 

In a year when our company faced unprecedented challenges, we delivered solid financial performance and moved forward on our transformation journey to

position Manulife to become the most digital, customer-centric global company in our industry. The pandemic required us to undertake a significant number of unplanned activities to meet customer needs, including reallocating resources to handle higher call volumes and adjusting our approach to prospective customers by providing information about our products and solutions remotely and quickly.

2020 performance highlights

 

Net income attributed to shareholders of $5.9 billion, up $0.3 billion from 2019

 

Core earnings1 of $5.5 billion, down $0.5 billion from the prior year

 

Strong LICAT ratio2 of 149%

 

Core ROE1 of 10.9% and ROE of 11.6%

 

New Business Value1 of $1.8 billion, down 13%3 from 2019

 

Annualized premium equivalent (APE) sales1 of $5.6 billion, 8% lower than the prior year

 

Global Wealth and Asset Management net inflows1 of $8.9 billion compared with net outflows of $0.9 billion in 2019

 

Cumulative reduction in pre-tax run-rate general expenses of $1 billion, achieving our medium-term target two years ahead of schedule

 

Total shareholder return (TSR) was -9%, between the 25th and 50th percentile3 of our performance peer group (see page 49 for a list of our peers)

 

Meaningfully progressed against our goal of building a high-performing team, with a 23-point improvement in the 2020 employee engagement survey compared to the prior year score, placing us in the 80th percentile of our financial services peer group

 

Improved the representation of women at the Vice President level and above, expanded on our Diversity and Inclusion efforts, continued our strong focus on talent with the addition of key talent and reduction in top talent turnover

 

Provided added supports to our employees including a thank you day off, an additional five personal paid days off in 2021 and a range of mental, physical and other supports

 

We were named a World’s Best Employer by Forbes, ranking among the top 100 globally

 

Impact on 2020 compensation

The management resources and compensation committee is responsible for developing and recommending compensation for approval by the board of directors. Shaping the discussion is the committee’s continuing objective of ensuring that total direct compensation for the executives closely aligns with company performance, shareholder interests and the market for executive talent. The committee receives independent advice, research and analysis from its external compensation advisor to fulfill these objectives.

 

 

Compensation highlights

• The 2020 annual incentive was funded at 84% for the named executives, reflecting the scale of their accomplishments despite the challenging environment (see page 56)

• The 2018 performance share unit awards vested in February 2021 at 91% of target (see page 62)

• No discretion was applied to adjust the scores because of COVID-19’s impact on the economic and operating environment

• The annual incentive for each named executive declined compared to 2019 and no salary increases were awarded for 2021

 

1

Non-GAAP measure. See page 55 for more information.

2

Life Insurance Capital Adequacy Test (LICAT) total ratio of The Manufacturers Life Insurance Company (MLI).

3

In 2021 up to March 1, Manulife’s TSR was 16%, in the top quartile of our performance peer group and 6.6% above the median of this group.

 

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Manulife’s company performance score for the 2020 annual incentive was 84%. This score determines the funding for annual incentive awards. Consistent with our plan design and prior years, each executive’s actual award also includes an adjustment for individual performance to determine the final payout.

While Manulife made strong advancements against its strategic priorities in 2020 and posted solid net income and core earnings results given the challenges presented by the pandemic, new business value was negatively affected by the market conditions, resulting in funding below target.

It is important to note that the performance objectives used to determine this score were set at the beginning of the year, based on the business plan the board approved for the year. We did not adjust these objectives or make any offsetting adjustments to address the impact of COVID-19 on our business results.

The business performance factor for the 2018 PSUs that vested in February 2021 was 91%. This score was based on the results over the three-year period of fiscal 2018, 2019 and 2020 (see page 62). Consistent with the approach taken to determining the 2020 annual incentive funding, we did not make any offsetting adjustments to the payout of the 2018 PSUs to address the impact of COVID-19, nor have we made any adjustments to the outstanding 2019 and 2020 PSUs to adjust for the impact of the pandemic.

Evolving our executive compensation program

As the 2020 annual incentive award and 2018 PSU payout illustrate, under our pay for performance philosophy our incentive programs are designed to adjust up or down based on results achieved against objectives. We believe having this strong level of “at-risk” compensation helps to closely align the interests of our executives with those of our shareholders over both the shorter and longer terms.

To ensure we deliver on this foundational principle, we continuously review our programs with the support of our independent compensation consultant. The consultant keeps the committee apprised of both evolving competitive pay design and governance practices, to ensure we continue to offer a compelling, balanced and contemporary approach to rewarding our company’s leaders. We conducted a comprehensive review in 2020 that has resulted in changes to the program in 2021.

Changes include updating the performance peer group, increasing the proportion of equity-based incentives allocated to performance share units (PSUs) and restricted share units (RSUs) and not awarding stock options in 2021, using total shareholder return (TSR) as a modifier for PSU awards instead of a performance measure, and temporarily adjusting our approach to setting PSU targets to account for the current industry uncertainties related to the implementation of accounting standard IFRS17 in 2023. The changes do not affect outstanding 2019 and 2020 PSUs. You can find more information about these changes on page 57.

We welcome your feedback at our annual meeting

This circular explains our executive compensation program, the compensation decisions we made for 2020 and changes to the program in 2021 to support our business goals and reinforce good compensation practices. We have worked hard to ensure that our compensation disclosure is clear and addresses your questions. We encourage you to review the following executive summary, which will direct you to various sections of the document for additional information. We are holding another advisory vote on executive pay at our 2021 annual meeting and, as always, we welcome your feedback.

 

 

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Don Lindsay

Chair of the Management Resources and Compensation Committee

 

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Executive Compensation

 

Compensation discussion & analysis

Executive summary

2020 PERFORMANCE AND COMPENSATION

Manulife’s executive compensation program is designed to reward executives for the successful execution of our business strategy in the short-term, and the achievement of longer-term strategic initiatives designed to promote sustainable growth. The majority of executive pay is variable, and dependent on company performance and our share price. This keeps the interests of our executives closely aligned with the interests of our shareholders.

The business results for 2020 are based on a plan that was established before the challenges introduced by COVID-19. While Manulife posted solid net income and core earnings results, given the challenges presented by the pandemic, new business value was negatively affected by the market conditions.

Annual incentive plan performance (see page 56)

The company performance score for 2020 was 84% for our named executives. This resulted from net income attributed to shareholders, core earnings and new business value performing below target, and customer, employee and strategic initiatives exceeding target. Target performance was established before the challenges introduced by COVID-19. The score was not adjusted for the impact of COVID-19. Consistent with our plan design and prior years, each executive’s actual award also includes an adjustment for individual performance to determine the final payout.

Performance share unit awards (see page 62)

The performance factor for PSUs that were awarded in 2018 and vested in February 2021 was 91%, reflecting core ROE and book value per share excluding AOCI performance near target and relative TSR below median over the three-year performance period (fiscal 2018, 2019 and 2020). The performance factor was not adjusted for the impact of COVID-19, and there were no adjustments to the targets for the outstanding 2019 and 2020 PSU awards.

CEO COMPENSATION

Mr. Gori’s leadership continues to be a strength for Manulife. In recognition of the continued momentum the company has achieved under his direction, especially under the unprecedented circumstances of 2020, the board awarded Mr. Gori an annual incentive of US$2,822,400 for 2020, equivalent to 118% of his target. This award factors in his exceptional leadership, financial results and continued progress against our strategic priorities during this unprecedented year.

CEO total direct compensation (US$)

 

      20171      2018      2019     2020      2021  
Base salary      $932,192        $1,100,000        $1,100,000       $1,200,000        $1,200,000  

 

Annual incentive2

     $2,404,000        $3,088,800        $3,700,000       $2,822,400       

$2,400,000

(target

 

Transition payment3      $1,500,000                             
Equity-based incentives2      $4,550,000        $5,200,000        $5,600,000       $6,325,000        $6,825,000  
Total direct compensation      $9,386,192        $9,388,800        $10,400,000       $10,347,400        $10,425,000  

 

1

Mr. Gori was appointed President & CEO on October 1, 2017.

2

Timing of awards: the 2020 column includes the annual incentive paid in February 2021 and equity-based incentives awarded in March 2020.

3

The transition payment in 2017 was intended to neutralize the tax and other personal financial consequences of Mr. Gori’s relocation from Hong Kong to Toronto.

 

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LINKING CEO PAY TO SHAREHOLDER VALUE

The graph below compares Manulife’s TSR to the performance of the S&P/TSX Composite Financials Index and the median of our performance peer group. It also shows the CEO’s realized and realizable pay over the same period and how it aligns with our share price. That is, when TSR has been lower CEO pay has decreased, and when TSR has been higher the CEO’s pay has increased. This alignment occurs because a significant portion of the CEO’s pay is equity-based. We also conduct other analyses to test our pay-for-performance alignment, including five-year lookbacks of our CEO’s compensation relative to Manulife’s share price (see page 66), and our TSR performance against our peers (see page 67).

 

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    Manulife TSR (on the TSX)
    S&P/TSX Composite Financials Index
    Median of our performance peer group
 

 

 

Realized and realizable pay for the CEO

 

 

     

2016

    

2017

    

2018

    

2019

    

2020

 

Manulife TSR (on the TSX)

  

 

19.9%

 

  

 

13.3%

 

  

 

(23.3%

  

 

42.0%

 

  

 

(9.2%

Median of our performance peer group

  

 

10.7%

 

  

 

13.0%

 

  

 

(18.0%

  

 

30.7%

 

  

 

(5.0%

S&P/TSX Composite Financials Index

  

 

24.1%

 

  

 

13.3%

 

  

 

(9.3%

  

 

21.4%

 

  

 

1.6%

 

Realized and realizable pay for the CEO1

  

$

37.8M

 

  

$

11.6M

 

  

$

1.7M

 

  

$

23.8M

 

  

$

4.2M

 

 

1

Realized and realizable pay for Mr. Guloien for 2016 and Mr. Gori for 2017 to 2020. Equity is valued based on our share price on the Toronto Stock Exchange (TSX) as at December 31 for each year. For 2020, reflects $9.3 million received in cash and from the release of escrowed shares, as per the arrangement discussed on page 102 (realized pay), and a decrease of $5.1 million in outstanding equity awards (change in realizable pay).

Realized and realizable pay

 

cash compensation paid for a given year, including salary, annual incentive (earned for the year shown but paid the following year),

 

payouts of restricted share units and performance share units upon vesting and gains realized from exercising stock options, and

 

the change in value of outstanding restricted share units, performance share units, stock options, deferred share units and shares held in escrow on December 31 of a given year compared to December 31 of the previous year, based on our share price on the TSX as at each of those dates.

Total shareholder return

TSR is the change in value of an investment between January 1 and December 31 of a given year, assuming dividends are reinvested. For Manulife, TSR reflects the value of our common shares on the TSX.

 

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Executive Compensation

 

COST OF MANAGEMENT RATIO

The table below shows a cost of management ratio as another measure of value for shareholders. The cost of management ratio expresses the total compensation reported for the named executives as a percentage of net income attributed to shareholders. It is affected by foreign exchange rates, the named executives each year and our net income. In 2020, this ratio remained consistent with the prior two years.

 

      2016      2017      2018      2019      2020  
Total compensation reported for the named executives ($ thousands)    $ 42,234      $ 49,615      $ 35,909      $ 38,492      $ 36,828  
Net income attributed to shareholders ($ millions)    $ 2,929      $ 2,104 1     $ 4,800      $ 5,602      $ 5,871  
Cost of management ratio      1.4%        2.4% 1       0.7%        0.7%        0.6%  

 

1

Adjusted for the impacts of changes to our legacy businesses and U.S. Tax Reform in 2017, net income used for the 2017 annual incentive award was $4,767 million and the cost of management ratio was 1.0%.

Total compensation reported for the named executives

The total compensation reported in the summary compensation table each year.

Cost of management ratio

Total compensation paid to the named executives divided by net income attributed to shareholders, expressed as a percentage.

Named executives each year

2016: Donald Guloien, Steve Roder, Roy Gori, Warren Thomson, Craig Bromley

2017: Roy Gori, Steve Roder, Warren Thomson, Marianne Harrison, Linda Mantia, Donald Guloien

2018: Roy Gori, Phil Witherington, Warren Thomson, Marianne Harrison, Anil Wadhwani

2019: Roy Gori, Phil Witherington, Rahul Joshi, Marianne Harrison, Anil Wadhwani

2020: Roy Gori, Phil Witherington, Marianne Harrison, Anil Wadhwani, Scott Hartz

COMPENSATION REVIEW AND 2021 PROGRAM CHANGES

The management resources and compensation committee continuously reviews our compensation program and practices with the support of an independent compensation consultant. It conducted a comprehensive review in 2020, resulting in the following decisions for 2021:

 

 

Updating our performance peer group to better reflect our product portfolio and geographic footprint.

 

Affirming our current approach to the annual incentive, which is funded based on a mix of financial measures and strategic initiatives that include measures on talent and culture, such as diversity objectives.

 

Adjusting how we deliver our equity-based incentives, increasing the portion awarded in PSUs to 60% of the total award and delivering the remaining 40% in restricted share units (RSUs).

 

Not awarding stock options in 2021 to address several factors, including tax and business considerations and dilution.

 

Revising our approach to the PSU performance conditions, with core ROE and book value per share excluding AOCI continuing to be the primary basis for payout determination, and making total shareholder return (TSR) over the three-year performance period a modifier in calculating the final award payouts.

 

Modifying our approach to setting PSU targets to account for the current industry uncertainties related to the implementation of IFRS 17 in 2023. We see this change in approach to target-setting as a temporary measure.

The changes do not affect outstanding 2019 and 2020 PSU awards or stock option grants.

Details about the 2020 compensation decisions for our other named executives begin on page 68.

 

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Our compensation philosophy

We expect executives to make decisions that are in the long-term interest of the company. Executive compensation is designed to contribute to our long-term sustainable growth by rewarding executives for strong performance in executing our business strategy.

Pay for performance is at the core of our approach to executive compensation. Compensation is tied to the achievement of our short, medium and long-term goals, so that most of what our executives earn is variable and not guaranteed. In practice, this has meant that executives earn more when performance is strong and earn less when performance is not strong. The board also has the discretion to adjust incentive payouts when significant events outside management’s control make awards unreasonable, unrepresentative or inappropriate.

We have set compensation for the majority of our named executives in U.S. dollars since 2004. As a global company, we draw from an international talent pool for executive talent at the most senior levels where the U.S. dollar is the most common currency basis for setting compensation. Foreign exchange rates may impact how much the named executives receive, depending on the currency in which they are paid. Accordingly, we take this into consideration when making compensation decisions to ensure our named executives are appropriately and competitively positioned relative to our Canadian, U.S. and global peer companies.

Five principles guide every compensation decision

 

 

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46     Manulife Financial Corporation


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Executive Compensation

 

What we do

   

 

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  Compensation aligned with long-term shareholder value
 

•   most executive compensation is directly affected by our share price and the value of our performance share units is based in part on relative TSR

 

•   the annual incentive plan incorporates measures tied to our future success

   

•   equity ownership guidelines, clawback provisions, stock option exercise restrictions and our code of business conduct and ethics discourage executives from taking undue risk

 

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  Compensation aligned with business strategy
 

•   incentive compensation is tied to the achievement of key performance measures, prudently balancing time horizons and performance perspectives

   

•   performance measures are tied directly to our business strategy and shareholder value

 

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  Compensation and performance benchmarked against peer companies
   

• executive pay is benchmarked against our compensation peer group

 

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  Compensation aligned with good governance practices
 

•   compensation is aligned with the Financial Stability Board’s Principles for Sound Compensation Practices

 

•   employees must annually certify compliance with our code of business conduct and ethics

 

•   management resources and compensation committee receives independent advice

 

•   shareholders have a say on executive pay

 

•   we engage with shareholders about our executive compensation program

   

•   employee engagement and diversity and inclusion initiatives have an impact on compensation

 

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  Compensation aligned with risk management objectives
 

•   incentive compensation for heads of control functions is based on measures that are not directly linked to the business they oversee

 

•   we stress test compensation plan designs

 

•   the CEO and CFO must hold Manulife equity for one year after leaving Manulife

 

•   executive compensation clawed back for wrongdoing, even when a financial restatement is not required

 

•   the CRO and the risk committee review the alignment of compensation plans with risk management objectives

   

•   incentive compensation for material risk takers considers feedback from internal audit, compliance and risk management

What we don’t do

   

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  No grossing up of perquisites

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  No repricing or backdating of stock options

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  No hedging or monetizing of equity awards

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  No multi-year guarantees in employment agreements

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  No severance of more than two years on termination following a change in control

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  No single-trigger change in control

 

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Benchmarking against our peers

 

We regularly benchmark our compensation against our peers to ensure compensation is competitive so we can attract and retain executive talent. We also benchmark our performance against our peers to assess our relative performance for our PSU awards.

 

Benchmarking compensation for individual roles

We look at how other companies compensate roles that are similar to ours, benchmarking each component of compensation as well as total direct compensation. This allows us to set compensation competitively so we can attract and retain high performing executive talent.

For our named executives, we primarily benchmark against our compensation peer group.

We also refer to pay information from three surveys published by prominent consulting firms:

 

 

Diversified Insurance Survey: widely referenced survey of pay levels among major insurance companies in the U.S.

 

Financial Services Executive Compensation Survey: survey of major financial institutions in Canada

 

Insurance Executive Rewards Survey: survey of major insurance companies in the Asia Pacific region.

We target total direct compensation for our executives at the median level of the external market but will position high performing executives above the median to reflect sustained high performance over time.

Peer groups

We use two peer groups:

 

a compensation peer group to benchmark executive pay

 

a performance peer group to assess our relative TSR for our PSU awards.

We review the companies in both groups every year to make sure they continue to meet the following criteria:

 

are in similar lines of business

 

have an international footprint

 

are similar in size and complexity (for the compensation peer group)

 

compete with us for talent (for the compensation peer group)

 

have readily available compensation data (for the compensation peer group).

The management resources and compensation committee selected 11 companies that meet these criteria for the compensation peer group: seven insurance companies and four Canadian banks.

The performance peer group is made up of 15 companies: the seven insurance companies in the compensation peer group, and eight additional insurance companies that create a basket of companies with an international footprint and lines of business similar to Manulife. These eight companies are not in the compensation peer group because individually they may not be comparable in size or scope of business or because they do not disclose compensation data in a manner that allows us to reliably benchmark compensation for our named executives.

 

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Executive Compensation

 

The Canadian banks are not included in the performance peer group because, while they are important competitors for capital and Canadian talent, they are not true competitors for many of our business lines and have different exposure to macroeconomic market influences, making their share performance less relevant for comparison.

 

   
         
     

Compensation peer group

• AIA Group Limited*

• Bank of Montreal

• Bank of Nova Scotia

• MetLife, Inc.*

• Power Corporation*

• Principal Financial Group Inc.*

• Prudential Financial, Inc.*

• Prudential plc*

• Royal Bank of Canada

• Sun Life Financial Inc.*

• Toronto-Dominion Bank

 

Performance peer group

• AIA Group Limited*

• Allianz SE

• Assicurazioni Generali S.p.A.

• Aviva plc

• AXA SA

• Brighthouse Financial

• Dai-ichi Life

• MetLife, Inc.*

• Power Corporation*

• Principal Financial Group Inc.*

• Prudential Financial, Inc.*

• Prudential plc*

• Sun Life Financial Inc.*

• Unum Group

• Zurich Insurance Group Ltd.

 

 

        

 

New in 2021

We are adding Brighthouse Financial, Dai-ichi Life and Unum Group to the performance peer group to better reflect our product portfolio and geographic footprint.1

 

    

    

 
 
 
 
 
 
*

Included in both peer groups.

1

The new performance peer group will apply to the 2021 PSU grants – it will have no impact on the outstanding 2019 or 2020 PSU awards.

Where we rank against our peers

The graph below shows how we rank against our peers. We compare our total assets, market capitalization and revenue with the compensation peer group, using the most recently reported figures in U.S. dollars. This illustrates why this group is appropriate as a benchmark for compensation. We compare our one, three and five-year TSR against the performance peer group. Manulife’s TSR is based on the price of Manulife’s common shares on the TSX for the periods ended December 31, 2020. Peer TSR is based on their primary stock exchange and on local currencies.

 

 

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(source: Bloomberg)

 

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Our compensation program and

2020 performance

Total compensation

Our executive compensation program for the executives named in this circular has six key components.

 

 

Base salary

Set in February of each year and effective March 1st

 

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  Fixed compensation based on role, performance, qualifications and experience  

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Each executive’s salary depends on:

• qualifications, experience and role

• performance in the role

• past promotions and career progression

• salaries paid for comparable roles at peer companies

• salaries of comparable roles within Manulife

We benchmark salaries at least once a year against comparable roles in peer companies and other executives at Manulife

 
    

Annual incentive

• annual cash-based incentive

 

Awarded in February for the preceding year’s performance

 

LOGO

 

Variable compensation designed to reward senior executives for meeting company objectives and Individual performance goals over a calendar year where performance is assessed based on “what” was achieved (contribution) and “how” it was achieved (exhibiting our cultural behaviours)

 

Ties compensation to short-term priorities that will result in sustainable performance over time

 

To encourage executives to increase their equity ownership, 10% of annual incentives are delivered in Manulife common shares purchased on the open market

 

 

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We set a target award for each executive (a percentage of base salary) based on competitive market data and the executive’s role

 

The amount we actually pay depends on a combination of company and individual performance

 

Company performance objectives are tied to the achievement of performance targets that position the company for future success

 

Individual performance objectives are aligned with our company strategy and are tied to:

 

• financial performance

• contribution to the delivery of Manulife’s five strategic priorities

      

 

 

   LOGO

 

See page 53

for details

      
 

 

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    Executive Compensation

 

    

Equity-based incentives

• restricted share units

• performance share units

• stock options

 

Awarded in the first quarter of each year

 

LOGO

 

Variable compensation designed to reward senior executives for meeting company objectives and individual performance goals over a multi-year period

 

Ties compensation to company and share price performance over both the medium and long term

 

Strengthens retention and reinforces alignment with shareholder value

 

The grant value will differ from the actual payout, if any, based on Manulife’s share price and company performance relative to the objectives established at the time of the grant

 

To encourage executives to increase their equity ownership, 10% of the vesting value of RSUs and PSUs will be used to buy Manulife common shares purchased on the open market

 

 

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We set awards for each executive based on role, contribution, potential and market competitiveness, and benchmark the award levels every year against comparable roles in peer companies

 

The payout each executive ultimately receives depends on our performance:

• the value of restricted share units depends on the price of Manulife common shares at the time of vesting

• the value of performance share units depends on the price of Manulife common shares at the time of vesting, as well as on how we perform against internal and relative performance conditions that are aligned with our company’s strategy

• the value of stock options depends on the difference in the price of Manulife common shares at the time of grant and when stock options are exercised

 

We do not consider the outstanding value of restricted share units, performance share units and stock options an executive already holds when granting awards

      

 

 

   LOGO

 

 

See page 57

for details

 

      

 

New in 2021

We are not awarding stock options in 2021 (see page 57 for details).

 

     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
 
    
Pension  

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  Assists our employees as they save for their retirement  

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   We typically offer capital accumulation plans, including defined contribution, cash balance and 401(k) plans, depending on the country where the employee works
      

 

 

   LOGO

 

 

See page 87

for details

 

                            
                         
Benefits and wellness  

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  Protects and invests in the well-being of our employees  

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   We offer group life, disability, health and dental insurance and wellness and other programs that reflect local market practice in the country where the employee works
 
                         
Perquisites  

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  Offers market-competitive benefits  

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   We offer perquisites based on local market practice
 

 

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2021 compensation mix

The charts below show the mix of components that make up target total direct compensation for our senior executives, and how those components pay out over time.

Most of each executive’s compensation is variable (or at risk), and a significant portion is tied to our share price. The proportion of at risk pay increases by level, making the link between pay and performance more pronounced for senior executives, because of the greater influence they have on our results. The combination of different incentive plans ensures that senior executives consider both the short-term and the long-term impact of their decisions.

The board believes this combination of incentives and time horizons helps to drive performance, align executive interests with those of shareholders, provide for competitive pay opportunities and encourage retention.

Chief Executive Officer

 

 

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Other named executives (average)

 

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    Executive Compensation

 

Compensation is aligned with business strategy and paid out over time

 

 

 

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About base salaries

Base salaries are set in February of each year and any changes go into effect on March 1. Each executive’s salary depends on several things, including qualifications, experience and role, performance, past promotions and career progression, salaries paid for comparable roles at peer companies and salaries of comparable roles within Manulife.

We benchmark salaries at least once a year against comparable roles at peer companies.

In 2021, there were no changes to the base salaries of our named executives.

About the annual incentive

Our annual incentive plan is designed to reward senior executives for meeting company objectives and individual performance goals over a calendar year where performance is assessed based on “what” was achieved (contribution) and “how” it was achieved (exhibiting our cultural behaviours). Incentive compensation for higher level positions is more heavily influenced by total company results, while the emphasis at less senior levels in the organization is more on segment, business unit or functional goals, with some links to global results to foster collaboration and a business owner mentality.

Performance objectives and weightings are:

 

linked to our strategy with targets consistent with our board-approved plan

 

stress tested and back tested to make sure potential awards are aligned with business performance and do not encourage inappropriate risk-taking

 

recommended by senior management and reviewed and approved by the board

 

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How we calculate the award for the senior executives

Each executive has a target annual incentive equal to a percentage of their base salary. For named executives, the actual annual incentive award depends on both the company performance score, which can range from 0% to 200%, and individual performance. We assess individual performance against goals that are tied to the financial and operating results of the named executive’s business, strategic initiatives for the year, and on their contribution to Manulife as a whole, including their impact on our risk culture. The minimum award under the plan is zero and the maximum award is 2.5 times target.

 

         

Base Salary

 

    LOGO    

Annual incentive target

% of base salary

 

    LOGO    

Company performance score

Range: 0% - 200%

 

    LOGO     Adjustment for individual performance     LOGO     Annual incentive award

Performance criteria and weighting

 

     

Aligns compensation with shareholder experience

 

   

 

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Net income attributed to shareholders

25%

    Threshold       Target       Maximum  
score   25*        100        200    
performance   30% below target       at target       40% above target    
   

 

* Below threshold performance results in a score of zero.

      
     

Reflects the underlying earnings capacity and is an important factor in valuing Manulife’s share price

 

   

 

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Core earnings excluding core investment gains

25%

    Threshold       Target       Maximum  
score   0        100        200    
performance   25% below target       at target       25% above target    
      
     

Measures profitable growth in new business across our portfolio, including:

• New business value for insurance businesses

• Wealth and Asset Management core earnings

 

   

 

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New business profitability

30%

    Threshold       Target       Maximum  
score   0        100        200    
performance   50% below target       at target       50% above target    
      
     
Customer, employee and strategic initiatives that are quantifiable measures and deliverables, subject to a qualitative overlay, and aligned with our strategic and annual operating plan. Also includes important measures on employee engagement, diversity and inclusion. Established at the beginning of the year and approved by the management resources and compensation committee.    

 

LOGO

 

Strategic focus

20%

 

           
             
        

 

54     Manulife Financial Corporation


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    Executive Compensation

 

How the measures are defined

Net income attributed to shareholders: as disclosed in our annual report, available at manulife.com.

Core earnings excluding core investment gains: core earnings1 measures the underlying earnings capacity of our businesses. For the annual incentive plan, we exclude core investment gains1 to align with operational performance.

New business profitability: measures profitable growth in new business across our portfolio. Includes the following measures:

 

 

New business value1 for insurance businesses represents the change in shareholders’ economic value as a result of sales1 in the period. Calculated as the present value of shareholders’ interest in expected future distributable earnings, after the cost of capital, on actual new business sold in the period.

 

Global WAM core earnings1: core earnings of our Global WAM segment, which provides fee-based wealth solutions to our retail, retirement and institutional customers around the world.

 

1

These are non-GAAP measures. See below for more information.

About 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 (GAAP) used for our audited financial statements.

Non-GAAP measures include core earnings, core return on equity (core ROE), core investment gains, core general expenses, new business value (NBV), assets under management, assets under management and administration, gross flows, net flows, APE sales and constant exchange rate basis (measures that are reported on a constant exchange rate basis include percentage growth/decline in core earnings, assets under management, assets under management and administration, gross flows, new business value and APE sales).

Non-GAAP financial measures are not defined terms under GAAP and, therefore, are unlikely to be comparable to similar terms used by other issuers. Therefore, they should not be considered in isolation or as a substitute for any other financial information prepared in accordance with GAAP.

For more information about these and other non-GAAP measures, see Performance and Non-GAAP Measures in our 2020 MD&A, which is available on our website (manulife.com), on SEDAR (sedar.com) and on EDGAR (sec.gov/edgar).

2020 annual incentive

The company performance score for the 2020 annual incentive award is 84% for the named executives. This is based on performance against measures and objectives that were set at the beginning of the year, in line with our board-approved business plan (see the table on the following page). There were no offsetting adjustments made to address the impact of COVID-19 on our business results.

You’ll find more information about each named executive’s annual incentive award, and a discussion of their performance against their individual goals, in the profiles starting on page 63. Our plan design includes an adjustment for individual performance to determine each executive’s final payout.

 

2021 Management information circular         55  


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Company performance score for 2020

 

Performance range                              

Performance criteria

and weighting

Threshold

0

 

Target

100

 

Maximum

200

  Actual   Score        Weighted
score
       2019
actual1
    
                   
$4,354   $6,220   $8,708   $5,871   86%       21%       $5,602  

 

LOGO

 

Net income attributed to
shareholders
2

($ millions)

25%

                   
                                         
$4,365   $5,820   $7,275   $5,516   79%       20%       $5,604  

 

LOGO

 

Core earnings excluding core
investment gains

($ millions)

25%

                   
                                         
                                   

 

LOGO

 

New business profitability

($ millions)

30%

 
$1,202   $2,404   $3,606   $1,802   50%       11%       $2,050       New business value (15%)
$625   $1,250   $1,875   $1,100   76%       8%       $1,021       Global WAM core earnings (15%)
                   
                                         
                120%       24%       115%  

 

LOGO

 

Strategic focus3

Customer, employee and
strategic initiatives

20%

                   
                                         
                        84%          

 

LOGO

  2020 company performance
score
                                         

 

1

This column shows the 2019 actual results for reference. The 2019 company performance score was 115.

2

Performance at threshold results in a performance score of 25%. Performance below threshold results in a performance score of zero.

3

Performance is assessed against several predetermined goals established in our business plan.

Financial measures

While we posted solid net income and core earnings results, new business value was negatively affected by the market conditions.

Understanding the strategic focus score

We made strong progress on our strategic priorities. Highlights from 2020 include:

 

Portfolio optimization: Achieved our external portfolio optimization goals three years ahead of schedule, releasing $5.9 billion in capital.

 

Expense efficiency: Reduced core general expenses by 3%, primarily through strong expense discipline and lower sales related expenses. We also achieved our $1 billion in expense efficiency target two years ahead of schedule, including over $300 million of sustainable savings in 2020

 

Accelerate growth: Highest potential growth businesses generated approximately 66% of our core earnings in 2020

 

Digital, customer leader: Our 2020 global net promoter score (rNPS) increased to +12, an 11 point improvement from the 2017 baseline and a 4 point improvement from 2019

 

High performing team: We delivered on our employee engagement target of ranking in the top quartile amongst our designated peer group, ranking in the 80th percentile amongst global financial services and insurance peers on our 2020 employee engagement survey

You can find more information about our financial results and our progress on our strategic priorities in our 2020 annual report at manulife.com.

 

56     Manulife Financial Corporation


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    Executive Compensation

 

About the equity-based incentives

We grant equity-based incentives every year, to offer a competitive mix of restricted share units, performance share units and stock options depending on the executive’s position. We are not awarding stock options in 2021.

Heads of control functions do not receive performance share units, to ensure their compensation is not tied to the performance of businesses they oversee.

The table below shows the mix of equity-based incentives for 2020:

 

  

 

    PSUs      RSUs      Stock options  
Chief Executive Officer      50%        20%        30%  
Other named executives      50%        20%        30%  
Chief Risk Officer/Chief Actuary      0%        70%        30%  
Global Compliance Chief/Chief Auditor      0%        80%        20%  

New in 2021

Starting in 2021, we will be increasing the proportion of equity-based incentives allocated to performance share units (PSUs) and restricted share units (RSUs). We are not awarding stock options in 2021 to address several factors, including tax and business considerations and dilution.

 

  

 

    PSUs      RSUs      Stock options  
Chief Executive Officer      60%        40%        0%  
Other named executives      60%        40%        0%  
Chief Risk Officer/Chief Actuary      0%        100%        0%  
Global Compliance Chief/Chief Auditor      0%        100%        0%  

 

           

Equity-based incentives

                       
            Restricted share units           Performance share units           Stock options
                                     
                 

 

  What they

  are

       

 

Notional shares that pay out based on the price of Manulife common shares

       

 

Notional shares that pay out based on our performance and on the price of Manulife common shares

       

 

Rights to buy Manulife common shares in the future at a specified price

                                     
                 

 

  Vesting and

  payout

       

 

Vest and pay out in cash within three years, 10% of cash is used to purchase Manulife common shares on the open market

 

Their payout value is equal to the average closing price of Manulife common shares on the TSX for the 10 trading days before the day they vest

       

 

Vest and pay out in cash within three years, 10% of cash is used to purchase Manulife common shares on the open market

 

The number of units that vest depends on our performance against absolute and relative performance conditions that are set at grant, aligned with our strategy and approved by the board

 

       

 

Vest 25% every year for four years from the grant date

 

Stock options granted in 2015 and later cannot be exercised until five years from the grant date except under extenuating circumstances

 

 

2021 Management information circular         57  


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Equity-based incentives

 

                       
            Restricted share units           Performance share units           Stock options
                                     
                 

  Vesting and

  payout (continued)

               

Their payout value is equal to the average closing price of Manulife

common shares on the TSX for the 10 trading days before the day they vest, multiplied by the number of performance share units, the performance factor and beginning with the 2021 grants, the relative TSR modifier

        

       

The exercise price is equal to the grant price

 

Their ultimate value is the difference between the exercise price and the price of Manulife common shares on the TSX when they’re exercised

 

Stock options expire at the end of 10 years and are only transferable when the executive dies

               

LOGO

See page 59 for details about the performance     conditions for the     PSUs awarded for     2020

 

 

 

     
                                     
                 

 

  Dividend equivalents

       

 

Credited as additional units at the same rate as dividends paid on Manulife common shares and subject to the same vesting conditions as the underlying units

 

       

 

Do not earn dividend equivalents

                                     
                 

 

  Grants

       

 

The grant price is the closing price of Manulife common shares on the TSX on the last trading day before the grant date or the average closing price for the 10 trading days before the grant date (whichever is higher)

 

The grant value of stock options is calculated using the Black-Scholes methodology

 

                                     
                 

 

  Notice of retirement    

       

For awards granted in 2015 and after, senior executives have to provide three months’ notice before leaving Manulife or they will lose their post-termination retirement benefits and all outstanding grants will be forfeited

 

                                     
                 

 

  Blackout

  periods

       

 

Equity-based incentives are not granted when our insiders are prohibited from trading, which is commonly referred to as a blackout period. Annual awards are normally granted 10 or more trading days following the end of the blackout period after our year-end financial results are announced. Awards can also be made to select new executives at the time of hire. If the hire date falls within a blackout period the grant is delayed until after the end of the blackout period. The company has an automatic stock option exercise program that allows insiders to elect in advance to have their expiring stock options exercised through the program, which may occur within a blackout period.

 

                                     

 

58     Manulife Financial Corporation


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    Executive Compensation

 

How we calculate the payout for performance share units

Performance share units vest and pay out based on the formulas below.

Performance targets are set at the time of grant. The board can adjust the calculated result up or down when significant events outside management’s control make awards unreasonable, unrepresentative or inappropriate. The board also believes management should not be penalized for making decisions that are in the long-term best interests of shareholders.

 

       

Number of

performance

share units

Performance share
units awarded and
received as dividend
equivalents during
the  three-year period  

 

 

LOGO

 

Performance

factor

range: 0-180

 

 

LOGO

  Share price at the
time of vesting
 

 

LOGO

  Performance
share units payout

Performance criteria and weighting for the 2020 PSU awards

Targets for the three-year performance period were set at the time of the grant, consistent with our business plan.

 

     
Focuses on long-term growth in equity needed to support the company’s growth and is used to value insurance companies and investment firms.
    
   

 

LOGO

  Book value per share excluding AOCI
    Threshold       Target       Maximum     33%

 

score

 

 

0

      

 

100

      

 

180

       

 

performance

 

 

10% below target

     

 

at target

     

 

8% above target

       
      
     
Reflects the efficient use of capital in generating core earnings.
    
   

 

LOGO

  Core return on equity
    Threshold       Target       Maximum     33%

 

 

score

 

 

0

      

 

100

      

 

180

       

 

performance

 

 

40% below target

     

 

at target

     

 

32% above target

       
      
     
Compared to the median of our performance peer group as measured on the New York Stock Exchange (NYSE). See page 48 for information about the performance peer group.
    
   

 

LOGO

 

Relative TSR

34%

    Threshold       Target       Maximum    
score   0        100        180        

 

performance

  30 percentage
points below
median
      median      

24 percentage

points above

median

       
      
     

We disclose targets for PSUs at payout, when we compare our target performance to actual results. Disclosing this information before the end of the performance period would seriously prejudice Manulife’s

 

2021 Management information circular         59  


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interests because it could potentially relay confidential information about our strategy, initiatives and business plan to our competitors or be inappropriately interpreted as earnings guidance.

How the measures are defined

Book value per share excluding accumulated other comprehensive income (AOCI): Calculated by dividing total common shareholders’ equity less AOCI by the number of common shares outstanding at the end of the period. We exclude AOCI because it includes items such as currency impacts, which can be volatile and distort results.

Core return on equity1: Calculated as core earnings available to common shareholders as a percentage of the capital deployed to earn the core earnings. Calculated using average common shareholders’ equity.

Relative TSR: TSR is a measure of the performance of common shares held by investors. Calculated by combining the price appreciation or depreciation, plus the value of dividends paid to shareholders (assuming dividends are reinvested in additional shares). Relative TSR is calculated by comparing the TSR of Manulife common shares traded on the NYSE with the median TSR of our performance peer group over the performance period. To minimize distortions, the 20-day average share price is used for the

opening and closing share price in the calculation of TSR for both Manulife and our performance peers.

New for PSU awards starting in 2021

The performance factor for grants beginning in 2021 will be determined as an average of performance relative to the threshold, target and maximum targets set at the beginning of each of the three years in the performance period, instead of based on performance measured against targets set for the cumulative three-year period. This change is in response to the significant industry uncertainties, including the IFRS accounting changes coming in 2023, which affect our ability to set meaningful, appropriate targets three years in advance. The targets are tied to the board-approved budgets and consistent with our external guidance. The management resources and compensation committee views this change as temporary.

Relative TSR will continue to be measured using the cumulative three-year performance period, but relative TSR will be used as a modifier of the performance factor rather than a separate performance condition. This will emphasize conditions that are more directly controllable by management while continuing to have TSR and our share price meaningfully affect the payout value over a three-year period.

Performance share units will vest and pay out based on the following formula.

 

         
 

Number of performance share units

Performance share units awarded and received as dividend equivalents during the three-year period

 

      LOGO      

Performance factor

 

range: 0-150

 

Book value per share excluding AOCI

50%

 

Core return on equity

50%

 

      LOGO      

Relative TSR multiplier

 

+/-20%

 

Compared to the median of our performance peer group as measured on the New York Stock Exchange (NYSE).

 

Top quartile = +20%

2nd or 3rd quartile = +0%

Bottom quartile = -20%

      LOGO       Share price at the time of vesting     LOGO       Performance share units payout  

 

1

This is a non-GAAP measure. See page 55 for more information.

 

60     Manulife Financial Corporation


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    Executive Compensation

 

Payout of the equity-based incentives that were awarded in 2018

Restricted share units awarded in 2018 vested on December 15, 2020. Performance share units awarded in 2018 vested on February 27, 2021. The amounts in the table below include reinvested dividends.

 

     

Vesting

date

    

Grant date

price

    

Performance

factor

    

Vesting date

price

    

Payout as a %

of grant value

 

 

2018 RSUs

  

 

 

 

December 15, 2020

 

 

  

 

$

 

24.73

 

 

  

 

 

 

        –

 

 

  

 

 

 

$23.10

 

 

  

 

 

 

        105%

 

 

 

2018 PSUs

  

 

 

 

February 27, 2021

 

 

  

 

$

 

24.73

 

 

  

 

 

 

91%

 

 

  

 

 

 

$25.32

 

 

  

 

 

 

106%

 

 

The performance factor for the 2018 PSUs was 91%. Performance was assessed using performance conditions and goals that were set in 2018, at the time of the grant, in line with our board-approved business plan.

 

       

Number of Performance

share units

Performance share units awarded and received as dividend equivalents during the three-year period

 

    LOGO    

Performance

factor

91%

    LOGO     Share price at the time of vesting     LOGO     Performance share units payout

 

                 


As a
percentage
of original
award
 
 
 
 

 

Roy Gori

 

 

151,551

 

 

 

 

x

 

 

 

 

91%

 

 

 

 

x

 

 

 

 

$25.32

 

 

 

 

=

 

 

 

 

$3,491,907

 

 

 

 

106%

 

 

 

Phil Witherington

 

 

46,199

 

 

 

 

x

 

 

 

 

91%

 

 

 

 

x

 

 

 

 

$25.32

 

 

 

 

=

 

 

 

 

$1,064,478

 

 

 

 

106%

 

 

 

Marianne Harrison

 

 

75,776

 

 

 

 

x

 

 

 

 

91%

 

 

 

 

x

 

 

 

 

$25.32

 

 

 

 

=

 

 

 

 

$1,745,966

 

 

 

 

106%

 

 

 

Anil Wadhwani

 

 

52,459

 

 

 

 

x

 

 

 

 

91%

 

 

 

 

x

 

 

 

 

$25.32

 

 

 

 

=

 

 

 

 

$1,208,726

 

 

 

 

106%

 

 

 

Scott Hartz

 

 

27,541

 

 

 

 

x

 

 

 

 

91%

 

 

 

 

x

 

 

 

 

$25.32

 

 

 

 

=

 

 

 

 

$634,570

 

 

 

 

106%

 

 

 

Mr. Gori also received PSUs in 2017 in connection with his promotion to CEO. These PSUs vested in June 2020 with a performance factor of 101%, and paid out at 85% of the original award value based on a share price of $22.56 at the time of vesting. For more information about the results that determined last year’s performance factor, see page 67 of our 2020 management information circular, which is available at manulife.com.

 

2021 Management information circular         61  


Table of Contents

 

Performance factor

The 2018 PSU grant was based on a single three-year performance period.

 

Performance range                          

Performance criteria

and weighting

 

Threshold

0

 

Target

100

 

Maximum

180

 

Actual

 

 

Score

 

      

Weighted
score

 

         
                 
$18.09   $20.10   $21.71   $20.08   99%       33%      

 

LOGO

 

Book value

per share

excluding AOCI

($ millions) 

33%

                 
                                     
7.4%   12.4%   16.4%   12.5%   101%       33%      

 

LOGO

 

Core return on

equity

33%

                 
                                     

30 percentage

points
below median

 

  median  

24 percentage

points above
median

 

-2.4% vs

5.8%
(median)

  73%       25%      

 

LOGO

 

Relative TSR

34%

                 
                                     
                        91%      

 

LOGO

  2018 PSU
performance factor
                                     

The performance factor of 91% is based on our performance against targets for the performance conditions across the three-year performance period. Book value per share excluding AOCI and core return on equity finished near target despite the impacts of COVID-19 on our business in 2020.

In calculating the performance factor, the board excluded the impacts of U.S. Tax Reform in 2017, as previously disclosed in our 2018 and 2019 circulars. The board also excluded the impact of the 2019 charge related to updated ultimate reinvestment rate (URR) assumptions issued by the Canadian Actuarial Standards Board. In aggregate, these adjustments increased the score by 2%.

The board adjusted for the impact of these items because we believe compensation should be aligned with long-term shareholder value: senior executives should not be penalized when they take actions that are in the long-term best interest of shareholders even though there may be short term effects on net income, or where there are legislative changes outside our control.

Relative TSR is calculated by comparing the TSR of Manulife common shares traded on the NYSE compared with the median TSR of our performance peer group across the performance period. To minimize distortions, we use the 20-day average share price for the opening and closing share price in the calculation of TSR for both Manulife and our performance peers. Relative TSR during the three-year period was 8.2 percentage points below the median TSR of the performance peer group.

 

62     Manulife Financial Corporation


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    Executive Compensation

 

Compensation of the named executives

 

 

LOGO

  

Roy Gori

 

President and CEO

 

Mr. Gori is President and CEO and a member of the board of directors. He has overall responsibility for Manulife’s strategy, operations and performance. Mr. Gori joined Manulife in 2015 as President and CEO, Manulife Asia, and was promoted to his current role in 2017.

Mr. Gori continued to drive Manulife’s ambitious transformation agenda in 2020, moving us closer to our ambition of becoming the most digital, customer centric global company in our industry. Additionally, Manulife delivered competitive financial results in a year with significant market volatility. Under his leadership, we were able to quickly adapt and identify thoughtful pivots enabling us to deliver competitive results despite economic headwinds and an uncertain operating environment. The information below describes the company’s financial results and other factors that went into determining his compensation for 2020.

FINANCIAL

 

Our TSR on the TSX was -9%, between the 25th and 50th percentile1 of our peers (see page 49 for a list of our peers)

 

We reported net income attributable to shareholders of $5.9 billion, up $300 million from 2019

 

We achieved core earnings2 of $5.5 billion, down 9%3 from 2019

 

We delivered core return on equity2 of 10.9%

 

We achieved new business value2 (NBV) of $1.8 billion, down 13%3 from 2019

 

We delivered APE sales2 of $5.6 billion, down 8% from 2019

 

Global WAM net inflows2 were $8.9 billion, compared with net outflows of $0.9 billion in 2019

PROGRESS AGAINST MANULIFE’S FIVE STRATEGIC PRIORITIES

Portfolio optimization

 

We successfully achieved our 2022 portfolio optimization goal three years ahead of schedule

 

We have delivered $5.9 billion of cumulative capital benefits, including $0.8 billion in 2020

Expense efficiency

 

We achieved cumulative expense efficiencies of $1.0 billion in pre-tax annual savings, achieved 2 years ahead of schedule, including over $300 million of sustainable savings in 2020

 

Core general expenses declined by 3% in 2020 compared with 2019 due to disciplined expense management

 

1

In 2021 up to March 1, Manulife’s TSR was 16%, in the top quartile of our performance peer group and 6.6% above the median of this group.

2

Core earnings, core return on common shareholders’ equity (core ROE), new business value (NBV), annualized premium equivalent (APE) sales and net flows are non-GAAP measures. See page 55 for more information.

3

Percentage growth/declines in core earnings, NBV, and APE sales are stated on a constant exchange rate basis. Constant exchange rate basis is a non-GAAP measure. See page 55 for more information.

 

2021 Management information circular         63  


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Accelerate growth

 

As a percentage of core earnings, generated 66% from highest potential businesses

 

Experienced 7% growth in Global WAM core earnings increasing to 20% of core earnings in 2020

 

Continued our expansion in bancassurance with an exclusive 16-year partnership with VietinBank1 to better meet the growing financial and insurance needs of the Vietnamese people and an extension of our agreement with PT Bank Danamon Indonesia to 2036

 

Continued our expansion of behavioural-based wellness insurance products through our Manulife Vitality program in Canada

Digital, customer leader

 

Our 2020 global net promoter score (rNPS) increased to +12, an 11 point improvement from the 2017 baseline and a 4 point improvement from 2019

 

Vast majority of our products are available to prospective customers through virtual face-to-face methods, which includes digital as well as non-digital solutions

High performing team

 

With a 95% response rate globally, we achieved a company-wide employee engagement score of 4.27 on a 5-point scale. This placed us in the 80th percentile amongst global financial services and insurance peers.

 

Named a World’s Best Employer by Forbes, ranked in the top 100 best employers globally

 

Total Company gender diversity of women at the executive level was 27%; we committed to invest more than $3.5 million over the next two years to promote diversity, equity and inclusion in our workplace and communities we serve

 

Turnover of top talent is 5%; our enhanced focus on talent development and planning will aim to further improve this score

 

We have made significant additions to build strong leadership teams in marketing and operations globally as well as recruited key roles in Asia

TOTAL DIRECT COMPENSATION

Mr. Gori’s 2021 target total direct compensation amount takes into consideration the global scope and complexity of his role as President and CEO, what our peers pay for similar roles and what other senior executives at Manulife are paid. The management resources and compensation committee received advice and additional research and analysis from its independent advisor when developing the compensation package for Mr. Gori’s role as President and CEO. The board believes that Mr. Gori’s 2020 target is appropriate, and that the pay mix emphasizes the focus on Manulife’s long-term performance and aligns with the shareholder experience.

The table below shows the total direct compensation the board approved for Mr. Gori for 2020, and his base salary and equity-based incentives for 2021, based on the recommendation of the management resources and compensation committee.

 

(in US$)    2018      2019      2020      2021  
Base salary      $1,100,000        $1,100,000        $1,200,000        $1,200,000  
Annual incentive2      $3,088,800        $3,700,000        $2,822,400       
$2,400,000
(target)
 
 
Equity-based incentives2            
• PSUs      $2,600,000        $2,800,000        $3,162,500        $4,095,000  
• RSUs      $1,040,000        $1,120,000        $1,265,000        $2,730,000  
• stock options      $1,560,000        $1,680,000        $1,897,500        $0  
Total direct compensation      $9,388,800        $10,400,000        $10,347,400        $10,425,000  

 

1

Subject to regulatory approval.

2

Timing of awards: the 2020 column includes the annual incentive paid in February 2021 and equity-based incentives awarded in March 2020.

 

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2020 compensation mix

 

LOGO

2021 target compensation mix

 

LOGO

Base salary

Mr. Gori’s salary for 2020 was US$1,200,000 and has not changed for 2021.

Annual incentive

Mr. Gori’s 2020 annual incentive award was approved and paid in February 2021. It was 118% of his target and 24% lower than his 2019 award. 10% of his award was delivered in Manulife common shares purchased on the open market.

You can read about the annual incentive plan and our performance for the year starting on page 53.

Equity-based incentives

Mr. Gori’s 2020 equity-based incentive awards totaled US$6,325,000. The award, made in March 2020, was based on his performance, the competitive position of his compensation compared to the peer group and the board’s focus on aligning executive pay with the interests of our shareholders.

You can read about the performance criteria for the performance share units starting on page 59.

The board approved US$6,825,000 in equity-based incentives for 2021, allocated 60% to performance share units and 40% to restricted share units. These awards are intended to be forward-looking. The actual amount Mr. Gori realizes will be greater or less than the theoretical grant date amount based on Manulife’s financial and share price performance over the next three years.

 

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CEO COMPENSATION LOOKBACK

The CEO lookback table compares compensation awarded to the CEO in each of the last five years to the actual value of that compensation as at December 31, 2020.

The actual value includes the realized and realizable value of the awards granted each year as at December 31, 2020:

 

realized value: cash compensation paid for the year, including salary, annual incentive (earned for the year but paid in the following year), payouts of restricted share units and performance share units that have vested, and gains realized from stock options exercised

 

realizable value: the value of restricted share units and performance share units that had not vested, and outstanding stock options that were in-the-money.

The table reflects compensation for Mr. Guloien for 2016 and Mr. Gori for 2017 to 2020.

The table also compares the actual value to the CEO for each $100 of compensation awarded each year to the value earned by shareholders over the same period. We have indexed these values at $100 to provide a meaningful comparison.

The table illustrates that the actual value of CEO compensation is closely aligned with the shareholder experience. This is consistent with our emphasis on aligning executive compensation with the longer-term success of Manulife.

 

    

Total direct

compensation

awarded

   

Actual value

(realized and
realizable)

at December 31,
2020

           Value of $100  
          Period      Manulife
CEO
    

Manulife

shareholders

 
2016     $14,607,399       $17,726,191                Jan 1, 2016 to Dec 31, 2020        $121.35        $134.51  
2017     $12,246,460       $12,766,034                Jan 1, 2017 to Dec 31, 2020        $104.24        $112.15  
2018     $12,081,371       $11,649,374                Jan 1, 2018 to Dec 31, 2020        $96.42        $98.97  
2019     $13,757,207       $12,003,746                Jan 1, 2019 to Dec 31, 2020        $87.25        $128.95  
2020     $13,576,368       $10,801,129                Jan 1, 2020 to Dec 31, 2020        $79.56        $90.80  

Total direct compensation awarded includes salary, annual incentive, share-based awards and option-based awards, as reported in the summary compensation table each year.

Actual value (realized and realizable) represents the actual value to the CEO of compensation awarded each year, realized between grant and December 31, 2020 or still realizable on December 31, 2020.

Value of $100 for CEO: represents the actual value (realized and realizable) to the CEO for each $100 of total direct compensation awarded for each fiscal year.

Value of $100 for Manulife shareholders: represents the cumulative value of a $100 investment in common shares made on the first trading day of the period, assuming dividends are reinvested.

 

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PAY FOR PERFORMANCE LOOKBACK

To illustrate the effectiveness of our executive compensation program and its alignment to our core principle of paying for performance, we compare the percentile ranking of our annualized TSR and CEO realized and realizable pay to the percentile ranking of our eleven compensation peers over the previous five years (2015 to 2019, because 2020 compensation data for our peers is not yet available). These are plotted in the graph below. We use a time horizon of five years because the nature of our industry is to seek long-term results for shareholders.

 

LOGO

For the companies in the shaded area, CEO compensation is aligned with returns. Companies above the shaded area have higher returns and lower CEO compensation than peers. Companies below the shaded area have lower returns and higher compensation than peers. This historical five-year analysis shows that Manulife’s CEO pay was in line with performance compared with our compensation peers.

See page 48 for information about our compensation peer group, and page 66 for details about how we calculate realized and realizable pay.

 

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LOGO

      

Phil Witherington

 

Chief Financial Officer

 

    Mr. Witherington is responsible for managing Manulife’s financial affairs, including financial accounting and reporting; planning and analysis; taxation; investor relations; treasury; capital management and financial regulation, while also overseeing the strategy, transformation and corporate development functions, and our property and casualty reinsurance operations. He is a member of Manulife’s executive leadership team.

Mr. Witherington has led the company’s financial response to the COVID 19 pandemic, adopting a forward-looking approach to anticipate and plan for a range of potential outcomes. This has included maintaining substantial financial flexibility, enabling the deployment of capital to support delivery of our strategic priorities, including M&A transactions. He has maintained high touch contact with key stakeholder groups against a backdrop of external uncertainty, which has increased the importance of effective communication. Additionally, he has delivered on expense saves, continued to improve the reporting framework and oversaw the execution of our strategy, ensuring we remained on track to deliver our transformation commitments. The information below describes the company’s financial results and other factors that went into determining his compensation for 2020.

FINANCIAL

 

Reported net income attributable to shareholders of $5.9 billion in 2019, up $0.3 billion from 2019

 

Achieved core earnings1 of $5.5 billion, down 9%2 from 2019

 

Disciplined expense management with core general expenses1 lowered by 3% in 2020 compared with 2019

 

Delivered core return on equity1 of 10.9% in 2020 (2019: 13.1%)

 

The Manufacturers Life Insurance Company’s Life Insurance Capital Adequacy Test (LICAT)1 total ratio was 149% as at December 31, 2020 (December 31, 2019: 140%)

CONTRIBUTION TO THE DELIVERY OF MANULIFE’S FIVE STRATEGIC PRIORITIES

 

Led the company’s financial response to the COVID 19 pandemic, including liquidity and capital planning, managing key stakeholder communications, and enhanced forecasting, stress testing and contingency planning

 

Completed a fulsome strategic planning review/refresh enabling the prioritization of key strategic actions

 

Delivered $1 billion in expense efficiencies target two years ahead of schedule, and refreshed plans to achieve a less than 50% efficiency ratio by 2022

 

Improved the expense planning processes to include a global function lens, and completed a robust financial plan despite the challenges of pandemic related uncertainty and the macro-economic backdrop

 

Continued to build and develop the leadership bench strength, delivering seamless transitions for a number of internal leadership appointments, and recruitment of an external candidate as the CFO for Global WAM

 

Employee engagement score for Finance increased 18 pps to 4.32 on a 5-point scale

 

1

These are non-GAAP measures. See page 55 for more information.

2

Presented on a constant exchange rate basis.

 

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TOTAL DIRECT COMPENSATION

The table below shows the total direct compensation the board approved for Mr. Witherington for 2020, and his base salary and equity-based incentives for 2021, based on the recommendation of the CEO and the management resources and compensation committee.

 

(in CAD$)   2018     2019     2020     2021  
Base salary     $850,000       $867,000       $915,000       $915,000  
Annual incentive1     $1,492,000       $1,770,000       $1,453,000      

$1,235,250

(target

 

Equity-based incentives1        
• PSUs     $1,000,000       $1,100,000       $1,250,000       $1,620,000  
• RSUs     $400,000       $440,000       $500,000       $1,080,000  
• stock options     $600,000       $660,000       $750,000       $0  
Total direct compensation     $4,342,000       $4,837,000       $4,868,000       $4,850,250  

 

1

Timing of awards: the 2020 column includes the annual incentive paid in February 2021 and equity-based incentives awarded in March 2020.

2020 compensation mix

 

LOGO

2021 target compensation mix

 

LOGO

 

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Base salary

Mr. Witherington’s salary for 2020 was $915,000 and has not changed for 2021.

Annual incentive

Mr. Witherington’s 2020 annual incentive award was approved and paid in February 2021. It was 118% of his target compared to 151% in 2019. 10% of this award was delivered in Manulife common shares purchased on the open market.

Equity-based incentives

Mr. Witherington’s 2020 equity-based incentive awards totaled $2,500,000. The award, made in March 2020, was based on his performance, the competitive position of his compensation compared to the peer group and the board’s focus on aligning executive pay with the interests of our shareholders.

In February 2021, the board approved $2,700,000 in equity-based incentives for Mr. Witherington, allocated 60% to performance share units and 40% to restricted share units. These awards are intended to be forward-looking. The actual amount Mr. Witherington realizes will be greater or less than the theoretical grant date amount based on Manulife’s financial and share price performance over the next three years.

 

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LOGO

      

Marianne Harrison

 

President and CEO, John Hancock

 

    Ms. Harrison is responsible for all aspects of the Company’s U.S. segment, providing life insurance products and administering in-force long-term care and insurance-based wealth accumulation products in the U.S. She also operates as a matrix leader to the U.S. Mutual Fund business and the U.S. Retirement Plan Services business, which have primary accountability into the Global WAM segment. She is a member of Manulife’s executive leadership team.

Ms. Harrison drove our strategy to build more holistic and long-lasting customer relationships by offering innovative products and solutions and making it easier for customers to do business with us. Under her leadership, we focused on revitalizing our insurance business by expanding our product offerings, modernizing the delivery process, enhancing customer experience and opportunistically evaluating potential adjacent market expansion. The information below describes the US segment’s financial results and other factors that went into determining her compensation for 2020.

FINANCIAL

 

Contributed 31% of the company’s core earnings from operating segments and, as at December 31, 2020, accounted for 18% of the company’s assets under management and administration

 

Delivered core earnings1 of US$1.5 billion, an increase of 5%2 compared with 2019

 

Delivered APE sales1 of US$455 million, a decrease of 14% compared with 2019

 

Gross flows in the U.S. were $75.9 billion, an increase of 9% compared with 2019

 

U.S. assets under management of US$188 billion as at December 31, 2020 increased 6% from December 31, 2019

CONTRIBUTION TO THE DELIVERY OF MANULIFE’S FIVE STRATEGIC PRIORITIES

 

Continued to see growth in our “Vitality for All” strategy with two versions of John Hancock Vitality: Vitality GO and Vitality PLUS, and extending Vitality benefits to all insurance customers

 

Announced a strategic collaboration with Amazon which adds the Halo wellness band to devices supported by the John Hancock Vitality Program

 

Launched numerous digital services, such as chat bots, SMS texts, non-paper apps and digital payment tools, with the goal of improving customer satisfaction and rNPS including a new, fully underwritten term life product in the U.S. which enables customers to purchase up to US$1 million in life insurance coverage digitally

 

Launched an eApplication to be used by brokers to streamline the application process. This online platform is a major step toward offering a fully digital end-to-end application experience

 

Implemented a digital new business/policy issue process that eliminates the reliance on paper applications for International insurance customers

 

Completed legacy optimization initiatives that contributed over $2.1 billion of cumulative capital benefits through December 31, 2020, including $765 million in 2020

 

Completed an agreement with Global Atlantic Financial Group to reinsure a block of legacy U.S. Bank Owned Life Insurance business that resulted in a capital benefit of $465 million

 

Continued our Annuity Guaranteed Minimum Withdrawal Benefit offer program that has released $200 million of capital since the start of the program, including $125 million in 2020

 

1

These are non-GAAP measures. See page 55 for more information.

2

Presented on a constant exchange rate basis,

 

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Reinsured individual and group payout annuity policies and sold the associated alternative long-duration assets which enabled us to release $90 million of capital. We expanded reinsurance coverage of certain universal life no lapse guarantee products that resulted in the release of $70 million of capital.

 

Continued to make progress in securing long-term care premium rate increases

 

Signed on to the CEO Action for Diversity & Inclusion pledge, the largest CEO-driven business commitment to advance diversity and inclusion within the workplace; began serving on the Racial Equity Fellowship steering committee

 

Employee engagement score for the U.S. segment increased 19 pps to 4.26 on a 5-point scale

TOTAL DIRECT COMPENSATION

The table below shows the total direct compensation the board approved for Ms. Harrison for 2020 and for her base salary and equity-based incentives for 2021, based on the recommendation of the CEO and the management resources and compensation committee.

 

(in USD$)   2018     2019     2020     2021  
Base salary     $715,000       $725,000       $740,000       $740,000  
Annual incentive1     $1,098,000       $1,315,000       $965,000       $999,000 (target)  
Equity-based incentives1        
• PSUs     $1,300,000       $1,300,000       $1,300,000       $1,560,000  
• RSUs     $520,000       $520,000       $520,000       $1,040,000  
• stock options     $780,000       $780,000       $780,000       $0  
Total direct compensation     $4,413,000       $4,640,000       $4,305,000       $4,339,000  
1

Timing of awards: the 2020 column includes the annual incentive paid in February 2021 and equity-based incentives awarded in March 2020.

2020 compensation mix

 

LOGO

2021 target compensation mix

 

LOGO

 

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    Executive Compensation

 

Base salary

Ms. Harrison’s salary for 2020 was US$740,000 and has not changed for 2021.

Annual incentive

Ms. Harrison’s 2020 annual incentive award was approved and paid in February 2021. It was 97% of her target compared to 134% in 2019. 10% of the award was delivered in Manulife common shares purchased on the open market.

Equity-based incentives

Ms. Harrison was granted a total of US$2,600,000 in equity-based incentives for 2020. The award, made in March 2020, was based on her performance, her anticipated future contributions, the competitive position of her compensation compared to the peer group and the board’s focus on aligning executive pay with the interests of our shareholders.

The board approved US$2,600,000 in equity-based incentives for 2021, allocated 60% to performance share units and 40% to restricted share units. These awards are intended to be forward-looking. The actual amount Ms. Harrison realizes will be greater or less than the theoretical grant date amount based on Manulife’s financial and share price performance over the next three years.

 

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LOGO       

Anil Wadhwani

 

President & CEO, Manulife Asia

 

    Mr. Wadhwani joined Manulife as President and CEO of Manulife Asia on November 13, 2017. He is responsible for the overall management of Manulife’s insurance operations in 11 markets across Asia, including Japan, Hong Kong, Macau, Singapore, mainland China, Vietnam, Indonesia, the Philippines, Malaysia, Cambodia and in Myanmar, where we recently received a license to start operations. He also operates as a matrix leader to the Global WAM business in Asia, which has primary accountability into the Global WAM segment. He is a member of Manulife’s executive leadership team.

Mr. Wadhwani successfully drove business momentum in Asia this year, despite unforeseen challenging market conditions and implementing several strategic initiatives to support Manulife’s transformation strategy. Under his leadership, we continued to accelerate our growth by expanding our distribution reach and implementing several changes to enhance customer experience. The information below describes the Asia segment financial results and other factors that went into determining his compensation for 2020.

FINANCIAL

 

Contributed 33% of the company’s core earnings from operating segments and, as at December 31, 2020, accounted for 11% of the company’s assets under management and administration

 

Reported net income attributable to shareholders of US$1,322 million, compared with US$1,457 million in 2019

 

Achieved core earnings1 of US$1,576 million in 2020 compared with US$1,511 million in 2019

 

Achieved new business value1 of US$1,037 million, a decrease of 14% compared with 2019

 

Delivered APE sales1 of US$2,892 million, a decrease of 11% compared with 2019

 

Generated wealth and asset management net inflows of $3.9 billion compared with net inflows of $4.8 billion in 2019

CONTRIBUTION TO THE DELIVERY OF MANULIFE’S FIVE STRATEGIC PRIORITIES

 

Increased the number of agents by 21% to over 115,000. Active number of agents grew by 14% year-on-year. There are now 6,400 Million Dollar Round Table agents compared with 3,700 in 2019

 

Continued expansion in bancassurance with the signing of an agreement with VietinBank to establish an exclusive 16-year bancassurance partnership to better meet the growing financial and insurance needs of the Vietnamese people. Signed an exclusive bancassurance partnership with UAB in Myanmar.

 

Extended the strategic bancassurance arrangement with PT Bank Danamon Indonesia Tbk in the first quarter of 2020. The new agreement extends the term covered in the original agreement to 2036

 

Grew customer base to more than 12 million customers and saw positive momentum in rNPS, more than doubling the overall score to more than 21. Sold the first policy in Myanmar, a digitally savvy market with one of the lowest insurance penetration rates in Asia

 

Received approval from China Banking and Insurance Regulatory Commission to begin preparation work to establish a new branch in Shaanxi Province

 

Expanded distribution capabilities, with approximately 97% of product shelf now accessible to customers through virtual non-face-to-face solutions

 

Collaborated with Dacadoo, a Swiss-based global digital health platform provider to strengthen the existing health engagement platform, ManulifeMOVE. Ended 2020 with over 1,000,000 policyholders enrolled in ManulifeMOVE, almost doubling the number of policyholders enrolled at the end of 2019

 

1

These are non-GAAP measures. See page 55 for more information.

2

Presented on a constant exchange rate basis.

 

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Entered into a partnership with Cong Dong Bau, a community with more than 5 million members that improves access to financial advice and solutions for expectant and new mothers

 

Employee engagement score for the Asia segment increased 19 pps to 4.27 on a 5-point scale

TOTAL DIRECT COMPENSATION

The table below shows the total direct compensation the board approved for Mr. Wadhwani for 2020, and his base salary and equity-based incentives for 2021, based on the recommendation of the CEO and the management resources and compensation committee.

 

 

(in US$)

 

 

 

2018

 

   

 

2019

 

   

 

2020

 

   

 

2021

 

 

 

Base salary

 

 

 

 

 

 

$650,000

 

 

 

 

 

 

 

 

 

$660,000

 

 

 

 

 

 

 

 

 

$690,000

 

 

 

 

 

 

 

 

 

$690,000

 

 

 

 

 

Annual incentive1

 

 

 

 

 

 

$1,093,000

 

 

 

 

 

 

 

 

 

$1,198,000

 

 

 

 

 

 

 

 

 

$1,017,000

 

 

 

 

 

 

 

 

 

$931,500
(target)

 

 

 
 

 

 

Equity-based incentives1

 

       

 

• PSUs

 

 

 

 

 

 

$900,000

 

 

 

 

 

 

 

 

 

$1,000,000

 

 

 

 

 

 

 

 

 

$1,100,000

 

 

 

 

 

 

 

 

 

$1,350,000

 

 

 

 

 

• RSUs

 

 

 

 

 

 

$360,000

 

 

 

 

 

 

 

 

 

$400,000

 

 

 

 

 

 

 

 

 

$440,000

 

 

 

 

 

 

 

 

 

$900,000

 

 

 

 

 

• stock options

 

 

 

 

 

 

$540,000

 

 

 

 

 

 

 

 

 

$600,000

 

 

 

 

 

 

 

 

 

$660,000

 

 

 

 

 

 

 

 

 

$0

 

 

 

 

 

Total direct compensation

 

 

 

 

 

 

$3,543,000

 

 

 

 

 

 

 

 

 

$3,858,000

 

 

 

 

 

 

 

 

 

$3,907,000

 

 

 

 

 

 

 

 

 

$3,871,500

 

 

 

 

1

Timing of awards: the 2020 column includes the annual incentive paid in February 2021 and equity-based incentives awarded in March 2020

2020 compensation mix

 

LOGO

2021 target compensation mix

 

LOGO

 

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Base salary

Mr. Wadhwani’s salary was US$690,000 and has not changed for 2021.

Annual incentive

Mr. Wadhwani’s 2020 annual incentive award was approved and paid in February 2021. It was 109% of his target compared to 134% in 2019. 10% of the award was delivered in Manulife common shares purchased on the open market.

Equity-based incentives

Mr. Wadhwani’s 2020 equity-based incentive awards totaled US$2,200,000. The award, made in March 2020, was based on his performance, his anticipated future contributions, the competitive position of his compensation compared to the peer group and the board’s focus on aligning executive pay with the interests of our shareholders.

The board approved US$2,250,000 in equity-based incentives for 2021, allocated 60% to performance share units and 40% to restricted share units. These awards are intended to be forward-looking. The actual amount Mr. Wadhwani realizes will be greater or less than the theoretical grant date amount based on Manulife’s financial and share price performance over the next three years.

 

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Scott Hartz

 

Chief Investment Officer

 

    Mr. Hartz is Chief Investment Officer for Manulife. He oversees all of Manulife’s U.S., Canadian, Asian and newly expanded European general account investments. Mr. Hartz is also the Chief Investment Officer for John Hancock Life Insurance Company (U.S.A.), a wholly owned subsidiary of Manulife. He is a member of Manulife’s executive leadership team.

Mr. Hartz demonstrated his deep experience, steady leadership and investment capability as we navigated extreme volatility and uncertainty in the global markets this year. He ensured we were able to quickly adapt and find ways to capitalize on the rapidly changing investment environment and he brought his seasoned leadership perspective to help us manage our way through a myriad of issues we faced across the company. The information below describes the company’s financial results, general fund performance and other factors that went into determining his compensation for 2020.

FINANCIAL

 

General fund invested assets of $411.0 billion as at December 31, 2020 increased 9% from December 31, 2019

 

Maintained average ratings across our total fixed income portfolio throughout 2020, which was 97% investment grade with 73% rated A or higher

 

General fund assets invested into renewable energy and energy efficiency projects had a carrying value of $13.7 billion as at December 31, 2020

 

Reported a net charge of $792 million in investment-related experience, impacted by lower-than-expected returns on alternative long-duration assets (“ALDA”) due to their mark-to-market nature, partially offset by favourable impact of fixed income reinvestment activities

 

Generated a gain of $932 million from the direct impact of equity markets and interest rates and variable annuity guarantee liabilities

 

Delivered $35.4 billion of investment income in 2020, an increase of 5% compared with 2019

CONTRIBUTION TO THE DELIVERY OF MANULIFE’S FIVE STRATEGIC PRIORITIES

 

Variable guarantee hedging program has served the company well recent volatile market experience and a significant drop in risk free interest rates

 

Interest rate hedging programs also served the company well as, despite the significant drop in risk free rates, we took advantage of the increase in value of the long AFS surplus bond gains to drive a $1.16 billion net gain from risk free rates

 

Took advantage of a narrow window when spreads widened by leveraging tools that had been put in place for fixed income reinvestment

 

Provided guidance and oversight to the Real Estate Finance group that handled hundreds of requests for payment deferrals and triaged them to provide much-needed assistance while still protecting the company’s interests

 

Completed the sale of NAL Resources Ltd.

 

Continued to expand our capabilities for the Asia balance sheet and provide our Asian clients with superior risk adjusted returns

 

Supported Private Markets on a number of new private equity and infrastructure funds

 

Continued multi-year transformation and digitization of infrastructure supporting investment operations

 

Employee engagement score for the General Account increased 39 pps to 4.31 on a 5-point scale

 

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TOTAL DIRECT COMPENSATION

The table below shows the total direct compensation the board approved for Mr. Hartz for 2021, and his base salary and equity-based incentives for 2021, based on the recommendation of the CEO and the management resources and compensation committee.

 

(in USD$)   2018     2019     2020     2021  
Base salary     $680,000       $686,800       $700,000       $700,000  
Annual incentive1     $1,596,000       $1,558,000       $1,191,000      
$1,050,000
(target
 
Equity-based incentives1        
• PSUs     $472,500       $750,000       $1,000,000       $1,200,000  
• RSUs     $472,500       $300,000       $400,000       $800,000  
• stock options     $405,000       $450,000       $600,000       $0  
Total direct compensation     $3,626,000       $3,744,800       $3,891,000       $3,750,000  
1

Timing of awards: the 2020 column includes the annual incentive paid in February 2021 and equity-based incentives awarded in March 2020.

2020 compensation mix

 

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2021 target compensation mix

 

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    Executive Compensation

 

Base salary

Mr. Hartz’s salary for 2020 was US$700,000 and has not changed for 2021.

Annual incentive

Mr. Hartz’s 2020 annual incentive award was approved and paid in February 2021. It was 113% of his target compared to 134% in 2019. 10% of this award was delivered in Manulife common shares purchased on the open market.

Equity-based incentives

Mr. Hartz’s 2020 equity-based incentive awards totaled US$2,000,000. The award, made in March 2020, based on his performance, the competitive position of his compensation compared to the peer group and the board’s focus on aligning executive pay with the interests of our shareholders.

The board approved US$2,000,000 in equity-based incentives for 2021, allocated 60% to performance share units and 40% to restricted share units. These awards are intended to be forward-looking. The actual amount Mr. Hartz realizes will be greater or less than the theoretical grant date amount based on Manulife’s financial and share price performance over the next three years.

 

2021 Management information circular         79  


Table of Contents

 

Share performance

The graph below compares the cumulative value of $100 invested in Manulife common shares on December 31, 2015 with the value of $100 invested in two major market indices and an “index” of our performance peers for the five-year period based on median performance, assuming dividends are reinvested.

Manulife’s share price performance compared to peers and other relevant indices is one lens the board reviews when establishing executive pay levels.

Total shareholder return

(as of December 31)

 

LOGO    
   
 

 

S&P/TSX Composite

Index ($)

 

---

 

S&P/TSX Composite

Financials Index ($)

    Median of our performance peer group ($)
   

 

Manulife ($)

   
   
   

 

(as at December 31)    2015         2016         2017         2018         2019         2020  
Manulife      $100.00        $119.94        $135.92        $104.32        $148.13        $134.51  
S&P/TSX Composite Index      $100.00        $121.08        $132.07        $120.35        $147.83        $156.11  
S&P/TSX Composite Financials Index      $100.00        $124.10        $140.63        $127.52        $154.76        $157.26  
Median of our performance peer group (see page 48)      $100.00        $110.66        $125.07        $102.56        $134.03        $127.27 1 

 

1

Represents the value of a $100 investment after five years if it had achieved the median annual share price performance of the performance peer group in each individual year (see page 49 for a listing of these peers). The value shown here is different from the median five-year TSR for the performance peer group shown on page 49, because that page uses the 2021 peer group (including three new performance peers), and a cumulative five-year period.

 

80     Manulife Financial Corporation


Table of Contents

    Executive Compensation

 

Executive compensation details

Summary compensation table

The table below shows the compensation awarded to the named executives for our last three fiscal years. For each named executive, the 2020 row includes the annual incentive paid in February 2021 and share-based and option-based awards granted in March 2020. We set compensation for the majority of the named executives in U.S. dollars, and have converted the amounts below to Canadian dollars consistent with our financial statements. Fluctuations in exchange rates can contribute to changes in the compensation amounts reported from year to year.

 

                            Non-equity
incentive
compensation
                   
     Year     Salary    

Share-based

awards

   

Option-

based

awards

   

Annual

incentive

   

Pension

value

   

All other

compensation

   

Total

compensation

 

Roy Gori

President and CEO

   

2020

2019

2018

 

 

 

   

$1,584,887

$1,461,167

$1,423,033

 

 

 

   

$5,887,690

$5,175,576

$4,592,515

 

 

 

   

$2,523,296

$2,218,104

$1,968,221

 

 

 

   

$3,580,497

$4,902,130

$4,097,602

 

 

 

   

$951,902

$813,100

$644,300

 

 

 

   

$168,816

$125,472

$260,673

 

 

 

   

$14,697,088

$14,695,549

$12,986,344

 

 

 

Phil Witherington

Chief Financial Officer

   

2020

2019

2018

 

 

 

   

$907,000

$864,167

$850,000

 

 

 

   

$1,750,000

$1,540,000

$1,400,000

 

 

 

   

$750,000

$660,000

$600,000

 

 

 

   

$1,453,000

$1,770,000

$1,492,000

 

 

 

   

$258,281

$226,000

$178,700

 

 

 

   

$53,532

$51,955

$81,589

 

 

 

   

$5,171,813

$5,112,122

$4,602,289

 

 

 

Marianne Harrison

President and CEO, John Hancock

   

2020

2019

2018

 

 

 

   

$989,024

$960,012

$923,657

 

 

 

   

$2,420,236

$2,402,946

$2,296,258

 

 

 

   

$1,037,244

$1,029,834

$984,110

 

 

 

   

$1,224,199

$1,742,244

$1,456,607

 

 

 

   

$226,444

$199,500

$193,400

 

 

 

   

$7,416

$13,129

$61,319

 

 

 

   

$5,904,563

$6,347,665

$5,915,351

 

 

 

Anil Wadhwani

President and CEO, Manulife Asia

   


2020

2019
2018

 

 
 

   

$921,524

$865,468

$834,278

 

 

 

   

$2,047,892

$1,848,420

$1,589,717

 

 

 

   

$877,668

$792,180

$681,307

 

 

 

   

$1,290,166

$1,587,230

$1,449,974

 

 

 

   

$46,053

$43,300

$47,400

 

 

 

   

$517,689

$511,046

$508,414

 

 

 

   

$5,700,992

$5,647,644

$5,111,090

 

 

 

Scott Hartz

Chief Investment Officer

   

2020

2019

2018

 

 

 

   

$935,767

$911,454

$877,356

 

 

 

   

$1,861,720

$1,386,315

$1,192,288

 

 

 

   

$797,880

$594,135

$510,980

 

 

 

   

$1,510,903

$2,064,194

$2,117,254

 

 

 

   

$247,359

$247,467

$225,858

 

 

 

   

$0

$3,320

$0

 

 

 

   

$5,353,629

$5,206,885

$4,923,736

 

 

 

 

Base salary

Mr. Gori’s salary is set in U.S. dollars, but paid semi-monthly in Canadian dollars using the Bank of Canada noon exchange rate that applied on the previous pay date. Mr. Witherington’s salary is set and paid in Canadian dollars. Ms. Harrison’s and Mr. Hartz’s salaries are set and paid in U.S. dollars. Mr. Wadhwani’s salary is set in U.S. dollars but paid in Hong Kong dollars. For each executive, we used the average annual exchange rates outlined in the table below to convert to Canadian dollars.

 

      Exchange rate for
U.S. dollars
                

Exchange rate for

HK dollars

  

        

2020    US$1.00 = $1.341       HK$1.00 = $0.1729   
2019    US$1.00 = $1.327       HK$1.00 = $0.1694   
2018    US$1.00 = $1.296             HK$1.00 = $0.1654     

 

Supplementary table: total

compensation in U.S. dollars

This table shows total compensation
for the named executives in U.S.
dollars for convenience. Amounts
paid in other currencies were
converted to U.S. dollars consistent
with our financial statements.

 

 
            (US$)  
Roy Gori    

2020

2019

2018

 

 

 

  $

$

$

  11,165,453

11,107,342

10,087,189

 

 

 

Phil Witherington    

2020

2019

2018

 

 

 

  $

$

$

3,934,427

3,862,983

3,551,697

 

 

 

Marianne Harrison    

2020

2019

2018

 

 

 

  $

$

$

4,477,124

4,798,745

4,607,073

 

 

 

Anil Wadhwani    

2020

2019

2018

 

 

 

  $

$

$

4,324,828

4,274,109

3,971,935

 

 

 

Scott Hartz    

2020

2019

2018

 

 

 

  $

$

$

4,073,469

3,934,725

3,797,377

 

 

 

 

 

2021 Management information circular         81  


Table of Contents

 

Share-based awards

The grant date fair value of performance
share units, restricted share units and
deferred share units awarded to the
named executives in the table to the right.

                 Grant date                   Share price    

Exchange rate for

           awards in U.S. dollars

 
  2020  

March 3

  $   24.38       US$1.00 = $1.3298  
  2019  

March 5

  $ 22.60       US$1.00 = $1.3203  
  2018

 

 

February 27

 

  $

 

24.73

 

 

 

   

 

US$1.00 = $1.2617

 

 

 

The grant date fair value is the closing price of a Manulife common share on the TSX on the last trading day before the grant date or the average closing price for the last 10 trading days before the grant date (whichever is higher).

 

 

Option-based awards

The grant date fair value of stock options
awarded to the named executives was
calculated using the data in the table to
the right.

 

We used the Black-Scholes methodology to
determine the fair value of the stock option
awards (using the same assumptions we
use for accounting purposes):

              Exercise
      price
   

Fair value

factor

   

Exchange rate

for awards in

                U.S. dollars

 
    2020    

March 3

  $   24.38       15%     US$ 1.00 = $1.3298  
    2019     March 5   $ 22.60       20.2%     US$ 1.00 = $1.3203  
   

 

2018

 

 

 

 

February 27

 

  $

 

24.73

 

 

 

   

 

20.1%

 

 

 

  US$

 

1.00 = $1.2617

 

 

 

         
         

Expected life

(years)

   

Expected

volatility

 

 

   

Risk-free

interest rate

 

 

   

Expected

dividend yield

 

 

    2020     8.0     23.0%       1.50%       3.50%  
    2019     6.3     28.0%       2.50%       3.50%  
   

 

2018

 

 

 

 

6.3

 

   

 

28.0%

 

 

 

   

 

2.00%

 

 

 

   

 

3.25%

 

 

 

 

Annual incentive

Paid in cash in the year following the fiscal year in which the award was earned.
The U.S. dollar amounts were converted to Canadian dollars using the exchange
rates that applied on the previous pay dates.

 

Exchange rate for

awards in in U.S. dollars

 

 
   

 

2020

2019

2018

 


 

 

   

 

US$1.00 = $1.2686
US$1.00 = $1.3249
US$1.00 = $1.3266

 

 
 
 

 

Pension value

The sum of the amounts under compensatory change for each named executive in the pension tables on pages 88 and 89.

All other compensation

Mr. Gori’s amount includes:

 

2020: $23,249 for club membership fees; $43,557 reimbursement for a disallowed tax credit related to his relocation to Canada in 2017 and a $100,000 flexible spending account allowance.

 

2019: $21,940 for club membership fees and a $100,000 flexible spending account allowance.

 

2018: $157,053 for club membership fees, and a $100,000 flexible spending account allowance.

Mr. Witherington’s amount includes:

 

2020: a $50,000 flexible spending account allowance.

 

2019: a $50,000 flexible spending account allowance.

 

2018: a $20,000 relocation allowance, and a $50,000 flexible spending account allowance.

Ms. Harrison’s amount includes:

 

2020: $7,416 in total perquisites.

 

2019: $13,129 in total perquisites.

 

2018: US$21,380 tied to her relocation and an attributed value of US$24,749 related to travel for conferences.

Mr. Wadhwani’s amount includes:

 

2020: HK$2,328,000 housing allowance, HK$67,480 for club membership fees and HK$598,675 for expenses related to his personal driver.

 

2019: a HK$2,328,000 housing allowance, HK$82,960 for club membership fees and HK$605,842 for expenses related to his personal driver.

 

2018: a HK$2,328,000 housing allowance, HK$151,782 for club membership fees and HK$563,503 for expenses related to his personal driver.

Mr. Hartz’s amount includes:

 

2019: $3,320 in total perquisites.

 

82     Manulife Financial Corporation


Table of Contents

    Executive Compensation

 

Equity compensation

Outstanding share-based and option-based awards (as at December 31, 2020)

 

    Option-based awards  
     Grant date  

Number of

securities

underlying

unexercised

options

    

Option

exercise

price

    

Option

expiration

date

    

Value of

unexercised

in-the-money

options

 
Roy Gori   Mar 02, 2015     260,931        $21.81        Mar 02, 2025        $219,182  
  Feb 23, 2016     436,301        $17.59        Feb 23, 2026        $2,207,683  
  Feb 28, 2017     243,473        $24.61        Feb 28, 2027        $0  
  Jun 8, 2017     167,872        $23.51        Jun 8, 2027        $0  
  Feb 27, 2018     395,962        $24.73        Feb 27, 2028        $0  
  Mar 5, 2019     485,894        $22.60        Mar 5, 2029        $24,295  
    Mar 3, 2020     689,991        $24.38        Mar 3, 2030        $0  
Phil Witherington   Feb 24, 2015     30,896        $22.02        Feb 24, 2025        $19,464  
  Feb 23, 2016     43,462        $17.59        Feb 23, 2026        $219,918  
  Feb 28, 2017     34,315        $24.61        Feb 28, 2027        $0  
  Feb 27, 2018     120,707        $24.73        Feb 27, 2028        $0  
  Mar 5, 2019     144,572        $22.60        Mar 5, 2029        $7,229  
    Mar 3, 2020     205,086        $24.38        Mar 3, 2030        $0  
Marianne Harrison   Feb 22, 2011     48,370        $18.91        Feb 22, 2021        $180,904  
  Feb 21, 2012     77,083        $12.64        Feb 21, 2022        $771,601  
  Feb 19, 2013     147,980        $15.52        Feb 19, 2023        $1,055,097  
  Feb 25, 2014     124,131        $21.20        Feb 25, 2024        $179,990  
  Feb 24, 2015     140,368        $22.02        Feb 24, 2025        $88,432  
  Feb 23, 2016     290,867        $17.59        Feb 23, 2026        $1,471,787  
  Feb 28, 2017     197,822        $24.61        Feb 28, 2027        $0  
  Feb 27, 2018     197,981        $24.73        Feb 27, 2028        $0  
  Mar 5, 2019     225,594        $22.60        Mar 5, 2029        $11,280  
    Mar 3, 2020     283,632        $24.38        Mar 3, 2030        $0  
Anil Wadhwani   Feb 27, 2018     137,064        $24.73        Feb 27, 2028        $0  
  Mar 5, 2019     173,534        $22.60        Mar 5, 2029        $8,677  
    Mar 3, 2020     239,997        $24.38        Mar 3, 2030        $0  
Scott Hartz   Feb 22, 2011     101,831        $18.91        Feb 22, 2021        $380,848  
  Feb 21, 2012     154,166        $12.64        Feb 21, 2022        $1,543,202  
  Feb 19, 2013     102,123        $15.52        Feb 19, 2023        $728,137  
  Feb 25, 2014     75,495        $21.20        Feb 25, 2024        $109,468  
  Feb 24, 2015     85,054        $22.02        Feb 24, 2025        $53,584  
  Feb 23, 2016     119,983        $17.59        Feb 23, 2026        $607,114  
  Feb 28, 2017     98,911        $24.61        Feb 28, 2027        $0  
  Feb 27, 2018     102,798        $24.73        Feb 27, 2028        $0  
  Mar 5, 2019     130,150        $22.60        Mar 5, 2029        $6,507  
    Mar 3, 2020     218,179        $24.38        Mar 3, 2030        $0  

 

2021 Management information circular         83  


Table of Contents

 

     Share-based awards  
  Grant date  

Type of share-

based award

 

Number of
shares or

units of
shares

that have
not vested

   

Market or

payout value of

share awards

that have not

vested

   

Market or payout

value of vested

share-based

awards not

paid out or

distributed

 
Roy Gori   Feb 27, 2018   PSU     151,551       $3,432,631          
  Mar 5, 2019   PSU     179,342       $4,062,105    
      RSU     71,737       $1,624,852          
  Mar 3, 2020   PSU     179,968       $4,076,285    
      RSU     71,987       $1,630,509          
    MFC shares1 (2015)         $3,477,675  
Phil Witherington   Feb 27, 2018   PSU     46,200       $1,046,426          
  Mar 5, 2019   PSU     53,362       $1,208,644    
      RSU     21,344       $483,453          
  Mar 3, 2020   PSU     53,492       $1,211,604    
        RSU     21,397       $484,646          
Marianne Harrison   Feb 27, 2018   PSU     75,776       $1,716,328          
  Mar 5, 2019   PSU     83,266       $1,885,985    
      RSU     33,307       $754,394          
  Mar 3, 2020   PSU     73,979       $1,675,621    
      RSU     29,591       $670,244          
        DSU                     $142,122  
Anil Wadhwani   Feb 28, 2018   PSU     52,460       $1,188,211          
  Mar 5, 2019   PSU     64,051       $1,450,755    
      RSU     25,620       $580,297          
  Mar 3, 2020   PSU     62,597       $1,417,831    
        RSU     25,039       $567,142          
Scott Hartz   Feb 27, 2018   PSU     27,541       $623,814          
  Mar 5, 2019   PSU     48,038       $1,088,060    
      RSU     19,215       $435,229          
  Mar 3, 2020   PSU     56,907       $1,288,948    
        RSU     22,763       $515,579          

 

1

As part of the process of relocating Mr. Gori from Hong Kong to Toronto, his outstanding RSUs, PSUs and DSUs were vested and settled and the after-tax proceeds were used to buy Manulife common shares to ensure the awards he earned while employed in Hong Kong were appropriately allocated. Mr. Gori did not receive additional units as part of this arrangement. These shares were placed in an escrow account and are subject to the same underlying performance, holding and forfeiture conditions as the share-based awards they replaced, except for the shares underlying the PSUs, which will be forfeited proportionately if performance is below target but will not be adjusted if performance is above target. This arrangement gave Mr. Gori substantial personal ownership of Manulife common shares that would otherwise have ultimately been settled in cash. See page 86 of our 2018 management information circular, which is available at manulife.com. The term MFC shares refers to the common shares with underlying conditions from his original equity awards granted in 2015.

In the tables above and to the left:

 

the value of unexercised in-the-money stock options is the difference between the exercise price of the stock options and $22.65, the closing price of Manulife common shares on the TSX on December 31, 2020. The amount is zero if the exercise price is higher than our year-end closing share price

 

the market or payout values of the share-based awards are based on $22.65, the closing price of Manulife common shares on the TSX on December 31, 2020

 

the value of performance share units and performance deferred share units that have not yet vested is calculated using a performance factor of 100%

 

restricted share units (RSUs), performance share units (PSUs) and deferred share units (DSUs) are paid out in cash. Starting with 2019 awards, 10% of RSU and PSU payments are delivered in Manulife common shares purchased on the open market.

 

84     Manulife Financial Corporation


Table of Contents

    Executive Compensation

 

Incentive plan awards – value vested or earned during the year

The table below shows, for each named executive:

 

the value of stock options that vested in 2020 is the amount that would have been realized if they had been exercised on the vesting date, based on the closing price of Manulife common shares on the TSX

 

the value of stock options that was received in 2020 is the actual gain realized by named executives who have exercised options

 

the value of share-based awards that vested and were paid in 2020

 

the annual cash bonus earned for 2020.

 

     Option-based awards    

Share-based

awards

   

Annual

incentive

 
 

Value vested

during the year

 

   

Value received

during the year

 

   

Value vested

during the year

 

   

Value earned

during the year

 

 

Roy Gori

 

   

 

$688,263

 

 

 

   

 

$0

 

 

 

   

 

$4,100,277

 

 

 

   

 

$3,580,497

 

 

 

Phil Witherington

 

   

 

$68,558

 

 

 

   

 

$0

 

 

 

   

 

$660,531

 

 

 

   

 

$1,453,000

 

 

 

Marianne Harrison

 

   

 

$458,844

 

 

 

   

 

$81,525

 

 

 

   

 

$2,659,460

 

 

 

   

 

$1,224,199

 

 

 

Anil Wadhwani

 

   

 

$0

 

 

 

   

 

$0

 

 

 

   

 

$1,129,280

 

 

 

   

 

$1,290,166

 

 

 

Scott Hartz

 

   

 

$189,275

 

 

 

   

 

$154,461

 

 

 

   

 

$1,317,066

 

 

 

   

 

$1,510,903

 

 

 

Stock options exercised in 2020

Scott Hartz and Marianne Harrison exercised stock options in 2020 under our automatic stock option exercise program (see below):

 

     Grant date      Number of options    Exercise price ($)    Gain ($)
Marianne Harrison     Feb 23, 2010      12,426    $19.48    $81,525
Scott Hartz     Feb 23, 2010      23,543    $19.48    $154,461

Automatic stock option exercise program

Executives with outstanding stock options are given the opportunity to elect to have their vested stock options automatically exercised prior to expiration. This program is designed to protect executives from having stock options expire in-the-money if they were unable to exercise due to a black out period, or if they were in possession of material non-public information. Elections were made during a time when they were not in possession of any material non-public information and are irrevocable. If an executive leaves Manulife, any elections under the program will terminate.

About deferred share units

In 2020, executives in Canada and the U.S. were given the opportunity to exchange some or all of their annual incentive award, vested restricted share units and vested performance share units for deferred share units, subject to local tax rules and rulings. We may also grant deferred share units to some new hires and to other executives in special situations.

Deferred share units are notional shares that track the value of Manulife common shares and earn dividend equivalents at the same rate as dividends paid on the common shares. They can only be redeemed for cash when the executive retires or leaves Manulife. For each unit redeemed, the executive will receive the market value of a Manulife common share at the time of redemption. Vesting conditions are specific to each grant, however deferred share units received in exchange for other vested awards, as described above, vest immediately. Deferred share units align executives with the long-term interests of shareholders and are only transferable if the executive dies.

Canadian executives can no longer exchange restricted share units and performance share units that are granted after 2015, in accordance with a change in Canadian tax rulings. Instead, to promote longer term equity ownership, Canadian executives can choose to receive deferred share units instead of restricted share units as long as they make this choice prior to the grant.

 

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About the deferred compensation account

Some U.S. executives can defer up to 90% of their base salary and some or all of their annual incentive and vested restricted share units into a deferred compensation account. The money must remain in the account for at least three years and is adjusted as though the funds had been invested in one or more investment options designated by Manulife and selected by the executive. On withdrawal, the executive can take the cash either in a lump sum or in annual instalments.

Securities authorized for issue under equity compensation plans

The table below shows the total number of securities to be issued and available for issue under our equity compensation plans as at December 31, 2020:

 

     

Number of securities to

be issued upon exercise

of outstanding options,

warrants and rights

    

Weighted average

of exercise price of

outstanding options,

warrants and rights

    

Number of securities

remaining available for

future issuance under

equity plans

 
Equity compensation plans approved by security holders      24,136,275        $21.74        6,130,761  

This table tells you about our plans and their status as at December 31, 2020:

 

Executive stock option plan   

The executive stock option plan was approved by shareholders at the 2000 annual and special meeting. Deferred share units, share appreciation rights, restricted shares and performance awards can also be granted under the executive stock option plan. We need shareholder approval to make changes to the plan.

 

 

Maximum number of common shares that may be issued      73,600,000  

• as a % of common shares outstanding

 

     3.8%  
Maximum number of common shares that may be issued (% of outstanding common shares that cannot be exceeded)

 

• to any one participant, or

     5%  

• to insiders as a whole

 

     10%  
Total number of common shares that have been issued in respect of stock options and deferred share units      43,604,649  

• as a % of common shares outstanding

 

     2.2%  
Stock plan for non-employee directors   

The stock plan for non-employee directors was approved by shareholders at the 2001 annual and special meeting. Deferred share units can also be granted under the stock plan. We need shareholder approval to make changes to the plan.

 

 

Maximum number of common shares that may be issued      1,000,000  

• as a % of common shares outstanding

 

     less than 0.1%  
Maximum number of common shares that may be issued (% of outstanding common shares that cannot be exceeded)   

• to any one participant, or

     5%  

• to insiders as a whole

 

     10%  
Total number of common shares that have been issued in respect of deferred share units      728,316  

• as a % of common shares outstanding

 

     less than 0.05%  

 

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    Executive Compensation

 

We granted 4,919,443 stock options to senior executives in 2020. The table below shows the total number of stock options, share-settled deferred share units outstanding, and securities available for future grant under the plans:

 

(as at December 31, 2020)

 

 

Stock options/
DSUs outstanding

 

          

Securities available for future issue

 

 
 

Number

 

    

As a % of diluted

common shares

 

           

Number

 

    

As a % of diluted

common shares

 

 

Stock plan for non-employee directors

 

   

 

271,684

 

 

 

    

 

0.01%

 

 

 

      

 

6,130,761

 

 

 

    

 

0.32%

 

 

 

 

 

Stock options

 

 

 

 

 

 

 

 

23,579,517

 

 

 

 

 

    

 

1.22%

 

 

 

       

 

Deferred share units

 

   

 

285,074

 

 

 

    

 

0.01%

 

 

 

                         

 

Total

 

 

 

 

 

 

24,136,275

 

 

 

 

  

 

 

 

 

1.24%

 

 

 

 

          

 

 

 

 

6,130,761

 

 

 

 

  

 

 

 

 

0.32%

 

 

 

 

Overhang, dilution and burn rate

 

(as at December 31)    2018      2019      2020  
Overhang      1.84%        1.63%        1.56%  

the total number of common shares reserved for issue to employees and directors, less the number of stock options and share-settled deferred share units redeemed, expressed as a percentage of the weighted average number of securities outstanding in the year

 

                          
Dilution      1.18%        1.09%        1.24%  

the total number of stock options and share-settled deferred share units outstanding, expressed as a percentage of the weighted average number of securities outstanding in the year

 

                          
Burn rate         
the number of stock options and share-settled deferred share units granted annually, expressed as a percentage of the weighted average number of securities outstanding in the year         

• Executive stock option plan

     0.16%        0.19%        0.25%  

• Stock plan for non-employee directors

 

    

 

0.01%

 

 

 

    

 

0.01%

 

 

 

    

 

0.01%

 

 

 

Retirement benefits

Executives participate in various defined benefit and defined contribution pension plans and supplemental retirement arrangements.

All our traditional defined benefit pension programs have been closed to new members because of the financial risks associated with them. In their place, we have introduced capital accumulation retirement programs including cash balance, 401(k) and defined contribution plans, where our only contributions are typically a fixed percentage of each employee’s pensionable earnings taking median market practice into account.

We may also provide supplemental retirement arrangements if tax rules limit the benefits that would otherwise be provided by our registered (or tax qualified) pension plans. The supplemental arrangements are not tax qualified and are typically unfunded.

To receive the benefits from our supplemental arrangements, executives generally must comply with several conditions after they leave our employment:

 

non-solicit: all executives, other than the few in traditional defined benefit supplemental arrangements, have a non-solicit provision for 24 months after their employment ends

 

non-compete:

 

24 months for all executives in traditional defined benefit supplemental arrangements

 

between 12 and 24 months for Senior Officers in capital accumulation supplemental arrangements.

 

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if an executive breaches the non-compete provision in their traditional defined benefit supplemental arrangement, the benefits are reduced by one-third

 

if an executive breaches any of the post-employment conditions attached to all or a part of their capital accumulation supplemental arrangements, those benefits are fully forfeited.

Amounts below that are determined in another currency have been converted using the exchange rates used in our 2020 consolidated financial statements.

DEFINED BENEFIT PENSION PLAN TABLE

Ms. Harrison and Mr. Hartz participate in the John Hancock defined benefit plans. Ms. Harrison has earned cash balance benefits for the periods she worked in the U.S. from March 2008 to December 2012 and since her return in October 2017. Mr. Hartz earned final average pay benefits until December 31, 2011 and has been earning cash balance benefits thereafter.

The table below shows:

 

their years of credited service at the end of 2020 and at the normal retirement age of 65

 

the estimated annual benefit accrued or earned for service up to the end of 2020, and to age 65

 

a reconciliation of the defined benefit obligation from December 31, 2019 to December 31, 2020.

 

   

Number of
years of

credited
service

   

Annual

benefits

payable

   

Opening

present
value of
defined
benefit
obligation

    Compensatory
change
   

Non-

compensatory
change

   

Closing

present
value of

defined
benefit
obligation

 
     Dec 31,
2020
    Age
65
   

Dec 31,

2020

    Age 65    

Service

cost

    Other  
Marianne Harrison     8.1       16.1       $14,500       $26,400       $175,100       $21,700       $0       $2,500       $199,300  
Scott Hartz     37.5       42.7       $684,000       $691,500       $9,862,800       $21,700       $0       $1,083,700       $10,968,200  

Annual benefits payable

Based on current pensionable earnings and the noted credited service, payable from age 65.

Opening and closing defined benefit obligation

Value of the projected pension for service to December 31, 2019 and December 31, 2020 respectively, using the actuarial assumptions used to determine the defined benefit obligations at those dates, as disclosed in Note 15 of our 2020 consolidated financial statements.

Service cost

Value of the projected pension earned for service in 2020, using the actuarial assumptions used to determine the defined benefit obligations at December 31, 2020, as disclosed in Note 15 of our 2020 consolidated financial statements.

Other

The impact of any plan amendments and differences between the actual and assumed compensation.

Non-compensatory change

Includes the impact of interest accruing on the opening defined benefit obligation, changes in the actuarial assumptions, experience gains and losses and any amounts due to currency fluctuations.

Exchange rates

Ms. Harrison and Mr. Hartz’s year-end amounts have been converted using the December 31 exchange rate of US$1.00 = $1.2732 for 2020 and US$1.00 = $1.2988 for 2019. The other amounts have been converted using the average 2020 exchange rate of US$1.00 = $1.3414.

 

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    Executive Compensation

 

DEFINED CONTRIBUTION PENSION PLAN TABLE

Mr. Gori and Mr. Witherington participate in the Manulife defined contribution plan and supplemental arrangement in Canada. Ms. Harrison and Mr. Hartz participate in the John Hancock 401(k) plan and the defined contribution supplemental arrangement in the U.S. Mr. Wadhwani participates in the Manulife Mandatory Provident Fund Top-up in Hong Kong.

Mr. Gori and Mr. Witherington participated in the Manulife Mandatory Provident Fund Top-up in Hong Kong before June 2017 and January 2018 respectively, when they worked in Hong Kong.

Ms. Harrison participated in the Manulife defined contribution plan and supplemental arrangement in Canada from January 2013 to September 2017 and before March 2008, when she worked in Canada. She participated in the John Hancock 401(k) plan and the defined contribution supplemental arrangement from March 2008 to December 2012, when she worked in the U.S. previously.

The table below is a reconciliation of the account balances from December 31, 2019 to December 31, 2020:

 

     

Opening

accumulated

value

        Compensatory change   

Non-

compensatory

change

  

Closing

accumulated

value

 

 

Service cost

   Other

 

Roy Gori

       $2,040,300                          $951,900            $0              $433,600        $3,425,800

 

Phil Witherington

       $879,900                          $258,300            $0              $170,500        $1,308,700

 

Marianne Harrison

       $2,949,000                          $205,000            $0              $412,400        $3,566,400

 

Anil Wadhwani

       $189,300                          $46,100            $0              $68,900        $304,300

 

Scott Hartz

       $2,795,100                          $226,800            $0              $400,000        $3,421,900

Service cost

The total amount contributed and/or notionally credited to each named executive in 2020 by Manulife or John Hancock under their respective plans.

Other

The impact of any plan amendments.

Non-compensatory change

Includes any contributions made by the named executives, all investment income credited during the year and any amounts due to currency fluctuations.

Exchange rates

Year-end amounts for Mr. Gori, Mr. Witherington and Mr. Wadhwani for the plan in Hong Kong have been converted using the December 31 exchange rate of HK$1.00 = $0.1642 for 2020 and HK$1.00 = $0.1668 for 2019. Other Hong Kong plan amounts have been converted using the average 2020 exchange rate of HK$1.00 = $0.1730

Year-end amounts for Ms. Harrison and Mr. Hartz for the U.S. plan have been converted using the December 31 exchange rate of US$1.00 = $1.2732 for 2020 and US$1.00 = $1.2988 for 2019. Other U.S. plan amounts have been converted using the average 2020 exchange rate of US$1.00 = $1.3415.

 

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Canada

 

        Closed defined benefit pension plan       Defined contribution pension plan
            
   

 

Who

participates

 

 

LOGO      

 

 

 

This plan has been closed to new members since January 1, 1999

None of the current named executives participate in this plan

 

 

 

 

LOGO      

 

 

 

Canadian-based employees who were hired after January 1, 1999

            
                    
   

 

 

Terms

 

 

LOGO      

   

 

LOGO      

 

 

Participants contribute 2% of pensionable earnings

 

Participants can make voluntary contributions ranging from 0.5% to 5% of pensionable earnings

 

Pensionable earnings are limited to $222,640 for 2020 and are calculated as base salary (plus the annual incentive for officers)

 

Participants choose from a range of options to invest their account

 

 

            
                    
   

 

 

Annual

pension

formula

 

 

LOGO      

   

 

LOGO      

 

 

 

We contribute 3% of pensionable earnings and a 50% match on participant voluntary contributions after the first year of employment

 

Our contributions and participant contributions combined are limited to the defined contribution maximum under the Income Tax Act ($27,830 in 2020)

Our contributions vest immediately

 

            
                    
   

 

 

Retirement

 

 

LOGO      

   

 

LOGO      

 

 

 

When they leave employment, participants can transfer the value of their account to a locked-in retirement vehicle, or purchase a life annuity

 

 

            
                    
                              

 

 

Closed defined benefit

supplemental arrangement

 

 

 

     

 

 

Defined contribution

supplemental arrangement

 

 

 

            
                    
   
 

 

LOGO      

 

 

 

These arrangements have not been offered since January 1, 1999

 

None of the current named executives have these arrangements, and there are no employees remaining with one of these arrangements

 

 

LOGO      

 

 

Executives who were hired after January 1, 1999 and employees who were promoted to an executive level after this date are eligible

 

We credit 10% of pensionable earnings (15% for Mr. Gori) above the pensionable earnings maximum to a notional account for each participant

 

Pensionable earnings are calculated as base salary and the annual incentive, including the amount taken as deferred share units

 

Investment income credits are based on the investment options selected by the participant

 

Participants can take the value of their account in instalments at retirement, or withdraw it as a lump sum with our consent

 

 

 

                    

 

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    Executive Compensation

 

United States

 

   

Defined benefit pension plan

(cash balance)

    401(k) plan
            
                    
   

 

Who participates

  LOGO        

 

All U.S. employees

 

 

LOGO      

 

 

Participation is voluntary for all U.S. employees

            
                    
   

 

Terms

 

 

LOGO      

 

Participants do not contribute

 

Participants receive contribution credits in a notional account that earns interest credits

 

Interest credits are based on the average annual yield of 10-year Treasury Constant Maturities in effect on each business day during the two months ending September 30 of the preceding calendar year

 

 

 

 

LOGO      

 

 

Participants contribute up to 50% of their eligible salary to the IRS maximum (US$19,500 in 2020)

 

Eligible salary is limited to the IRS maximum (US$285,000 in 2020)

 

Participants choose from a range of options to invest their account

 

 

            
                    
   

 

Pension formula

 

 

LOGO      

 

 

We credit participant accounts with 4% of eligible compensation up to the Social Security Wage Base, plus 8% of eligible compensation that exceeds this base

 

Eligible compensation is limited to the IRS maximum (US$285,000 in 2020), and is calculated as base salary plus the annual incentive received

 

Our contributions vest after three years of service

 

 

LOGO      

 

 

We contribute a 100% match on participant contributions to a maximum of 4% of eligible salary

 

Our contributions and participant contributions combined are limited to the IRS maximum (US$57,000 in 2020)

 

Our contributions vest immediately

            
                    
   

 

Retirement

 

 

LOGO      

 

Normal retirement is 65, but benefits can be paid at any retirement age based on the value of the participant’s account on the date their pension begins

 

Payments are normally made as a life annuity, but participants can choose a lump sum or other payment option

 

 

LOGO      

 

 

Participants receive the value of their account when they leave employment or if they become permanently disabled

            
                    
   

 

LOGO      

 

 

Closed defined benefit pension plan
(final average pay) and defined benefit
supplemental arrangements

 

 

 

LOGO      

 

Defined contribution

supplemental arrangement

 

            
                    
   
  LOGO        

 

Mr. Hartz earned final average pay benefits in these plans until December 31, 2011. No other NEOs participate in these plans.

 

The final average pay benefit is the sum of the following:

 

i)  1.43% of average compensation (highest 3 years) up to the average Social Security Wage Base (SSWB) for each year of pre-2012 service up to 30 years,

ii) 1.80% of average compensation in excess of the average SSWB for each year of pre-2012 service up to 30 years, and

iii)1.00% of the sum of (i) and (ii) for each year of pre-2012 service in excess of 30 years.

 

 

LOGO      

 

 

We credit 8% of eligible compensation above the IRS maximum to a notional account for each participant

 

Eligible compensation is calculated as base salary and the annual incentive, including the amount taken as deferred share units

 

Our notional contributions vest after three years of service

 

Investment income credits are based on the investment options selected by the participant

 

Participants receive the value of their account in 18 monthly instalments beginning the seventh month after leaving employment

 

            
                    

 

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Hong Kong

 

   

Defined contribution plan

 

(Manulife Mandatory Provident Fund (MPF) Top-up)

         
        

 

Who participates

 

 

 

LOGO      

 

 

All Hong Kong permanent employees

         
        

 

Terms

 

 

 

LOGO      

 

 

Participants contribute 5% of annual salary

 

Contributions on salary up to the MPF maximum (HK$360,000 in 2020) go to the mandatory account. Contributions on salary above the MPF maximum go to the voluntary account

 

 

Participants choose from a range of options to invest their account

         
        
Pension formula  

 

LOGO      

 

 

We contribute based on length of service as follows:

 

Less than 5 years

5% of annual salary

 

5 to 10 years

7.5% of annual salary

 

More than 10 years

10% of annual salary

 

All our contributions, other than the first 5% of annual salary up to the MPF maximum, go to the voluntary account

 

Our contributions to the mandatory account vest immediately

 

Our contributions to the voluntary account vest on a sliding scale based on length of service that grades by 10% per year starting at 30% after three years to 100% after 10 years

 

         
        

 

Retirement

 

 

 

LOGO      

 

 

Participants can receive the value of the voluntary account at any time but can receive the value of the mandatory account only after age 60

 

         
        

 

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    Executive Compensation

 

Termination and change in control

The table below shows the estimated amounts that would be provided to each named executive if employment is terminated under five different scenarios, assuming the scenario took place on December 31, 2020.

The actual amounts will depend on our share price at the time as well as other variables, such as the named executive’s age and years of service. The information below is calculated as at December 31, 2020 for all of the named executives.

 

     Type of payment   Retirement
(early or
normal)
    Termination
with
cause
    Resignation     Termination
without cause
    Change in
control
 

 

Roy Gori

 

 

Severance

 

 

 

 

 

 

                $9,658,800       $11,223,877  
  Additional vesting of RSUs, PSUs and stock options                       $14,515,701       $14,844,604  
 

Pension

 

   

 

 

 

 

   

 

 

 

 

   

 

 

 

 

         

 

 

 

 

   

Total value

 

   

 

 

 

 

   

 

 

 

 

   

 

 

 

 

    $24,174,501       $26,068,481  

 

Phil Witherington

  Severance                       $3,225,375        
  Additional vesting of RSUs, PSUs and stock options                       $2,493,775        
 

Pension

 

   

 

 

 

 

   

 

 

 

 

   

 

 

 

 

           
   

 

Total value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

 

 

 

    $5,719,150        

 

Marianne Harrison

  Severance                       $3,499,303        
  Additional vesting of RSUs, PSUs and stock options     $6,103,324                   $6,103,324        
 

Pension

 

   

 

 

 

 

   

 

 

 

 

   

 

 

 

 

           
   

 

Total value

 

 

 

 

 

 

$6,103,324

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

 

 

 

    $9,602,627        

 

Anil Wadhwani

  Severance                       $3,262,863        
  Additional vesting of RSUs, PSUs and stock options                       $2,914,911        
 

Pension

 

   

 

 

 

 

   

 

 

 

 

   

 

 

 

 

           
   

 

Total value

 

   

 

 

 

 

   

 

 

 

 

   

 

 

 

 

    $6,177,774        
Scott Hartz   Severance                          
  Additional vesting of RSUs, PSUs and stock options     $3,654,933                   $3,654,933        
 

Pension

 

   

 

 

 

 

   

 

 

 

 

   

 

 

 

 

           
   

 

Total value

 

 

 

 

 

 

$3,654,933

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

 

 

 

    $3,654,933        

Equity-based awards are treated according to the terms and conditions of the award agreements and plan documents unless the named executive has entered into an agreement that indicates otherwise. See below for information about Mr. Gori’s change in control agreement and employment agreement.

The amount shown for additional vesting of RSUs, PSUs and stock options is the estimated value that would be payable under each termination scenario, and is based on $22.65, the closing price of Manulife common shares on the TSX on December 31, 2020. The value of performance share units is calculated assuming a performance factor of 100%.

 

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Resignation and retirement

No severance is paid if the named executive resigns or retires.

Ms. Harrison and Mr. Hartz were eligible for normal retirement. Mr. Gori, Mr. Witherington and Mr. Wadhwani were not eligible for either early or normal retirement.

Termination with cause

If Manulife terminates a named executive’s employment with cause, employment ends immediately, no severance is paid and performance share units, restricted share units, stock options and the supplemental retirement benefit are forfeited.

Termination without cause

All the named executives except Mr. Hartz have employment agreements that specify their entitlements if they are terminated without cause. These are outlined in the table below, and are conditional on the executive signing a full and final release and remaining bound by covenants in their employment agreements relating to:

 

protection of confidential information (indefinitely)

 

company ownership of our intellectual property (indefinitely)

 

non-solicitation (24 months for Mr. Gori, Mr. Witherington, Ms. Harrison and Mr. Wadhwani)

 

non-competition (12 months for Mr. Gori, Mr. Wadhwani; 24 months for Ms. Harrison; 18 months for Mr. Witherington)

 

non-disparagement (24 months for Mr. Gori, Ms. Harrison and Mr. Wadhwani; indefinitely for Mr. Witherington).

Breaches of any of the covenants entitle Manulife to seek a court injunction, in addition to pursuing any other available rights and remedies.

 

            

 

Roy Gori

     

Mr. Gori is entitled to:

• 24 months of compensation in lieu of notice comprised of base salary and target annual incentive

• an annual incentive payment calculated at target for the year in which his active employment ends, pro-rated based on the end date

• continued vesting and exercisability of share-based awards and stock options for 24 months following his termination date

• continued participation in the group benefits plan for 24 months (excluding life, short-term, and long-term disability insurance)

 

If he commences new employment during the severance period:

• he will no longer participate in the group benefits plans

 

If, after June 5, 2023, he and Manulife agree to a mutual separation:

• he is entitled to normal retirement treatment for purposes of his share-based awards and stock options

 

 

         
            

 

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    Executive Compensation

 

            

 

Phil Witherington

     

Mr. Witherington is entitled to:

• 18 months of compensation in lieu of notice comprised of base salary and target annual incentive

• an annual incentive payment calculated at target for the year in which his active employment ends, pro-rated based on the end date

• continuation of group benefits for 18 months (excluding life, short-term and long-term disability insurance)

• reimbursement of the costs for his relocation to Hong Kong, provided the relocation occurs within 10 months of his termination date

 

If he commences new employment or self-employment during the severance period:

• he will no longer participate in the group benefits plans

• severance payments will cease and he will be entitled to a lump sum payment of 50% of the remaining severance payments

 

 

         
            

 

Marianne Harrison

     

 

Ms. Harrison is entitled to:

• 18 months of compensation comprised of base salary and target annual incentive

• continuation of group benefits for 18 months (excluding life, short-term and long-term disability insurance)

 

If she commences new employment or self-employment during the severance period:

• she will no longer participate in the group benefits plans

• severance payments will cease and she will be entitled to 50% of the remaining severance payments

 

         
            

 

Anil Wadhwani

     

 

Mr. Wadhwani is entitled to:

• 18 months of notice or compensation in lieu of notice comprised of base salary and target annual incentive

• an annual incentive payment calculated at target for the year in which his active employment ends, pro-rated based on the end date

• continuation of medical, dental and group life insurance coverage for up to 18 months from the end date

 

If he commences new employment or self-employment during the severance period:

• he will no longer receive medical, dental and group life insurance coverage

• severance payments will cease and he will be entitled to a lump sum payment of 50% of the remaining severance payments

 

            

Change in control

Mr. Gori is the only named executive who has a change in control agreement that protects him from losing employment benefits if there is a change in control. He entered into a change in control agreement when he was appointed President.

If there is a change in control and Mr. Gori’s employment is terminated without cause or for good reason within a protection period that starts 90 days before a change in control and ends 24 months after the change in control, he is entitled to:

 

two times his annual salary and two times his average annual incentive awarded in the prior three years

 

full vesting and payment of outstanding awards, including those granted within the past year, while performance share units remain subject to applicable performance conditions

 

continuation of his group benefits for up to two years (excluding life and disability insurance)

 

two years eligibility for relocation benefits as defined by our relocation policy

 

extension of the period to exercise stock options to one year after the date of termination or the date specified in the award (whichever is later, however it cannot be later than the actual option expiry date).

 

2021 Management information circular         95  


Table of Contents

 

Mr. Gori’s existing equity-based incentive awards will have accelerated vesting if, following a change in control, the successor employer does not assume or honour the awards, or offer equivalent awards under new substitute plans.

Change in control is described as any of the following:

 

the incumbent directors no longer constitute at least a majority of the board

 

any party becomes a beneficial owner holding directly or indirectly 35% of our voting shares

 

our shareholders approve a merger, amalgamation, consolidation, statutory share exchange or a similar transaction requiring the approval of shareholders, unless immediately following the transaction our shareholders retain majority voting control, no person would beneficially own 35% or more of our voting shares, and the incumbent directors constitute a majority of the board

 

our shareholders approve the complete liquidation or dissolution of Manulife or the sale of our assets, unless immediately following the transaction pre-existing beneficial owners retain majority voting control, no person would beneficially own 35% or more of our voting shares, and the incumbent directors constitute a majority of the board

 

management of Manulife is transferred to a non-affiliated party.

Good reason is described as any of the following events during the protection period:

 

we diminish Mr. Gori’s position, authority or scope or scale of duties or responsibilities

 

we require him to be based at a location more than 40 km from his current work location or to travel to a significantly greater extent

 

we reduce his annual base salary or do not increase it in line with adjustments to the base salary of other executives

 

we reduce his target incentive awards

 

we do not either continue or provide an alternative to Manulife’s welfare benefit plans or programs for benefits, perquisites and expense reimbursements

 

we do not maintain reasonable and adequate indemnification for his services as an officer of Manulife.

How a change in employment status affects equity compensation

The chart on the following page summarizes the treatment under the terms and conditions of the award agreements and plan documents of restricted share units (RSUs), performance share units (PSUs), stock options and deferred share units (DSUs) when a named executive retires, resigns, is terminated without cause or dies:

 

treatment of the award on resignation or termination may be specified in the named executives’ employment agreements (see pages 94 and 95)

 

if a named executive reaches normal or early retirement during the severance period that follows a termination without cause, certain vested options may be exercised until the end of the severance period

 

awards that have not vested may be forfeited if the executive breaches post-employment conditions. The named executives are subject to non-competition and non-solicitation conditions for two years

 

awards may be clawed back as the board can recoup or cancel the incentive awards if the named executive is involved in fraud or a serious misconduct

 

awards are forfeited if the named executive is terminated with cause

 

restricted share units, performance share units, stock options, deferred share units and performance deferred share units may be transferred to a beneficiary or an estate when a named executive dies.

 

96     Manulife Financial Corporation


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    Executive Compensation

 

       

Early retirement1, 2

• 55 years old and
age plus
continuous service
totals at least 65

 

Normal
retirement1, 2

• 65 years old, or
• 55 years old and
age plus
continuous service
totals at least 70

  Resignation or
termination
without cause
  Death
 
       

 

RSUs/PSUs

 

 

LOGO

 

 

Number is pro-rated

 

Payment on the scheduled payout date, subject to any performance conditions

 

 

Number is pro-rated for grants within the first anniversary of the grant date

 

Vest in full for grants beyond the first anniversary of the grant date

 

Payment on the scheduled payout date, subject to any performance conditions

 

 

 

Forfeited on resignation

 

Number is pro-rated based on service from the date of grant on termination without cause

 

 

Vest in full

 

Payment as of the date of death

 

Performance conditions are waived

 
       

 

Stock options

 

 

LOGO

 

 

Unvested options terminate

 

Vested options can be exercised until the end of the term

 

 

Unvested options are pro-rated for grants made in the previous 12 months

 

Unvested options continue to vest in full according to the vesting schedule

 

Vested options can be exercised until the end of the term

 

 

Unvested options are forfeited upon resignation and continue to vest for 90 days upon termination without cause

 

Vested options can be exercised for a 90-day period beginning one year after resignation or termination without cause

 

 

Unvested options vest

 

Vested options can be exercised within one year of the date of death

 
 

 

DSUs

 

 

LOGO

 

 

Canadian executives must redeem vested awards by December 15 of the following year

 

U.S. executives can redeem vested awards on the date they’ve designated on their deferral election form

 

 

 

1

Named executive must notify us three months before retiring. Vested stock options that were granted up to and including in 2014 can be exercised for up to three years following retirement (defined as 55 years old and 10 years continuous service, while normal retirement is defined as 65 years old).

2

We changed our definitions of early and normal retirement effective January 27, 2020, to ensure award terms for mid- and later-career hires are competitive:

   

early retirement: 55 years old and age plus continuous service totals at least 60

   

normal retirement: 55 years old and age plus continuous services totals at least 65.

 

2021 Management information circular         97  


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Compensation oversight

How the board oversees executive compensation

 

The table on the following page explains the respective roles of Manulife’s board, management and outside advisors in designing and awarding executive compensation.

 

We make sure Manulife’s executive compensation program follows good governance practices by aligning it with the Financial Stability Board’s (FSB) Principles for Sound Compensation Practices, the FSB’s Implementation Standards and other governance best practices related to compensation.

 

We conduct an internal audit of the executive compensation program every year to confirm alignment with the FSB’s Principles and Implementation Standards.

 

 

Independent advisor to the board

 

The management resources and compensation committee works with Korn Ferry, a consulting firm that provides independent advice on executive compensation. The independent advisor:

• attends committee meetings

• provides advice about decisions related to compensation

• reports on compensation trends.

 

The committee began working with Korn Ferry in November 2019 and worked with Hugessen Consulting, Inc. before that. The table below shows the fees paid to Korn Ferry and Hugessen for their work with the committee over the last two years:

 

      2019        2020      
Executive compensation-related fees          

• Korn Ferry

     $71,469          $803,795    

• Hugessen

     $306,297          $0    
All other fees          

• Korn Ferry

     $40,250          $354,910    

• Hugessen

     $0          $0    

 

Korn Ferry meets the requirements of an independent advisor and does not work with management directly without the committee’s prior approval. In 2020 the MRCC asked Korn Ferry to conduct a full review of our incentive plan programs including the design, measures and market competitiveness. All other fees in 2020 include marketing benchmarking surveys and execution of a talent management program in Asia. All other fees in 2019 were for market benchmarking surveys.

 

98     Manulife Financial Corporation


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    Executive Compensation

 

Board of directors

 

Oversees our overall approach to compensation, including alignment with sound risk management principles and Manulife’s risk appetite

 

Approves:

• overall financial plans and strategy upon which the targets for our incentive programs are based

• major compensation decisions, including compensation for the CEO and other senior executives

 

  
 

Board committees

 

The board carries out its compensation-related responsibilities with the help
of two board committees: the management resources and compensation committee and the risk committee

 

All board committee members are independent

  LOGO

 

 

See page 121 for
information about
director
independence

 

 

You’ll find more about each committee’s members and responsibilities starting on page  31

Management resources and compensation committee

•  oversees our approach to human resources, including the executive compensation program

•  recommends major compensation decisions to the board

•  all members are knowledgeable, senior leaders with broad experience as a senior officer or chair of the board of a major organization (public, private or not-for-profit), and the majority have experience in executive compensation

•  there is cross-membership with the risk committee

 

Risk committee

•  reviews the alignment of our incentive compensation plans with sound risk management principles and practices and our risk appetite

•  the majority of members have knowledge of risk management, as well as technical knowledge of relevant risk principles

•  there is cross-membership with the management resources and compensation committee

  
 

Management’s executive compensation committee

•  includes the Chief Risk Officer, the Chief Financial Officer and the Chief Human Resources Officer

•  reviews incentive plan business performance measures, targets, weightings and results for alignment with our business strategy and risk management objectives

•  monitors the incentive program designs of our peers

•  reviews compensation program changes for alignment with our risk management objectives

 

Chief Risk Officer

•  participates in management resources and compensation committee meetings where recommendations for the design of the compensation program are reviewed and approved to ensure there is informed discussion of the associated risks

•  reviews the incentive compensation oversight process

•  reviews changes to the compensation program with the risk committee to make sure they are in line with our risk management objectives

•  also a member of management’s executive compensation committee

 

  

 

2021 Management information circular         99  


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Managing compensation risk

 

Compensation is aligned with the company’s risk appetite and risk management objectives, and discourages inappropriate risk taking.

 

We use a compensation risk framework to structure how we manage the risks associated with the compensation program and the design features that mitigate these risks. The framework includes four categories, which shape the development of our compensation program. We assess our compensation program against the framework every year.

 

 

 

     

Business risk

 

Business risk has two aspects:

•  the risk that our compensation program encourages behaviour that is not in line with our business strategy, our risk appetite statement and our goal of generating long-term shareholder value

•  the risk that the compensation program discourages the taking of healthy risks

 

We seek to manage both aspects of business risk by including performance measures in our incentive plans that align compensation with our business strategy and reflect the impact employees have on performance

 

     

Talent risk

 

Talent risk is the risk that our compensation program will not attract and retain talented employees

 

We seek to manage this risk by designing our compensation program to be competitive and appealing to the talent we want to attract

     

Performance risk

 

Performance risk is the risk that our compensation program will not motivate employees to maintain high performance standards

 

We seek to manage this risk by including appropriate links between pay and performance and designing compensation to encourage executives to achieve performance objectives without taking undue risk

     

Compliance and ethical risk

 

Compliance and ethical risk is the risk that our compensation program will encourage employees to engage in questionable, unethical or illegal behaviour

 

We seek to manage this risk through strong oversight and control mechanisms, and by structuring our compensation program in a way that minimizes the potential incentive to breach compliance and ethical guidelines

                        
     

 

 

   LOGO

 

 

 

See page 112 for information about our risk appetite and our enterprise risk management framework

 

 

100     Manulife Financial Corporation


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    Executive Compensation

 

Mitigating compensation risk

We seek to manage potential risk through our risk management policies, the design of our executive compensation program and proper oversight of our incentive plans. We also integrate our risk appetite into our incentive plans and performance assessments.

Program design

 

compensation award horizons are appropriately balanced between short and longer term

 

incentive plans include several performance objectives, combining various performance scenarios

 

incentive plan awards depend on both company performance and TSR, which links our strategy and risk appetite with improving shareholder outcomes and capital strength

 

performance share unit awards balance efficient use of capital and long-term equity growth

 

compensation for the Chief Risk Officer, Global Compliance Chief, Chief Auditor, and Chief Actuary is not linked to our business performance to promote unbiased oversight and advice to senior management and the board

 

annual incentives for segment control function heads providing oversight are not directly linked to the performance of businesses they oversee

Incentive plan oversight

 

the management resources and compensation committee oversees all incentive plans, including payout distribution, control and monitoring processes and the potential impact they may have on business risk

 

segment heads, with the support of their associated risk officers, human resources heads, and compliance officers, review and approve significant changes to material segment incentive compensation plans, and attest annually that they do not generate inappropriate levels of business risk for the segment and for Manulife as a whole

 

we stress test and back test compensation plan designs to make sure payouts under different scenarios are appropriate and in line with our business performance

 

the Chief Risk Officer and the risk committee also review the alignment of compensation plans with risk management objectives

Risk perspective in performance assessment

 

individual risk management objectives are included in annual goals for all senior leaders

 

we assess employees against risk management criteria to make sure they are mindful of the risks inherent in their jobs and are working within the boundaries of our policies and practices, while still providing appropriate incentives for material risk takers to achieve our objectives

 

performance assessments are expected to reflect how the employee contributed to managing our risk profile within our risk appetite and also take into account any reports from internal audit, compliance or risk management highlighting inappropriate actions

 

incentive compensation for material risk takers is adjusted for risk and considers reports from internal audit, compliance and risk management. Any adjustments made are reported to the management resources and compensation committee

Risk management policies

 

Clawbacks – if a vice president or above commits fraud, theft, embezzlement or serious misconduct, whether or not there is a financial restatement, the board can, at its discretion, cancel some or all of the executive’s vested or unvested incentive awards, and require repayment of all or a portion of the incentive awards that have already been paid

 

Equity ownership requirements – all executives are required to meet equity ownership requirements. The CEO and CFO are required to maintain their equity ownership for one year after leaving Manulife

 

2021 Management information circular         101  


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Share retention requirements – the CEO and CFO must hold at least 50% of the net realized gains from the exercise of stock options in common shares during their employment and for one year after leaving the company, to the extent they do not otherwise meet their equity ownership requirements

 

No hedging – executives and directors are not allowed to use strategies (for example, short selling, or buying or selling a call or put option or other derivatives) to hedge or offset a change in price of Manulife securities. This policy is incorporated into our code of business conduct and ethics. All employees and directors are required to certify compliance with the code every year

Equity ownership guidelines

Executives are required to own Manulife securities to align their interests with those of our shareholders.

Executives have five years from the date they are appointed or promoted to the position to meet the requirement. All of the named executives meet or exceed the equity ownership guidelines.

Deferred share units (DSUs), restricted share units (RSUs), performance share units (PSUs), common shares and preferred shares that executives own personally all qualify to meet the guideline, but stock options do not. We use the grant price or the current market price (whichever is higher) to calculate the value of awards and assume a performance factor of 100% for PSUs. Shares held personally are valued at the current market price.

The following table shows equity ownership for each named executive as at March 2, 2021.

We calculated the value using a share price of the greater of $25.98, the closing price of Manulife common shares on the TSX on March 2, 2021, and the grant price. Salaries were converted to Canadian dollars using the exchange rate of US$1.00 = Cdn$1.2626 on that date.

 

    

Time at

level

   

Required

ownership

as multiple

of base

salary

    RSUs     PSUs     DSUs    

Personal

shareholdings

   

Total

holdings

   

Equity

ownership

as multiple

of base

salary

 

 

Roy Gori

    3.4 years       7.0       $7,183,046       $14,508,519       $0       $11,855,418       $33,546,983       22.1  

 

Phil Witherington

    3.2 years       4.0       $2,190,429       $4,396,073       $0       $363,876       $6,950,378       7.6  

 

Marianne Harrison

    8.2 years       4.0       $2,948,023       $6,056,136       $227,740       $240,990       $9,472,889       10.1  

 

Anil Wadhwani

    3.3 years       4.0       $2,453,196       $4,995,916       $0       $323,340       $7,772,452       8.9  

 

Scott Hartz

    2.0 years       4.0       $2,101,316       $4,242,556       $0       $1,465,235       $7,809,107       8.8  

Roy Gori

As part of the process of relocating Mr. Gori from Hong Kong to Toronto in May 2017, his outstanding RSUs, PSUs and DSUs were replaced with Manulife common shares. His share-based awards were vested and settled and the after-tax proceeds were used to buy 421,492 shares that were placed in an escrow account and made subject to the same underlying performance, holding and forfeiture conditions as the share-based awards they replaced, except for the shares underlying the PSUs, which will be forfeited proportionately if performance is below target but will not be adjusted if performance is above target. Mr. Gori did not receive additional units as part of this transaction. This arrangement ensured the awards earned by Mr. Gori while employed in Hong Kong were appropriately allocated and gave Mr. Gori substantial personal ownership of Manulife common shares in place of his share-based awards that would otherwise have settled in cash. See page 86 of our 2018 management information circular, which is available at manulife.com. The total value of his personal shareholdings, including the shares remaining in escrow, was $11,855,418, based on a share price of $25.98, the closing price of Manulife common shares on the TSX on March 2, 2021.

 

102     Manulife Financial Corporation


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Executive Compensation

 

The decision-making process

 

We use the following process to determine compensation for the CEO, all executive leadership team members and heads of control functions, including the named executives. The executive leadership team is made up of our most senior leaders who have responsibility for setting our strategy. Base salary increases and equity-based incentives are awarded at the beginning of each year. Annual incentives are approved after the end of each fiscal year.

 

                
     

 

 

Review plan design

 

 

 

 

LOGO   

 

 

Management presents its initial recommendations for compensation structure and supporting rationale for the upcoming year to the management resources and compensation committee. This includes:

 

• compensation components

• compensation mix

• performance measures

 

The management resources and compensation committee discusses the recommendations and provides feedback to management. The committee seeks advice and guidance about compensation issues from its independent compensation advisor, and may seek feedback from shareholders and proxy advisory firms

 

The risk committee reviews the risk management aspects of the program

 

Once the recommendations are finalized, the management resources and compensation committee recommends the compensation program and structure to the board for approval

 

 

 

 

 

   LOGO

 

 

 

See page 50 for this

year’s compensation

program

 

 
   
   
   
   
   
   
   
   
   
   
   
   
   
   
                
     

 

Set performance goals

 

 

 

LOGO

 

The board approves the individual performance goals of the CEO and other senior executives

 

The management resources and compensation committee:

 

• reviews, approves and recommends to the board the individual performance goals of the executive leadership team and heads of control functions

• reviews, approves and recommends to the board the business performance measures and financial targets for incentive plan purposes. Targets are aligned with the board-approved plans and are intended to be achievable yet provide a performance “stretch”

• reviews stress tests of different scenarios to set appropriate financial targets, performance peer group composition and plan changes

 

 

 

 

   LOGO

 

 

 

 

See pages 54 and 59
for this year’s

performance goals

 

 
   
   
   
   
   
   
   
   
   
     
             

 

 

Ongoing review of

market and trends

 

   

 

 

LOGO

 

 

The management resources and compensation committee:

 

• reviews and approves changes to the composition of the compensation and performance peer groups

• reviews the competitive positioning of target compensation against desired market positioning

• reviews ongoing trends

 

 

 

 

 

   LOGO

 

 

 

 

 

See page 48 for more

about compensation

benchmarking

 

 

 
        
 

 

2021 Management information circular         103  


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Assess

performance

 

 

 

 

LOGO

 

The CFO presents and discusses the business performance results with the management resources and compensation committee

 

The independent advisor provides their perspective on the soundness of performance measures and standards used for the incentive plans

 

The management resources and compensation committee reviews the performance factors for the annual incentive plan and performance share units

 

The board reviews the performance results and assesses circumstances that might result in a discretionary adjustment, and then approves the performance factors

 

Management presents to the management resources and compensation committee a summary of any adjustments to incentive compensation for material risk takers resulting from reports from internal audit, compliance or risk management

 

 

 

 

 

   LOGO

 

 

 

See pages 56 and

62 for this year’s

performance results

 

 

 

 

 
   
   
   
   
   
   
   
   
   
   
   
                
     

 

Finalize

Compensation

 

 

LOGO

 

 

The CEO discusses and approves the individual performance and compensation recommendations for all executive leadership team members and heads of control functions with the management resources and compensation committee

 

During sessions held without management, the management resources and compensation committee and the board discuss compensation for the CEO, all executive leadership team members and heads of control function

 

The board exercises independent judgment when making final compensation decisions

 

 

 

 

 

   LOGO

 

 

 

 

 

See the named

executive profiles

starting on page 63

for details about their

compensation this year

 

 
   
   
   
   
                

 

104     Manulife Financial Corporation


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Executive Compensation

 

Compensation of employees who have

a material impact on risk

We are committed to ensuring our compensation program is aligned with the Financial Stability Board’s (FSB) Principles for Sound Compensation Practices, the Financial Stability Board’s Implementation Standards and other governance practices related to compensation. Our internal auditors conduct an annual independent review of the executive compensation program. The last audit was finalized in April 2020 and confirmed that we continued to be aligned with the FSB Principles and Standards. See page 98 for more information about our compensation governance practices.

 

      LOGO    

You can read about the management resources and compensation committee’s composition and mandate in its report on page 33, and the compensation decision-making process and program design beginning on page 103

FSB PRINCIPLES AND BASEL COMMISSION FOR BANKING SUPERVISION

PILLAR 3 REQUIREMENTS

The tables below show the breakdown of 2020 compensation for employees who have a material impact on our risk exposure (material employees). Material employees include:

 

all executives who were members of the executive leadership team at any point in 2020, and

 

employees who have:

 

authority and responsibility for policy-setting and implementation of controls, or

 

significant influence, oversight and approval authority on general account assets, or

 

oversight of a significant business unit that could have a material impact on our risk exposure.

Compensation awarded in U.S. dollars was converted to Canadian dollars using the exchange rates we used for the summary compensation table (see page 81).

2020 compensation

 

    ($ thousands)

 

 

Number of

material

employees

 

 

Total

compensation

 

   

Fixed

compensation

 

   

Variable compensation

 

   

Non-deferred

compensation

 

   

Deferred
variable

compensation

 

   

Severance

payments

 

 

 

45

 

 

 

 

 

 

$121,476

 

 

 

 

 

 

 

 

 

$30,808

 

 

 

 

 

 

AIP

 

 

 

 

$

 

 

 

  32,374

 

 

 

 

 

 

 

 

 

 

 

$64,305

 

 

 

 

 

 

 

 

 

$57,441

 

 

 

 

 

 

 

 

 

$0

 

 

 

 

     

 

Special awards

 

 

 

 

$

 

 

 

1,123

 

 

 

 

 

 

     
     

 

RSUs

 

 

 

 

$

 

 

 

20,624

 

 

 

 

 

 

     
     

 

PSUs

 

 

 

 

$

 

 

 

20,771

 

 

 

 

 

 

     
     

 

Other medium-
term
incentives

 

 

 

 

$

 

 

 

2,330

 

 

 

 

 

 

     
     

 

Stock options

 

 

 

 

$

 

 

 

13,715

 

 

 

 

 

 

     
                   

 

Total

 

 

$

 

 

90,397

 

 

 

 

                       

Manulife provided $749,000 in sign-on bonuses to two material employees in 2020. Sign-on bonuses replace compensation employees forfeit when they leave their previous employer.

 

2021 Management information circular         105  


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Variable compensation

The annual incentive and grant values of restricted share units, performance share units and stock options awarded for 2020. With the exception of one retiree and one employee who left the company, all material employees received incentive awards for 2020.

Deferred variable compensation

The total value of restricted share units, performance share units, deferred share units and stock options awarded for 2020.

Severance payments

In 2020, no severance payments were made or agreed to for material employees. The number of terminations each year fluctuates depending on circumstances.

DEFERRED COMPENSATION OUTSTANDING

 

    ($ thousands)  

Number of

material

employees

  RSUs/PSUs/DSUs     Stock options    

Total value of
deferred
compensation
outstanding
at year-end

 

   

Deferred
compensation
paid out in
2020

 

   

Value of
deferred
compensation
granted in
2020

 

   

Implicit
change in
deferred
compensation
value

 

 
 

Outstanding
vested

 

   

Outstanding
unvested

 

   

Outstanding
vested

 

   

Outstanding
unvested

 

 
45               $ 11,808     $ 103,796     $ 24,669     $ 213     $ 140,486     $ 31,652     $ 43,726     $ -44,374  

Restricted share units, performance share units and deferred share units

Amounts are based on $22.65, the closing price of Manulife common shares on the TSX on December 31, 2020.

Vested and unvested, unexercised in-the-money stock options

Amounts are the difference between the exercise price of the stock options and $22.65, the closing price of Manulife common shares on the TSX on December 31, 2020.

Other medium-term incentives

Some material risk takers participate in medium-term incentive plans outside of our RSU/PSU/stock option plans. These plans are based on an internal book value of a business or the market value of funds managed.

Deferred compensation paid out in 2020

The total value of restricted share units and performance share units vested and paid out and any gains from stock options exercised in 2020. In 2020 there were no discretionary adjustments of deferred compensation or payments made due to malus, clawbacks or similar reversals or downward revaluations of awards.

Implicit change in deferred compensation value

The increase (or decrease) in value of deferred compensation due to any change in share price and performance vesting conditions.

 

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Governance at Manulife

We believe that excellent corporate governance is critical to our long-term success – for us, our shareholders and our customers. Our board of directors sets the tone at the top, promoting a strong culture of integrity and ethical behaviour throughout our entire organization.

Our governance policies and practices are consistent in all material respects with the various rules and requirements that apply to us, including:

 

Insurance Companies Act (Canada)

 

corporate governance guidelines established by OSFI and the Canadian Securities Administrators

 

U.S. Securities and Exchange Commission rules and regulations

 

TSX corporate governance guidelines

 

New York Stock Exchange corporate governance rules for domestic issuers.

 

 

LOGO       Where to find it

 

About the Manulife board

     109  

Board committees

     111  

Board roles and responsibilities

     111  

Serving as a director

     119  

Serving on other boards

     120  

Integrity

     120  

Equity ownership

     120  

Term limits

     120  

Independence

     121  

Diversity

     121  
Skills and experience      122  
Director development      124  
Assessment      125  
Board succession      126  
Other information      127  
Environmental, social and governance      127  
Liability insurance      127  
Loans to directors and officers      127  
Directors’ approval      128  
 

 

 

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What we do

 

 

LOGO

 

Independence

•   All our directors are independent except for the CEO and all members of our four board committees are independent

•   Board committees can retain independent advisors

•   The roles of board chair and CEO are separate

•   We have an annual strategic planning meeting with the board and management separate from regular board meetings

•   In camera sessions are held at every board and committee meeting without management present to facilitate open and candid discussion

 

LOGO

 

Ethics and integrity

• We promote a strong culture of integrity and ethical behavior, and have an Ethics Hotline where anyone, including third parties, can file a confidential report on ethics matters

• We require all directors to certify compliance with our code of business conduct and ethics every year

 

LOGO

 

Leadership and development

• We provide directors with orientation and continuing education

• The board has a formal annual assessment process involving peer and management input

• We continuously monitor board succession requirements and candidates, maintain a skills matrix for directors and, where appropriate, use an independent recruiting firm to assist in board recruiting

 

LOGO

 

Diversity and succession

•   We have a board diversity policy that includes diversity characteristics such as gender, age, ethnicity, disability, sexual orientation and geographic representation, as well as an objective that at least 30% of the independent directors should be women, a goal we’ve met since 2013

•   Diversity and inclusion is promoted and embedded in our global talent management, talent acquisition and leadership programs

•   We have an ongoing process to identify board succession candidates whose skills align with the key competencies and experience necessary to support our operations and strategy and in 2020 we used an independent recruiting firm to help identify and track a diverse group of board succession candidates

•   Shareholders elect individual directors annually

•   Our majority voting policy is informed by best-in-practice governance standards and complies with the TSX rules

•   We limit directors to a term of 12 years under our tenure policy (in accordance with the policy the board chair may serve a term of five years regardless of the number of years served as a director)

 

LOGO

 

Shareholder engagement and alignment

•   We have a robust shareholder engagement program with publicly available shareholder engagement principles and an annual shareholder engagement outreach program that the Chairman and at least one other director participate in

•   We require directors and executives to meet equity ownership guidelines, and directors to receive at least 50% of the annual board retainer in equity, to align their interests with those of our shareholders

•   We adopted a proxy access policy in 2017

 

LOGO

 

Risk oversight

•   We have strong risk oversight, carried out by the board and supported by the risk committee

•   The audit and risk committees have joint meetings at least once a year

What we don’t do

LOGO

  No hedging or monetizing of Manulife securities, including equity awards

LOGO

  No pensions or stock options for non-executive directors

LOGO

 

No slate voting for directors

•   Shareholders can vote for or withhold their vote from individual directors

LOGO

 

No staggered voting for directors

•   We have annual elections for all directors – directors are not elected for staggered terms

LOGO

 

No unequal voting structure

•   We do not have dual-class or subordinate voting shares

LOGO

 

No tie-breaking vote

•   Our board chair does not have a deciding vote in the event of a tie at the board

 

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Governance at Manulife

 

About the Manulife board

The board is responsible for overseeing our business and affairs as set out in the board’s mandate. You can read about the board’s responsibilities in more detail beginning on page 111, and you will find a copy of the board’s mandate on manulife.com as well as on SEDAR (sedar.com). The board carries out its responsibilities directly and through its four standing committees, which you can read about beginning on page 31.

Other than the CEO, all of our directors are independent, and all members of the board’s standing committees are independent. This ensures the board and committees can effectively oversee all aspects of our business and act in Manulife’s best interests.

The board needs a mix of certain competencies, experience and personal qualities for proper oversight and effective decision-making, and sets its size and composition accordingly. The board routinely reviews its size and make-up with the corporate governance and nominating committee, and may appoint new directors to the board between annual meetings. You can read more about board diversity and the competencies and experience of our directors beginning on page 121.

The board and each committee set aside time at each meeting to meet without management present.

The board holds monthly update calls to keep directors informed between regularly scheduled meetings.

The corporate governance and nominating committee reviews the board mandate annually. The board mandate, committee charters and position descriptions for the board chair, committee chairs, individual directors and the CEO are posted on manulife.com.

 

   

2020 highlights

The board introduced the following governance enhancements in 2020:

• enhanced oversight during the pandemic, ensuring a continued strong relationship between the board and management and the ability to be agile and pivot quickly on key issues impacting the company in a critical period through frequent briefings, constant written updates, informal communications and update calls

• leveraged technology to continue to provide effective oversight and guidance to management in the pandemic environment, increasing the frequency and depth of the board’s involvement and interactions with management

• completed a refresh of board composition based on a long-term review of succession needs. This included identifying, appointing and onboarding two new directors with expertise in wealth and asset management and technology and driving transformative organizational change—areas critical to Manulife’s ongoing growth

• enhanced the new director orientation program

• increased board oversight of ESG matters and its focus on organizational culture and health and safety

 

Contacting the board

Our board of directors values regular and constructive engagement with shareholders, and encourages shareholders to express their views on governance matters directly to the board. If you have questions regarding our governance practices you can send them to the Chairman at the following address:

Chairman of the Board

Manulife Financial Corporation

200 Bloor Street East

Toronto, Ontario M4W 1E5

Canada

Email:  corporate_governance@manulife.com

If your question relates to a board committee matter, please address your note to the chair of the appropriate committee.

 

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Board chair

provides independent board leadership and oversight

 

                
          

 

Board of directors

oversees:

• culture of integrity and ethics

• strategic planning

• risk management

• leadership development and succession planning

 

 

 

• corporate governance

• internal controls

• communications and public disclosure

                
          

 

Audit committee

• oversees the external auditors, internal control over financial reporting and our finance, actuarial, internal audit and global compliance functions

• serves as the conduct review committee

• reviews our compliance with legal and regulatory requirements

 

 

Corporate governance and nominating committee

• develops our governance policies, practices and procedures

• develops and oversees the approach to director succession and development

• develops and oversees the process for assessing effectiveness of the board, its committees and individual directors

• oversees director compensation

• oversees the company’s environmental, social and governance framework

 

 

 

Management resources and compensation committee

oversees:

• our global human resources strategy, policies and programs

• management succession

• executive compensation

• pension plan governance

 

 

Risk committee

oversees:

• the management of our principal risks

• our programs and procedures to manage those risks

                

 

Management

• reports to the committees and the board

• control functions such as finance, risk, compliance and internal audit operate independently of the business units

 

 

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Governance at Manulife

 

Board committees

The board has four standing committees to help carry out its mandate:

 

audit committee

 

corporate governance and nominating committee

 

management resources and compensation committee

 

risk committee.

Each committee is made up entirely of independent directors, and has a committee charter. Committees set aside time at each meeting to meet in camera (without management present), and may also use part of this time to meet with independent advisors and individual members of management.

Committee chairs report to the board, providing updates on the committee’s deliberations and any recommendations that require the board’s approval.

Committees review their charter every year and update it as necessary. They also conduct an assessment of the committee’s performance and effectiveness in carrying out the responsibilities set out in its charter. Each committee considers the results when developing its priorities and work plan for the coming year.

The corporate governance and nominating committee reviews committee composition at least once a year and reconstitutes committee membership as appropriate. The CEO is not involved in any of these decisions.

You can access the committee charters and position description for each committee chair on manulife.com and read the 2020 committee reports beginning on page 31.

Independent advice

The board and committees may retain outside advisors to receive independent advice, and we pay for the cost of these services.

Board roles and responsibilities

The board is responsible for approving our strategy, risk oversight, leadership development and succession planning, among other things. It reviews and approves our financial statements, significant investments, the raising of capital and other significant matters such as significant mergers, acquisitions and divestitures.

1 — PROMOTING A CULTURE OF INTEGRITY AND ETHICAL BEHAVIOUR

The board and management promote a strong culture of integrity and ethical behaviour.

Our code of business conduct and ethics applies to all directors, officers and employees and sets out the importance of Manulife’s values, ethics in the workplace and our business relationships, avoiding conflicts of interest, protecting our assets, and prompt reporting of illegal or unethical behaviour.

 

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Anyone, including third parties, can contact our Global Compliance Office, or file a confidential report by contacting our Ethics Hotline, 24 hours a day, 7 days a week. Reports can be made anonymously.

 

   

Online

By phone

 

manulifeethics.com

1-866-294-9534

(toll free in North America)

 

All Manulife directors, officers and employees have a duty to comply with the code and to report an incident if they suspect fraud or other unethical behaviour or wrongdoing, including a breach relating to accounting, auditing or internal controls. The code makes it clear that an individual can report suspected or potential illegal or unethical behavior without fear of retaliation for any report made in good faith.

Each year everyone subject to the code must complete annual training and confirm that they have read and comply with the code. The audit committee monitors compliance with the code and reviews the code every year.

Some limited aspects of the code can be waived for directors and senior executives in exceptional situations if approved by the board on the recommendation of the audit committee, and promptly disclosed. To date, the board has not waived any aspect of the code. You can access a copy of the code on manulife.com.

2 — STRATEGIC PLANNING

The board and senior management hold an annual strategic planning meeting, separate from regular board meetings, where board members and management review Manulife’s strategy and discuss emerging trends, the competitive environment, risk issues and any significant business issues or products as important context for our strategic direction. The strategic planning meeting includes sessions on each of the key operating segments as well as areas of importance to the company’s strategy, such as the macroeconomic environment, talent, technology, digitization and transformation initiatives. In 2020, the board continued to provide effective oversight and guidance to management on strategic planning matters in the pandemic environment, including leveraging technology and taking advantage of scheduling flexibility to refine meeting scheduling, allowing for more in-depth discussion and stand-alone sessions on topics of strategic importance.

Management develops strategic, financial and capital plans, our risk appetite and allocation of resources. The strategic business plans include the strategy and related opportunities and risks for Manulife and each of our business segments.

The board reviews the plans, risk appetite and resource allocation, consults further with management and considers any other key issues before it approves them.

The board monitors management’s progress on strategic plans throughout the year. It receives regular updates from the CEO and management on strategic developments and our performance against the strategic plan, and oversees adjustments management makes to the plans to reflect new conditions or environmental factors.

The strategic planning meeting regularly rotates among Canada, the U.S. and Asia to give the board an opportunity to visit our operations and meet with local staff. The 2020 meeting was held virtually due to ongoing COVID-19 developments and the directives from public health and government authorities for group gatherings, travel and social distancing.

3 — RISK OVERSIGHT

The company’s strategic direction drives our overall risk appetite, which defines the amount and types of risks we are willing to assume in pursuit of our objectives. All risk-taking activities are managed within the company’s risk appetite framework.

Risk oversight has three components: risk-taking philosophy, risk appetite statements, and risk limits and tolerances.

 

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The activities required to achieve our strategy are guided by our values and involve elements of risk-taking. When making decisions about risk-taking and risk management, we place a priority on the following risk management objectives:

 

safeguarding the commitments and expectations established with our customers, creditors, shareholders and employees

 

supporting the successful design and delivery of customer solutions

 

prudently and effectively deploying the capital that shareholders have invested in us with appropriate risk/return profiles

 

investing wealth and asset management’s customer assets consistent with their objectives, including investment risks and returns

 

protecting and/or enhancing our reputation and brand

 

maintaining our targeted financial strength rating.

We only accept risks we can appropriately analyze and monitor. Risk management drives our success by providing a framework to mitigate exposures within our risk appetite, and effectively deploying our capital towards appropriate risk/return profiles. As an integrated component of our business model, risk management helps us achieve our objectives and encourages organizational learning.

We categorize the risks we face into five principal areas, to identify, measure, assess and manage our risk profile: strategic, market, credit, product, and operational.

The board looks to the audit committee, risk committee and management resources and compensation committee to assist in overseeing certain areas of risk:

 

audit committee

 

oversees compliance with legal and regulatory requirements

 

oversees policies and internal control systems for effectiveness to mitigate our exposure to financial reporting risk

 

reviews our quarterly and annual financial statements and related disclosure before recommending them to the board for their review and approval

 

risk committee

 

reviews and assesses our principal risks, including our overall risk profile and reviewing our risk appetite

 

reviews the risk impact of the business plan and new business initiatives

 

oversees the risk management function

 

oversees our compliance with risk management policies

 

evaluates the company’s risk culture

 

management resources and compensation committee and risk committee

 

reviews our executive compensation program to ensure alignment against our risk management principles and our risk appetite

Each director sits on two committees. There is cross-membership between the management resources and compensation committee and the risk committee, which adds depth to committee deliberations. The audit committee and risk committee have at least one joint meeting every year.

In 2020, the board continued to provide effective oversight of risk-related matters in the pandemic environment, increasing the frequency and depth of the board’s involvement and interactions with management.

The board meets directly with OSFI, our principal regulator, every year, and there are regular meetings between the Chairman and OSFI throughout the year.

Enterprise risk management (ERM) framework

Our ERM framework provides a structured approach to risk-taking and risk management activities across the enterprise, supporting our long-term revenue, earnings and capital growth strategy. It is communicated through risk policies and standards, which are intended to enable a consistent design and

 

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execution of strategies across the organization. We have a common approach to managing all risks we are exposed to, and to evaluating potential comparable risk-adjusted returns on contemplated business activities.

We are subjected to external and internal risk factors (such as economic conditions, political environment, technology and risk culture), which can significantly impact the levels and types of risks we might face in pursuing our strategies. Our ERM framework incorporates relevant impacts and mitigating actions as appropriate.

As part of our ERM framework, we have a compensation risk framework in place to support the governance and design of controls for the risks associated with the compensation program. Our compensation programs are assessed against this framework every year.

The enterprise-wide information security program, which is overseen by the Chief Information Risk Officer and includes regular reporting to the risk committee, seeks to mitigate information security risks. This program establishes our information and cyber security framework, including governance, policies and standards, and appropriate controls to protect information and computer systems.

Compliance and reporting

Management oversees the principal risks and implementation of controls to manage risk, and regularly assesses whether there are any material deficiencies. They update the board on our principal risks at least quarterly.

Controls and certifications

We update our risk policies, risk management processes, internal controls and management information systems regularly to make sure they match our risk profile and comply with regulatory requirements. We also perform stress testing on an ongoing basis to support the way we identify, assess and mitigate risk.

The CEO and CFO certify our disclosure controls and procedures, annual financial statements and quarterly financial statements, among other things, to meet legal and regulatory requirements.

4 — LEADERSHIP DEVELOPMENT AND SUCCESSION

The management resources and compensation committee reviews our approach to human resources, talent management, compensation and the succession planning process for senior executives.

Diversity

We value a high performing workforce that reflects the diversity of our customers and the communities where we operate. We believe that a diverse workforce, especially in leadership roles, can enhance performance, foster innovation and improve business results.

We are committed to developing a more diverse and inclusive workforce that is more representative of our customer base and has more women and Black, Indigenous, and People of Colour (BIPOC) in leadership positions.

Roy Gori has signed the Catalyst Accord 2022, committing to increase the percentage of women in executive positions in Canada to 30% or greater by 2022. We have established action plans to drive accountability for greater diversity in our workforce.

In 2020, we announced leadership and recruitment goals to increase the representation of BIPOC employees across our North American businesses. This includes increasing BIPOC representation in leadership roles (director level and above) by 30% by 2025 and annually hiring at least 25% BIPOC talent into new graduate program positions across our businesses and functions. In addition to these commitments, we have signed on to a pledge with the BlackNorth Initiative in Canada, as well as the CEO Action for Diversity and Inclusion pledge in the U.S. Both of these efforts align with our objective of advancing diversity and inclusion in the workplace.

 

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Our global executive Diversity, Equity and Inclusion (DEI) Council guides, supports and facilitates the implementation of our DEI strategy. Chaired by our CEO, the DEI Council is made up of executive leaders who are passionate about DEI. There are twelve employee resource groups (ERG) with 37 chapters and more than 11,000 members. Open to all employees, ERGs support local employee engagement, champion our larger DEI initiatives and provide opportunities for personal and professional development.

The table below shows the number of women in leadership positions at Manulife and our subsidiaries:

 

 

(as at February 28, 2021)

 

               

 

Women in senior leadership roles (vice president and higher)

 

  

 

 

 

 

142 of 500

 

 

 

 

  

 

 

 

 

28%

 

 

 

 

 

Women in senior officer roles (senior vice president and higher)

 

  

 

 

 

 

24 of 102

 

 

 

 

  

 

 

 

 

24%

 

 

 

 

 

Women on the executive leadership team

 

  

 

 

 

 

3 of 15

 

 

 

 

  

 

 

 

 

20%

 

 

 

 

Increasing the representation of women and BIPOC leaders is a priority in our corporate strategy, and we’ve made tangible progress by:

 

embedding diversity practices in our global talent management programs and including diversity results in workforce reporting to senior management and the board

 

implementing annual DEI plans for each business segment and function

 

introducing diversity dashboard quarterly reviews with the executive leadership team

 

formally including diversity goals in all people leader’s goals

 

building representation of BIPOC professionals through focused recruitment efforts from diverse post-secondary schools across North America

 

accelerating development program opportunities for mid-career BIPOC leaders and leaders of our ERGs

 

incorporating diversity into the ongoing review and discussion of our succession candidates

 

offering internal and external training and development programs for high performing women

 

providing unconscious bias training for all employees

 

providing programs designed to educate and train all employees that go beyond our mandatory unconscious bias training, including regular listening forums to foster conversations and build inclusion across our global team, allyship resources and targeted training for all managers on leading inclusively. We partnered with Accenture to launch two learning platforms for all leaders in late 2020: All Against Racism (North America) and Inclusive Leadership (Asia)

 

continuing to provide dedicated support and development of our internal employee communities for women and BIPOC employees that focus on professional development and networking. This includes our GWA (Global Women’s Alliance), VIBE (Valuing the Inclusion of Black Experiences), IPTA (Indigenous Peoples and Their Allies), AMP (Association of Multicultural Professionals), PACES (Pan-Asian Community for Employee Success), Ability (Disabilities) and Being Yourself (mental health focus) ERGs. Each chapter has an executive sponsor (vice president or higher, and country general manager level in some cases) to increase exposure and impact

 

internally and externally celebrating and promoting the history, culture, and contributions of diverse communities, including annual celebrations of International Women’s Day, Black History Month, Martin Luther King Jr. Day, Juneteenth, National Indigenous Peoples Day, Orange Shirt Day, Pacific Heritage Month, South Asian Celebration, International Day of Pink, PRIDE, Ally Week, Mental Health Awareness Month, National Disability Employment Awareness Month, Autism awareness day, International Day of Persons with Disabilities and many more

 

communicating transparently to employees about diversity and profiling leaders who demonstrate authenticity

 

revising workforce policies around flexible work arrangements and increasing our parental leave to better accommodate and retain employees. We increased maternity and paternity leave benefits in Canada to a market leading position in 2021

 

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adding more external partnerships with leading networks that support the advancement of women and BIPOC employees and provide opportunities to share best practices and attend events and educational sessions that encourage leadership across the organization. Organizations include Catalyst, Women in Capital Markets, Career Edge, ICON Talent Partners, Onyx and many more

 

continuing to enhance sourcing, assessment and selection of potential employees. We follow a formal recruitment process where all vacancies are posted internally and externally, and all executive search vendors must ensure their slate of candidates is diverse and includes a focus on women

 

implementing diverse slate requirements internally to increase hire and promotion rates of diverse candidates. To support diverse candidate slates, we introduced the use of technology in our hiring process that reduces biased job posting language and hired two dedicated diverse candidate recruiters. All recruiters are trained in inclusive hiring practices

 

enhancing the collection of applicant and employee diversity data across the organization

We may also establish other measurable objectives for increasing diversity in leadership as we continue to develop our overall approach to diversity globally.

Management development and assessment

The management resources and compensation committee oversees our human resources strategy and our talent management program globally.

Management development

We integrate our talent and succession planning process for senior management with the primary objective of having high performing individuals in critical roles across the organization.

We’re focusing on several areas to ensure we have depth of talent and diverse leadership to fill critical roles in the future:

 

acquiring and retaining high performing, high potential talent

 

selective external hiring of exceptional, seasoned executives

 

increasing our diversity to better reflect the global markets where we operate

 

identifying early high performing, high potential employees, with a focus on growing our pipeline of women in senior roles, developing their skills and providing regular assessments

 

engaging our talent and driving high performance

 

significantly investing in the development of our top talent both on the job and through formal development programs.

High potential employees participate in development programs that combine formal training in specific areas and practical work experience that is meaningful and varied. The program may include roles in different divisions or an international assignment, among other things.

We have adapted our hiring and onboarding practices to support all employees in a completely remote work environment due to the pandemic. We have also added personal communications from senior leaders (including a note from Roy Gori) to incoming employees to enhance connection with the organization in a challenging situation.

Assessment

We have a formal assessment process that is based on corporate and individual performance. The independent directors assess the CEO’s performance every year and the board approves the CEO’s objectives for the following year. The management resources and compensation committee reviews assessments of the performance of senior executives every year, based on business performance, including risk-related aspects, and individual performance. The board also approves compensation decisions for the CEO and other senior executives based on these assessments.

 

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The audit committee assesses the effectiveness of the heads of our oversight functions, including the CFO, Chief Auditor, Chief Actuary and Global Compliance Chief. The risk committee assesses the effectiveness of the Chief Risk Officer. The management resources and compensation committee and the board approve all senior executive appointments.

Management succession planning

Our succession strategy is based on promoting talented individuals within the organization and hiring from outside to strengthen our capabilities where appropriate and to build diverse perspectives and fresh thinking.

The board and committees review the succession plans for senior management and the heads of our key oversight functions. The board develops the CEO’s succession plan, and the management resources and compensation committee monitors succession plans for senior executives. The management resources and compensation committee, with the assistance of the audit committee and risk committee where appropriate, also monitors succession plans for the heads of our oversight functions.

Management devotes its attention to developing talent below the senior executive level to ensure there is a well-trained, high performing pool of executives that is representative of our customer base and the communities where we operate, and that has a broad range of business and functional experience that can contribute to a common culture and values for building a sustainable, high performing company. Developing our people helps retention and ensures orderly transitions.

The management resources and compensation committee conducts regular reviews of senior executive succession planning.

5 — COMMUNICATIONS AND SHAREHOLDER ENGAGEMENT

Disclosure policy and practices

The board has established policies and standards for the disclosure of material information to ensure it is timely, accurate and balanced.

The executive disclosure committee is responsible for overseeing and monitoring our disclosure processes and practices, including the review, from time to time, of Manulife’s disclosure policy. It is made up of members of senior management and reports to the audit committee on disclosure matters. The executive disclosure committee reviews all material information in disclosure documents before the audit committee and board review and approval.

A cross-functional group that includes members of senior management, as well as employees from our legal, investor relations and corporate communications groups, and others as required, reviews information and developments to assess materiality in compliance with our disclosure policies.

The board reviews and approves our financial statements, management’s discussion and analysis (MD&A) and earnings releases, annual information form, management information circular and other material disclosure based on the review and recommendation of the audit committee. The audit committee also reviews and approves our disclosure policy.

 

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Engagement

We have a longstanding practice of engaging with our stakeholders, as we believe that engaging and communicating directly with shareholders and other stakeholders is important for providing timely and meaningful feedback. Our shareholder engagement principles help shareholders understand how the board engages with shareholders and how they can contact the board. These are available on manulife.com.

 

The board’s shareholder engagement outreach program facilitated by our investor relations group includes:

• an annual shareholder engagement outreach program to generate dialogue and feedback on a variety of topics in which the Chairman and at least one other director participate each year

• ongoing communication, which is an important part of creating an open, candid and productive dialogue. Directors make themselves available throughout the year to engage and respond to questions from shareholders

• encouraging shareholders to participate at the annual meeting, because it offers a valuable opportunity to discuss Manulife, our corporate governance practices and other topics.

 

Say on executive pay

This year shareholders will again have an opportunity to have a say on our approach to executive pay. This is an advisory vote, so the results are not binding. The board will, however, take the results into account together with feedback received from other shareholder engagement activities, when making decisions about compensation policies, procedures and executive pay in the future. You can read more about this on page 12.

    

As part of the annual Shareholder Outreach Program, John Cassaday, the Chairman, Sheila Fraser, a member of the corporate governance and nominating committee and the chair of the audit committee, and Don Lindsay, a member of the risk committee and the chair of the management resources and compensation committee met with investors who collectively own approximately 35% of Manulife’s outstanding institutional shares. A broad range of matters were discussed, including:

• governance – Manulife’s approach to governance, including oversight during the pandemic

• accounting – topics related to the implementation of IFRS 17

• ESG – Manulife’s approach to environmental, social, and governance (ESG) matters and how our shareholders are integrating ESG factors into their investment decision-making

• risk management – views on emerging risks and approach to risk management, including cyber security

• executive compensation – potential refinements to our compensation plan design and shareholder input

• transformation – Manulife’s progress on digitization initiatives.

Shareholder proposals

Shareholders can submit proposals to be considered at an annual meeting and included in our circular. The corporate governance and nominating committee oversees this process. See page 13 for more information.

We did not receive any proposals to be considered at the 2021 annual meeting.

 

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Proxy access

The board understands that proxy access has become a matter of importance for shareholders and has a proxy access policy that allows shareholders to nominate directors for election at the next annual meeting.

Eligible shareholders (or a group of up to 20 eligible shareholders) who have held full voting and economic rights in at least 5% of the outstanding common shares for at least three years as of the date of the nomination, may nominate up to 20% of the number of directors to be elected at the next annual meeting. Nominations must be made in compliance with the proxy access policy and nominees must meet the eligibility criteria described in the policy. See page 13 for more information on submitting nominations under the proxy access policy.

You can find our proxy access policy at manulife.com.

For more information

You can find more information about Manulife on manulife.com, including webcasts of the quarterly investor conference calls and senior management’s presentations to the investment community, our annual reports and other investor information.

Serving as a director

We and the board expect directors to conduct themselves professionally, with integrity and always in the best interests of Manulife.

A director must commit the necessary time to their duties as a director and we expect them to attend all of their meetings except in extenuating circumstances. We compensate directors appropriately and our fee schedule is competitive with the market (see page 35 for details).

 

If a director is contemplating joining another public company board, changes employment or country of residence, or there is any other significant change, the director must notify the chair of the corporate governance and nominating committee. The chair will review the

    

Directors who receive more withheld votes
than for votes in an uncontested election
have to submit their resignation. See page
15 for more about our majority voting
policy.

    

matter and consider an appropriate course of action including, in the case of a public company appointment, seeking the approval of the committee. As part of its review, the committee considers whether there are circumstances that could impair the director’s ability to exercise independent judgment or create a conflict of interest, as well as whether the proposed appointment would impede the director’s ability to devote the time and commitment necessary. We expect the director to resign if the change creates a conflict of interest, or affects our ability to comply with legal or regulatory requirements or our own internal policies.

 

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SERVING ON OTHER BOARDS

We have not set a limit for the number of public company boards our directors can serve on, however, as noted above, the corporate governance and nominating committee must review and approve a proposed appointment to another public company board to ensure the additional commitment does not create a conflict of interest or affect the director’s independence or ability to devote appropriate time to Manulife. None of the nominated directors serve together on another public company board.

INTEGRITY

In addition to complying with our code of business conduct and ethics, directors are required to follow rules established to ensure they exercise independent judgment and avoid conflicts of interest.

EQUITY OWNERSHIP

We require directors to hold equity in Manulife to help align their interests with those of our shareholders. All independent directors must hold at least six times the mandatory equity portion of the annual board member retainer. Directors are expected to meet their equity ownership requirements within six years of joining the board. To facilitate equity ownership, all directors receive a minimum of 50% of the annual board retainer in deferred share units. Mr. Gori has separate equity ownership requirements as President and CEO, which he meets. See pages 35 and 102 for details.

TERM LIMITS

 

Independent directors can serve up to 12 years on our board, to balance the benefits of experience with the need for board renewal and new perspectives. When term limits were

             

We eliminated the mandatory retirement age
of 72 when term limits were introduced in
December 2013.

   
   
introduced, a transitional provision was included to allow (until 2019) independent directors who had served at least 12 years on the board as of the date of the 2014 annual meeting but had not turned 72 (the mandatory retirement age in effect before December 5, 2013) to be re-elected. John Cassaday was previously re-elected under this transitional provision.

A director who has served the maximum term will only be nominated for election in exceptional circumstances. The board does, however, have discretion to nominate a director again for up to three years if the director’s specific expertise meets the needs of the board at that time.

The board chair may serve a full five-year term as Chairman regardless of the number of years that individual has served as a director.

 

 

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Governance at Manulife

 

INDEPENDENCE

We have a board independence policy that complies with all applicable legal, regulatory and securities exchange requirements.

A director is independent if the individual doesn’t have a direct or indirect relationship with Manulife that could reasonably be expected to interfere with the director’s ability to exercise independent judgment. Other than the CEO, all of the nominated directors are independent. Members of the audit committee and the management resources and compensation committee also meet the additional independence requirements applicable to those committees.

Independent Chairman

The board chair must be an independent director. The board chair is appointed each year by the directors and can serve up to five years in the role. The board appointed John Cassaday to the role of Chairman effective following his successful election at the 2018 meeting. Mr. Cassaday has never been a Manulife employee.

The Chairman is responsible for providing leadership to the board, encouraging open discussion and debate, overseeing performance and guiding deliberations on strategic and policy matters. The Chairman has frequent discussions with senior management, sets the meeting agendas and attends all committee meetings whenever possible. The Chairman also has frequent interactions with Manulife’s primary regulator to facilitate direct and open communication. The Chairman works closely with the corporate governance and nominating committee on all governance matters. In 2020, the Chairman held more frequent one-on-one sessions with directors to ensure consistent connection during the pandemic. The Chairman’s mandate is available on manulife.com.

Independent directors

The independent directors meet regularly with senior management, and meet without management present at each board and committee meeting to facilitate open and candid discussion.

The independent directors also meet in a closed session at least once every year to review the performance of the CEO and approve his compensation, review the board’s own performance assessments and approve the board’s objectives for the following year.

They also regularly have closed sessions with our external auditors, other independent advisors, heads of our control functions and other members of management.

DIVERSITY

Having a mix of highly qualified directors from diverse backgrounds brings different perspectives and experiences to the boardroom to generate healthy discussion and debate and effective decision-making.

 

The board has a long-standing diversity policy that covers age, gender, ethnicity, disability, sexual orientation and geographic representation. When identifying director candidates, the corporate governance and nominating committee considers prospective candidates based on merit, along with all of these characteristics, in the context of competencies, expertise, skills, background

     

46% of the nominated independent directors
are women and five of the seven new directors
appointed to the board in the last four years
have been women.

 

One of the nominated independent directors
(8%) is a member of a racially/ethnically
diverse group.

     
     

and other qualities the board identifies from time to time as being important. Adherence to the policy is also taken into account as part of the annual performance and effectiveness evaluations of the corporate governance and nominating committee and the board.

 

2021 Management information circular         121  


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The policy sets out the board’s objective of women representing at least 30% of the independent directors, which we’ve met since 2013, as well as its aim to achieve gender parity among the independent directors, which we achieved in 2020 with the appointment of Nicole Arnaboldi and Leagh Turner to the board. The committee reviews the diversity objective every year and may recommend changes or additional objectives as appropriate. The table below shows the number of women currently on the board.

 

(nominated directors as at February 28, 2021)                  
Female directors (as a percentage of total directors)        6 of 14        43
Female directors (as a percentage of independent directors)        6 of 13        46

SKILLS AND EXPERIENCE

The corporate governance and nominating committee helps determine the necessary qualities, skills and experience for a member of the board of a global financial services company and Manulife in particular. The committee maintains a skills matrix to identify any gaps or emerging areas of importance in the board’s overall skill set.

Directors must possess six core attributes:

 

a reputation for integrity and ethical behaviour

 

a demonstrated ability to exercise judgment and communicate effectively

 

financial knowledge

 

prominence in their area of expertise

 

experience relevant to our operations

 

sufficient time to dedicate to board and committee work.

In addition to the core attributes, all members of the board have considerable senior executive experience, operations/governance experience in one or more of Asia, Canada and the U.S., and are financially literate within the meaning of applicable securities laws.

The table on the following page shows the diverse experience of the board and individual nominees in areas identified as necessary for effective oversight of the company given its current operations and strategy. These qualifications are considered in reviewing board succession and evaluating potential board members.

 

122     Manulife Financial Corporation


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Governance at Manulife

 

Key competencies   LOGO     LOGO     LOGO     LOGO     LOGO     LOGO     LOGO     LOGO     LOGO     LOGO     LOGO     LOGO     LOGO     LOGO  
                             

Finance/Accounting

We operate in a financial environment with complex accounting, actuarial and capital management issues

    LOGO       LOGO                       LOGO       LOGO       LOGO       LOGO       LOGO       LOGO       LOGO       LOGO       LOGO          
                             

Insurance/Reinsurance/Investment management

We value industry expertise as it provides insight into operations, strategy, and market factors

    LOGO       LOGO                       LOGO       LOGO               LOGO                               LOGO       LOGO          
                             

Risk management

We operate in a complex risk environment and experience in risk disciplines provides us with expertise to effectively manage our principal risks

    LOGO       LOGO                               LOGO       LOGO       LOGO               LOGO       LOGO       LOGO       LOGO       LOGO  
                             

Talent management/Executive compensation

We want to attract, develop and retain the best talent globally as we focus on transforming our business

    LOGO               LOGO       LOGO       LOGO               LOGO       LOGO       LOGO       LOGO       LOGO       LOGO       LOGO       LOGO  
                             

Technology/Operations

We value technology expertise as we focus on transforming our business by using technology to become a digital, customer leader

                            LOGO       LOGO                       LOGO       LOGO       LOGO               LOGO               LOGO  

Key experience

 

                             

Asia experience

Business and cultural experience in regions in which we operate, particularly in those regions where we are focusing on accelerating growth, is essential to providing oversight in the best long-term interests of the company

    LOGO       LOGO       LOGO               LOGO                       LOGO       LOGO       LOGO       LOGO       LOGO               LOGO  
                             

Government relations/Public policy/Regulatory

Experience with governmental agencies provides valuable insight into government processes and actions, and knowledge of the regulatory environments across our geographical footprint is essential to understanding the threats and opportunities of our long-term strategy

                    LOGO                       LOGO       LOGO               LOGO               LOGO                          
                             

Public company executive/Director

Public company experience provides practical insights on the operations and governance of a complex, publicly-traded organization

    LOGO               LOGO       LOGO       LOGO               LOGO       LOGO       LOGO       LOGO       LOGO       LOGO       LOGO       LOGO  
                             

Digital transformation/Sales/Marketing 

Experience in sales and marketing provides valuable market and consumer insights as we focus on transforming our business and becoming a digital, customer leader

                            LOGO       LOGO                       LOGO       LOGO                                       LOGO  

 

2021 Management information circular         123  


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DIRECTOR DEVELOPMENT

Directors receive ongoing education to keep them up to date in their knowledge and understanding of our businesses and market and regulatory environment so they can carry out their responsibilities effectively.

Orientation

We’re able to attract qualified and experienced directors from various backgrounds with a diverse range of skills. New directors participate in a comprehensive orientation program to increase their knowledge of Manulife and matters that are important to our operations. The program is tailored to each director’s knowledge, skills and experience. It was enhanced in 2020 to take advantage of the virtual environment to create a more flexible program tailored to individual director needs.

Directors receive information about Manulife, the board and board committees and their duties as a director. The board chair and committee chairs meet with new directors to discuss the role of the board and committees and to give them an opportunity to have a candid discussion and ask questions.

We also arrange sessions with senior management on a wide variety of relevant subjects to help new directors gain a deeper understanding of our strategic priorities, businesses and challenges.

All directors have a standing invitation to attend committee meetings whether or not they are a member, and new directors are encouraged to do so as part of their orientation.

Continuing education

We run a continuing education program for all directors and the corporate governance and nominating committee coordinates the program agenda.

The program includes regular presentations by senior executives about emerging issues and topics relevant to our business and operations and the regulatory environment, as well as information packages developed to enhance the director’s understanding of the subject matter. External experts are also invited from time to time to speak on various topics.

In typical years we also organize site visits for directors so they gain additional insights into various aspects of our business and our global operations. Site visits also give directors an opportunity to meet directly with management and other employees in those areas or regions. Due to COVID-19 concerns and restrictions, no site visits were organized in 2020.

Committee chairs may also coordinate education sessions on specific topics for their committee members.

 

124     Manulife Financial Corporation


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Governance at Manulife

 

The table below provides highlights of our continuing education program for directors in 2020:

 

Topic    Date    Audience
Business and operations          
Competitor and Business Economics Review    February/May/June/
November 2020
   board
Property & Casualty Reinsurance Business Review    June 2020    board
Actuarial Assumptions Overview    November 2020    board
Market trends and regulatory updates          
Review of Australian Prudential Regulatory Authority (APRA) Inquiry into governance frameworks and practices at the Commonwealth Bank of Australia (CBA)    January 2020    board
Tax Environment Overview    June 2020    board
Macroeconomic Environment Overview    September 2020    board
Geopolitical Environment Review    August/November
2020
   board
U.S. Election Results Review    November 2020    board

We also encourage directors to participate in outside professional development programs. We pay for these expenses as long as the board chair and the chair of the corporate governance and nominating committee approve the program in advance.

All of our directors are members of the Institute of Corporate Directors (ICD) and the National Association of Corporate Directors (NACD), which provide continuing education for directors through publications, seminars and conferences. They are also provided with corporate subscriptions to certain relevant industry publications.

ASSESSMENT

The corporate governance and nominating committee carried out a self-assessment of the board, committees, the board chair and committee chairs in 2020. The committee periodically engages an independent advisor to assist in conducting the self-assessment. This was last done for 2019.

Directors completed a comprehensive qualitative and quantitative questionnaire to assess the performance and effectiveness of:

 

the board vis-à-vis its objectives

 

the board chair in carrying out his mandate

 

the committees and the chairs of those committees, in addressing areas of focus, and

 

themselves and their peers.

Senior executives are also invited to complete committee assessments, providing another opportunity for management feedback.

 

2021 Management information circular         125  


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Assessment results are compiled and reported to the board chair and the chair of the corporate governance and nominating committee. The corporate governance and nominating committee reviews the results and provides a final report to the full board, which is used to address any areas for improvement and develop the board’s priorities for the following year.

The board chair also has one-on-one interviews with each director to receive any candid feedback on the performance of the board, committees and peer directors for developing the board’s priorities for the following year. He then meets with the board to discuss the recommendations and plan the implementation of the board’s priorities for the coming year.

BOARD SUCCESSION

The corporate governance and nominating committee manages board succession in light of the board’s overall needs, term limits and retirements. In doing so, the committee takes a long-term, strategic view of board succession, considering the competencies and experience necessary for effective oversight of the company given its current operations and strategy as well as its ambitions for the future. It also reviews board composition in light of the annual board assessment results and recommends any changes as appropriate.

In 2020, Tom Jenkins, Lesley Webster and Rona Ambrose resigned from the board. Nicole Arnaboldi and Leagh Turner were appointed after an extensive search process. They both bring significant experience and expertise that will support the effective oversight of the company’s strategy and operations. You can read more about these new directors in the director profiles starting on page 17.

The committee is responsible for the director candidate search, identifying qualified candidates for nomination to the board, on its own, with suggestions from the board and others, and often with the assistance of an independent advisor or search firm to help identify suitable candidates who meet the board’s selection criteria required for effective oversight of the company given its current operations and strategy, as well as supporting the board’s diversity objectives. It also maintains a list of prospective candidates who meet established criteria and diversity objectives. In 2020 the committee worked with an independent strategic advisor to assist with the long-term board succession plan.

The committee considers prospective candidates based on merit, with the expertise, skills, background, experience and other qualities the board identifies as important for supporting our strategy and operations. It also takes into account legal and regulatory requirements, such as residency and independence, and considers gender, age, ethnicity, disability, sexual orientation and geographic representation as part of the board’s diversity policy. You can read more about board diversity on page 121 or access the board’s diversity policy on manulife.com.

The board chair, committee chairs and other directors interview suitable candidates and an independent firm conducts a background check. The committee considers input from all of these sources before it recommends a candidate for the board’s review and approval for nomination or appointment to the board.

 

126     Manulife Financial Corporation


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Other Information

 

Other Information

Environmental, social and governance

We report on the economic, environmental and social dimensions of our products and services, operations and community activities annually in Manulife’s Sustainability Report and Public Accountability Statement. The report provides information on our environmental, social and governance priorities and performance. You can download a copy of the report from the sustainability section of our website: www.manulife.com/sustainability. You can read more about the board’s oversight of ESG on page 31.

Guided by our corporate values, we have taken a forward-thinking approach to our sustainability agenda; an approach that drives action in the best interests of our various stakeholders. To ensure our sustainability efforts make an impact beyond our business, we actively engage with various international recognized initiatives and frameworks to help drive progress across industries and geographies.

Since 2017, Manulife has been a supporter of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) recommendations. In alignment with the TCFD recommendations, our 2020 Management’s Discussion and Analysis includes disclosures related to our climate risk governance, risk management, strategy, and metrics, in the Strategic Risk section, under Environmental, Social, Governance Risk.

Liability insurance

We have liability insurance to protect our directors and officers against liabilities they may incur as directors and officers of Manulife and our subsidiaries in circumstances where we cannot indemnify them. Our current policy provides approximately US$500 million in coverage and will be reviewed in September 2021.

Loans to directors and officers

We may grant loans to our directors, officers and other employees in the regular course of business as long as the loans are in compliance with legal and regulatory requirements and are on market terms, and therefore on the same terms as loans we make to customers with similar creditworthiness.

As at February 28, 2021 the total indebtedness to Manulife or any of our subsidiaries of all officers, directors and employees and former officers, directors and employees of Manulife or our subsidiaries, excluding routine indebtedness under applicable Canadian securities laws, was $1,300,598.

 

Name and principal position   Involvement of
company or
subsidiary
 

Largest amount
outstanding during
financial year ended
December 31, 2020

($)1

   

Amount
outstanding as at
February 28, 2021

($)1

 
Paul Lorentz, President and CEO, Global Wealth and Asset Management   Manulife Bank as Mortgagee   $ 1,234,704     $ 1,156,516  
1

Amount represents a Manulife One Account secured against a secondary residence of the borrower. As at December 31, 2020, the facility had a balance of $1,142,534 in a sub account with a fixed rate of 2.04% per annum and a 5-year term and a revolving balance of $92,170 at the Manulife One variable base rate of 3.05% per annum. As at February 28, 2021, the facility had a balance of $1,116,706 in the sub account and a revolving balance of $39,811.

 

2021 Management information circular         127  


Table of Contents

 

Directors’ approval

The board of directors has approved the contents of this circular and authorized us to distribute it to all shareholders of record.

 

LOGO

Antonella Deo

Corporate Secretary

March 10, 2021

 

128     Manulife Financial Corporation


Table of Contents

LOGO

III Manulife
Our Registered office
Manulife Financial Corporation
200 Bloor Street East
Toronto, Ontario M4W 1E5
Canada
Manulife.com
IR3832E
MIX
Paper from
Responsible sources
FSR C132107
FSC www.fsc.org

Exhibit 99.4

MANULIFE FINANCIAL CORPORATION

 

 

 

Proxy Voting Information

We offer you four ways to vote your shares

   

MAIL

 

 

Complete, sign, date and mail this proxy form in the envelope provided.

 

   

INTERNET

 

 

Go to the website:

 

www.astvotemyproxy.com

 

Follow the instructions on the screen.

 

You will need the Control Number located on this proxy form.

 

   

TELEPHONE

 

 

Call toll free 1-888-489-7352 in Canada or the United States from any touch-tone telephone and follow the instructions. You will need the Control Number located on this proxy form.

 

     

SMARTPHONE

 

Scan QR Code

 

 

 

LOGO

 

   

 

 

Proxy Form – Annual Meeting of Common Shareholders

 

 

       Proxy Information                                                               

 

 

This proxy confers discretionary authority on the proxy named herein to vote in respect of any amendments or variations to the matters identified in the notice of meeting or any other matter which may properly come before the meeting in such manner as such proxy in his or her judgment may determine.

 

A shareholder has the right to appoint a person to represent him or her at the meeting other than the management representatives designated in this proxy. Such right may be exercised by filling in the name of the other person in the blank space provided; such other person need not be a shareholder.

 

 

       Notes

 

 

•   This proxy must be signed by a shareholder or his or her attorney duly authorized in writing. If you are an individual, please sign exactly as your shares are registered. If the shareholder is a corporation, a duly authorized officer or attorney of the corporation must sign this proxy, and if the corporation has a corporate seal, its corporate seal should be affixed.

 

•   Signatories on behalf of a trust, estate or under a power of attorney or similar authority should specify the capacity in which they sign. Documentation may be required evidencing authority.

 

•   If the shares are held by two or more persons then all those persons should sign this proxy.

 

•   This proxy should be read in conjunction with the accompanying Management Information Circular and Notice of Annual Meeting of Common Shareholders.

 

•   If not dated, this proxy is deemed to bear the date on which it was mailed on behalf of management of the Company.

 

•   For your proxy vote to be counted, this proxy must be completed and delivered in accordance with the Voting Instructions above.

 

 

       Request for Financial Statements                               

  

 

If you wish to receive the financial statements and MD&A for the next year by mail, you must check the appropriate box below.

 

I wish to receive the Interim Financial Statements and MD&A                                        

I wish to receive the Annual Financial Statements and MD&A                                        

  You may also make your request online at https://ca.astfinancial.com/financialstatements. Our Company code number is 4658A.

Save paper – reduce mail – to receive documents electronically rather than via the mail,

sign up for e-delivery after casting your vote at www.astvotemyproxy.com


LOGO   

 

MANULIFE FINANCIAL CORPORATION

Annual Meeting of Common Shareholders

May 6, 2021

                        

 

 

PLEASE MARK YOUR VOTE IN BLUE OR BLACK INK AS SHOWN HERE    

 

This proxy is solicited on behalf of management of Manulife Financial Corporation (the “Company”).

The undersigned shareholder of the Company hereby appoints Roy Gori, President and Chief Executive Officer, or failing him, John M. Cassaday, Chairman of the Board, with full power of substitution, or instead of any of them,                                                                          , as proxy of the undersigned, to attend, vote and act for and on behalf of the undersigned at the Annual Meeting of Common Shareholders of the Company to be held at 11:00 a.m. Eastern Time on Thursday, May 6, 2021, and at all adjournments thereof, and are specifically directed to vote the common shares represented by this proxy upon the following matters.

Information on the following can be found in the Management Information Circular and Notice of Annual Meeting of Common Shareholders dated March 10, 2021.

The directors and management recommend shareholders vote FOR items 1, 2 and 3. Where no choice is specified, the proxyholders designated by management intend to vote FOR items 1, 2 and 3.

 

 

  1.   Election of Directors

 

 

  The proposed nominees are:

 

          FOR      WITHHOLD  
   

  01

          Nicole S. Arnaboldi      
   

  02

          Guy L.T. Bainbridge      
   

  03

          Joseph P. Caron      
   

  04

          John M. Cassaday      
   

  05

          Susan F. Dabarno      
   

  06

          Julie E. Dickson      
   

  07

          Sheila S. Fraser      
   

  08

          Roy Gori      
   

  09

          Tsun-yan Hsieh      
   

  10

          Donald R. Lindsay      
   

  11

          John R.V. Palmer      
   

  12

          C. James Prieur      
   

  13

          Andrea S. Rosen      
   

  14

 

 

        Leagh E. Turner

 

  

 

  

 

 

  2.   Appointment of Auditors

 

     

 

  FOR  

     WITHHOLD  
   

Appointment of Ernst & Young LLP as Auditors

 

  

 

  

 

     

 

  3.   Advisory Resolution Accepting Approach to Executive Compensation

 

     

 

  FOR  

  

 

  AGAINST  

   

Advisory resolution accepting approach to executive compensation

 

  

 

  

 

 

 

 

 

  Please Sign and Return this Proxy Form                       

 

  

To be valid, this proxy must be signed and received by the Company’s transfer agent, AST Trust Company (Canada), P.O. Box 721, Agincourt, Ontario, Canada, M1S 0A1, no later than 5:00 p.m. Eastern Time on Tuesday, May 4, 2021 or, if the meeting is adjourned, no later than 5:00 p.m. Eastern Time on the second business day preceding the day to which the meeting is adjourned. This proxy revokes and supersedes all proxies of earlier dates.

Please see the Notes on the reverse side of this form for instructions on how to complete this proxy and vote your shares.

Dated this              day of                                         , 2021.

 

 

Signature of Shareholder/Authorized Officer                                                 

 

 

            

 

 

Name of Shareholder (Please PRINT clearly)