EX-99.1 2 d828654dex991.htm EX-99.1 EX-99.1

Exhibit 99.1

 

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Manulife Financial Corporation

Consolidated Financial Statements

For the year ended December 31, 2019


Responsibility for Financial Reporting

The accompanying consolidated financial statements of Manulife Financial Corporation are the responsibility of management and have been approved by the Board of Directors. It is also the responsibility of management to ensure that all information in the annual report to shareholders is consistent with these consolidated financial statements.

The consolidated financial statements have been prepared by management in accordance with International Financial Reporting Standards and the accounting requirements of the Office of the Superintendent of Financial Institutions, Canada. When alternative accounting methods exist, or when estimates and judgment are required, management has selected those amounts that present the Company’s financial position and results of operations in a manner most appropriate to the circumstances.

Appropriate systems of internal control, policies and procedures have been maintained to ensure that financial information is both relevant and reliable. The systems of internal control are assessed on an ongoing basis by management and the Company’s internal audit department.

The actuary appointed by the Board of Directors (the “Appointed Actuary”) is responsible for ensuring that assumptions and methods used in the determination of policy liabilities are appropriate to the circumstances and that reserves will be adequate to meet the Company’s future obligations under insurance and annuity contracts.

The Board of Directors is responsible for ensuring that management fulfills its responsibility for financial reporting and is ultimately responsible for reviewing and approving the consolidated financial statements. These responsibilities are carried out primarily through an Audit Committee of unrelated and independent directors appointed by the Board of Directors.

The Audit Committee meets periodically with management, the internal auditors, the external auditors and the Appointed Actuary to discuss internal control over the financial reporting process, auditing matters and financial reporting issues. The Audit Committee reviews the consolidated financial statements prepared by management and then recommends them to the Board of Directors for approval. The Audit Committee also recommends to the Board of Directors and shareholders the appointment of external auditors and approval of their fees.

The consolidated financial statements have been audited by the Company’s external auditors, Ernst & Young LLP, in accordance with 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.

 

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Roy Gori

President and Chief Executive Officer

  

Philip Witherington

Chief Financial Officer

Toronto, Canada

February 12, 2020

Appointed Actuary’s Report to the Shareholders

I have valued the policy liabilities and reinsurance recoverables of Manulife Financial Corporation for its Consolidated Statements of Financial Position as at December 31, 2019 and 2018 and their change in the Consolidated Statements of Income for the years then ended in accordance with actuarial practice generally accepted in Canada, including selection of appropriate assumptions and methods.

In my opinion, the amount of policy liabilities net of reinsurance recoverables makes appropriate provision for all policyholder obligations and the consolidated financial statements fairly present the results of the valuation.

 

 

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Steven Finch

Appointed Actuary

Toronto, Canada

February 12, 2020

 

96        Manulife  Financial Corporation  |  2019 Annual Report  |  Consolidated Financial Statements


Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of Manulife Financial Corporation

Opinion on the Consolidated Financial Statements

We have audited the accompanying Consolidated Statements of Financial Position of Manulife Financial Corporation (the “Company”) as of December 31, 2019 and 2018, the related Consolidated Statements of Income, Consolidated Statements of Comprehensive Income, Consolidated Statements of Changes in Equity and Consolidated Statements of Cash Flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

Report on Internal Control over Financial Reporting

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 12, 2020, expressed an unqualified opinion thereon.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

 

   
   

Valuation of Insurance Contract Liabilities

 

Description of the Matter

 

 

The Company recorded insurance contract liabilities of $351.2 billion at December 31, 2019 on its consolidated statement of financial position. Insurance contract liabilities are reported gross of reinsurance ceded and represent management’s estimate of the amount which, together with estimated future premiums and net investment income, will be sufficient to pay estimated future benefits, policyholder dividends and refunds, taxes (other than income taxes) and expenses on insurance policies in-force. Insurance contract liabilities are determined using the Canadian Asset Liability Method (CALM), as required by the Canadian Institute of Actuaries. The valuation of insurance contract liabilities is based on an explicit projection of cash flows using current assumptions for each material cash flow item. Cash flows related to insurance contract liabilities have two major components: a best estimate assumption and a provision for adverse deviation. Best estimate assumptions are made with respect to mortality, morbidity, investment returns, policy termination rates, premium persistency, expenses, and taxes. A provision for adverse deviation is recorded to reflect the inherent uncertainty related to the timing and amount of the best estimate assumptions. Disclosures on this matter are found in Note 1 ‘Nature of Operations and Significant Accounting Policies’ and Note 6 ‘Insurance Contract Liabilities and Reinsurance Assets’ of the consolidated financial statements.

 

 

Auditing the valuation of insurance contract liabilities was complex and required the application of significant auditor judgement due to the complexity of the cash flow models, the selection and use of best estimate assumptions, and the interrelationship of these variables in measuring insurance contract liabilities. The audit effort involved professionals with specialized skill and knowledge to assist in evaluating the audit evidence obtained.

 

 

100        Manulife  Financial Corporation  |  2019 Annual Report  |  Consolidated Financial Statements


 

How We Addressed the Matter in Our Audit

 

 

We obtained an understanding, evaluated the design, and tested the operating effectiveness of management’s controls over the valuation of insurance contract liabilities. The controls we tested related to, among other areas, actuarial methodology, integrity of data used, controls over relevant information technology, and the assumption setting and implementation processes used by management.

 

To test the valuation of insurance contract liabilities, our audit procedures included, among other procedures, involving our actuarial specialists to assess the methodology and assumptions with respect to compliance with the Company’s policies, Canadian Institute of Actuaries guidance and industry practice. We performed audit procedures over a sample of assumptions, including the implementation of those assumptions into the models. These procedures included testing underlying support and documentation, including testing a sample of experience studies supporting specific assumptions, challenging the nature and timing of changes recorded, and assessing whether individual changes were errors or refinements of estimates. We also performed independent recalculation procedures on a sample of insurance policies to evaluate management’s recorded reserves. In addition, we assessed the adequacy of the disclosures provided in the notes to the consolidated financial statements.

 

   
   

Valuation of Invested Assets with Significant Non-Market Observable Inputs

 

Description of the Matter

 

 

The Company recorded invested assets of $17.0 billion at December 31, 2019 on its consolidated statement of financial position which are both (a) measured at fair value and (b) subject to a valuation estimate that includes significant non-market observable inputs. These assets are valued based on internal models or third-party pricing sources that incorporate assumptions with a high-level of subjectivity. Examples of such assumptions include interest rates, yield curves, credit ratings and related spreads, expected future cash flows and transaction prices of comparable assets. These invested assets are classified as level 3 within the Company’s hierarchy of fair value measurements. Disclosures on this matter are found in Note 1 ‘Nature of Operations and Significant Accounting Policies’ and Note 3 ‘Invested Assets and Investment Income’ of the consolidated financial statements.

 

Auditing the valuation of these invested assets was complex and required the application of significant auditor judgment in assessing the valuation methodology and non-observable inputs used. The valuation of these assets is sensitive to the significant non-market observable inputs described above, which are inherently forward-looking and could be affected by future economic and market conditions. The audit effort involved professionals with specialized skill and knowledge to assist in evaluating the audit evidence obtained.

 

 

How We Addressed the Matter in Our Audit

 

 

We obtained an understanding, evaluated the design, and tested the operating effectiveness of management’s controls over the investment valuation process. The controls we tested related to, among other areas, management’s determination and approval of assumptions and methodologies used in model-based valuations and management’s review of valuations provided by third-party pricing sources.

 

To test the valuation of these invested assets, our audit procedures included, among other procedures, involving our valuation specialists to assess the methodologies and significant assumptions used by the Company. These procedures included assessing the valuation methodologies used with respect to the Company’s policies, valuation guidelines, and industry practice and comparing a sample of valuation assumptions used against benchmarks, including comparable transactions and independent pricing sources where available. We also performed independent investment valuations on a sample of investments to evaluate management’s recorded values. In addition, we assessed the adequacy of the disclosures provided in the notes to the consolidated financial statements.

 

 

 

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Chartered Professional Accountants

Licensed Public Accountants

We have served as Manulife Financial Corporation’s auditors since 1905.

Toronto, Canada

February 12, 2020

 

Consolidated Financial Statements  |  Manulife Financial Corporation  |   2019 Annual Report        101


Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of Manulife Financial Corporation

Opinion on Internal Control over Financial Reporting

We have audited Manulife Financial Corporation’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the “COSO criteria”). In our opinion, Manulife Financial Corporation (the “Company”) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Consolidated Statements of Financial Position of the Company as of December 31, 2019 and 2018, and the related Consolidated Statements of Income, Consolidated Statements of Comprehensive Income, Consolidated Statements of Changes in Equity and Consolidated Statements of Cash Flows for the years then ended, and the related notes and our report dated February 12, 2020, expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in Management’s Report on Internal Control Over Financial Reporting contained in the Management’s Discussion and Analysis. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

 

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Chartered Professional Accountants

Licensed Public Accountants

Toronto, Canada

February 12, 2020

 

102        Manulife  Financial Corporation  |  2019 Annual Report  |  Consolidated Financial Statements


Consolidated Statements of Financial Position

 

As at December 31,

(Canadian $ in millions)

   2019              2018         

Assets

          

Cash and short-term securities

   $ 20,300         $ 16,215    

Debt securities

     198,122             185,594    

Public equities

     22,851           19,179    

Mortgages

     49,376           48,363    

Private placements

     37,979           35,754    

Policy loans

     6,471           6,446    

Loans to bank clients

     1,740           1,793    

Real estate

     12,928           12,777    

Other invested assets

     28,760                 27,543          

Total invested assets (note 3)

     378,527                 353,664          

Other assets

          

Accrued investment income

     2,416           2,427    

Outstanding premiums

     1,385           1,369    

Derivatives (note 4)

     19,449           13,703    

Reinsurance assets (notes 6 and 7)

     41,446           43,053    

Deferred tax assets (note 16)

     4,574           4,318    

Goodwill and intangible assets (note 5)

     9,975           10,097    

Miscellaneous

     8,250                 8,431          

Total other assets

     87,495                 83,398          

Segregated funds net assets (note 22)

     343,108                 313,209          

Total assets

   $ 809,130               $ 750,271          

Liabilities and Equity

          

Liabilities

          

Insurance contract liabilities (note 6)

   $   351,161         $ 328,654    

Investment contract liabilities (note 7)

     3,104           3,265    

Deposits from bank clients

     21,488           19,684    

Derivatives (note 4)

     10,284           7,803    

Deferred tax liabilities (note 16)

     1,972           1,814    

Other liabilities

     16,244                 15,190          
     404,253           376,410    

Long-term debt (note 9)

     4,543           4,769    

Capital instruments (note 10)

     7,120           8,732    

Segregated funds net liabilities (note 22)

     343,108                 313,209          

Total liabilities

     759,024                 703,120          

Equity

          

Preferred shares (note 11)

     3,822           3,822    

Common shares (note 11)

     23,127           22,961    

Contributed surplus

     254           265    

Shareholders’ retained earnings

     15,488           12,704    

Shareholders’ accumulated other comprehensive income (loss):

          

Pension and other post-employment plans

     (350         (426  

Available-for-sale securities

     1,511           (265  

Cash flow hedges

     (143         (127  

Real estate revaluation surplus

     31           20    

Translation of foreign operations

     5,398                 7,010          

Total shareholders’ equity

     49,138           45,964    

Participating policyholders’ equity

     (243         94    

Non-controlling interests

     1,211                 1,093          

Total equity

     50,106                 47,151          

Total liabilities and equity

   $ 809,130               $ 750,271          

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

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Roy Gori

President and Chief Executive Officer

  

John Cassaday

Chairman of the Board of Directors

 

Consolidated Financial Statements  |  Manulife Financial Corporation  |   2019 Annual Report        103


Consolidated Statements of Income

 

For the years ended December 31,

(Canadian $ in millions except per share amounts)

          2019                     2018         

Revenue

              

Premium income

              

Gross premiums

     $   41,059           $ 39,150    

Premiums ceded to reinsurers

             (5,481                         (15,138        

Net premiums

                 35,578                         24,012          

Investment income (note 3)

              

Investment income

       15,393             13,560    

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

             18,200                         (9,028        

Net investment income

             33,593                         4,532          

Other revenue (note 13)

             10,399                         10,428          

Total revenue

             79,570                         38,972          

Contract benefits and expenses

              

To contract holders and beneficiaries

              

Gross claims and benefits (note 6)

       28,660             27,878    

Increase (decrease) in insurance contract liabilities (note 6)

       33,727             2,907    

Increase (decrease) in investment contract liabilities (note 7)

       170             35    

Benefits and expenses ceded to reinsurers

       (5,373           (5,153  

(Increase) decrease in reinsurance assets (note 6)

             (1,269                       (9,733        

Net benefits and claims

       55,915             15,934    

General expenses

       7,686             7,957    

Investment expenses (note 3)

       1,748             1,708    

Commissions

       6,293             6,173    

Interest expense

       1,319             1,275    

Net premium taxes

             389                         406          

Total contract benefits and expenses

             73,350                         33,453          

Income before income taxes

       6,220             5,519    

Income tax expense (note 16)

             (718                       (632        

Net income

           $ 5,502                       $ 4,887          

Net income (loss) attributed to:

              

Non-controlling interests

     $ 233           $ 214    

Participating policyholders

       (333           (127  

Shareholders

             5,602                         4,800          
             $ 5,502                       $ 4,887          

Net income attributed to shareholders

       5,602             4,800    

Preferred share dividends

             (172                       (168        

Common shareholders’ net income

           $ 5,430                       $ 4,632          

Earnings per share

              

Basic earnings per common share (note 11)

     $ 2.77           $ 2.34    

Diluted earnings per common share (note 11)

       2.77             2.33    

Dividends per common share

             1.00                         0.91          

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

104        Manulife  Financial Corporation  |  2019 Annual Report  |  Consolidated Financial Statements


Consolidated Statements of Comprehensive Income

 

For the years ended December 31,

(Canadian $ in millions)

   2019              2018         

Net income

   $   5,502               $    4,887          

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

     (1,933         3,078    

Net investment hedges

     320           (428  

Available-for-sale financial securities:

          

Unrealized gains (losses) arising during the year

     2,212           (458  

Reclassification of net realized (gains) losses and impairments to net income

     (433         13    

Cash flow hedges:

          

Unrealized gains (losses) arising during the year

     (28         (34  

Reclassification of realized losses to net income

     12           16    

Share of other comprehensive income (losses) of associates

     1                 (1        

Total items that may be subsequently reclassified to net income

     151                 2,186          

Items that will not be reclassified to net income:

          

Change in pension and other post-employment plans

     76           (62  

Real estate revaluation reserve

     11                 (1        

Total items that will not be reclassified to net income

     87                 (63        

Other comprehensive income (loss), net of tax

     238                 2,123          

Total comprehensive income (loss), net of tax

   $ 5,740               $ 7,010          

Total comprehensive income (loss) attributed to:

          

Non-controlling interests

   $ 237         $ 212    

Participating policyholders

     (334         (127  

Shareholders

     5,837                 6,925          

 

Income Taxes included in Other Comprehensive Income

 

 

For the years ended December 31,

(Canadian $ in millions)

   2019              2018         

Income tax expense (recovery) on:

          

Unrealized foreign exchange gains/losses on translation of foreign operations

   $ (1       $ 1    

Unrealized foreign exchange gains/losses on net investment hedges

     39           (62  

Unrealized gains/losses on available-for-sale financial securities

     558           (151  

Reclassification of realized gains/losses and recoveries/impairments to net income on available-for-sale financial securities

     (140         26    

Unrealized gains/losses on cash flow hedges

     (20         31    

Reclassification of realized gains/losses to net income on cash flow hedges

     4                   4    

Change in pension and other post-employment plans

     18           4    

Real estate revaluation reserve

                     1          

Total income tax expense (recovery)

   $     458               $ (146        

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

Consolidated Financial Statements  |  Manulife Financial Corporation  |   2019 Annual Report        105


Consolidated Statements of Changes in Equity

 

For the years ended December 31,

(Canadian $ in millions)

   2019              2018         

Preferred shares

          

Balance, beginning of year

   $ 3,822         $ 3,577    

Issued (note 11)

               250    

Issuance costs, net of tax

                     (5        

Balance, end of year

     3,822                 3,822          

Common shares

          

Balance, beginning of year

     22,961           22,989    

Repurchased (note 11)

     (677         (269  

Issued on exercise of stock options and deferred share units

     104           59    

Issued under dividend reinvestment and share purchase plans

     739                 182          

Balance, end of year

     23,127                 22,961          

Contributed surplus

          

Balance, beginning of year

     265           277    

Exercise of stock options and deferred share units

     (20         (10  

Stock option expense

     11           10    

Impact of deferred tax asset rate change

     (2            

Acquisition of non-controlling interest

                     (12        

Balance, end of year

     254                 265          

Shareholders’ retained earnings

          

Balance, beginning of year

     12,704           10,083    

Opening adjustment at adoption of IFRS 16 (note 2)

     (19            

Net income attributed to shareholders

     5,602           4,800    

Common shares repurchased (note 11)

     (662         (209  

Preferred share dividends

     (172         (168  

Common share dividends

     (1,965               (1,802        

Balance, end of year

     15,488                 12,704          

Shareholders’ accumulated other comprehensive income (loss) (“AOCI”)

          

Balance, beginning of year

     6,212           4,087    

Change in unrealized foreign exchange gains (losses) of net foreign operations

     (1,612         2,650    

Change in actuarial gains (losses) on pension and other post-employment plans

     76           (62  

Change in unrealized gains (losses) on available-for-sale financial securities

     1,775           (443  

Change in unrealized gains (losses) on derivative instruments designated as cash flow hedges

     (16         (18  

Change in real estate revaluation reserve

     11           (1  

Share of other comprehensive income (losses) of associates

     1                 (1        

Balance, end of year

     6,447                 6,212          

Total shareholders’ equity, end of year

     49,138                 45,964          

Participating policyholders’ equity

          

Balance, beginning of year

     94           221    

Opening adjustment at adoption of IFRS 16 (note 2)

     (3            

Net income (loss) attributed to participating policyholders

     (333         (127  

Other comprehensive income attributed to policyholders

     (1                        

Balance, end of year

     (243               94          

Non-controlling interests

          

Balance, beginning of year

     1,093           929    

Net income attributed to non-controlling interests

     233           214    

Other comprehensive income (loss) attributed to non-controlling interests

     4           (2  

Contributions (distributions/disposal), net

     (119               (48        

Balance, end of year

     1,211                 1,093          

Total equity, end of year

   $  50,106               $  47,151          

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

106        Manulife  Financial Corporation  |  2019 Annual Report  |  Consolidated Financial Statements


Consolidated Statements of Cash Flows

 

For the years ended December 31,

(Canadian $ in millions)

          2019                            2018         

Operating activities

                

Net income

     $ 5,502             $ 4,887    

Adjustments:

                

Increase in insurance contract liabilities

       33,727               2,907    

Increase in investment contract liabilities

       170               35    

(Increase) decrease in reinsurance assets excluding coinsurance transactions (note 6)

       (557             893    

Amortization of (premium) discount on invested assets

       117               212    

Other amortization

       626               747    

Net realized and unrealized (gains) losses and impairment on assets

       (20,265             8,727    

Deferred income tax expense (recovery)

       (454             930    

Stock option expense

             11                                 10          

Cash provided by operating activities before undernoted items

       18,877               19,348    

Changes in policy related and operating receivables and payables

             1,665                                 (160        

Cash provided by (used in) operating activities

             20,542                                 19,188          

Investing activities

                

Purchases and mortgage advances

       (80,610             (101,172  

Disposals and repayments

       65,333               82,111    

Change in investment broker net receivables and payables

       1,159               (128  

Net cash flows from acquisition and disposal of subsidiaries and businesses

             288                                 187          

Cash provided by (used in) investing activities

             (13,830                               (19,002        

Financing activities

                

Change in repurchase agreements and securities sold but not yet purchased

       266               (189  

Redemption of long-term debt (note 9)

                     (400  

Issue of capital instruments, net (note 10)

                     597    

Redemption of capital instruments (note 10)

       (1,500             (450  

Secured borrowing from securitization transactions

       107               250    

Changes in deposits from Bank clients, net

       1,819               1,490    

Lease payments (note 2)

       (117                

Shareholders’ dividends paid in cash

       (1,398             (1,788  

Contributions from (distributions to) non-controlling interests, net

       (22             (60  

Common shares repurchased (note 11)

       (1,339             (478  

Common shares issued, net (note 11)

       104               59    

Preferred shares issued, net (note 11)

                                             245          

Cash provided by (used in) financing activities

             (2,080                               (724        

Cash and short-term securities

                

Increase (decrease) during the year

       4,632               (538  

Effect of foreign exchange rate changes on cash and short-term securities

       (466             822    

Balance, beginning of year

             15,382                                 15,098          

Balance, December 31

             19,548                                 15,382          

Cash and short-term securities

                

Beginning of year

                

Gross cash and short-term securities

       16,215               15,965    

Net payments in transit, included in other liabilities

             (833                               (867        

Net cash and short-term securities, January 1

             15,382                                 15,098          

End 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, December 31

           $ 19,548                               $ 15,382          

Supplemental disclosures on cash flow information

                

Interest received

     $ 11,549             $ 10,952    

Interest paid

       1,299               1,212    

Income taxes paid (refund)

             104                                 461          

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

Consolidated Financial Statements  |  Manulife Financial Corporation  |   2019 Annual Report        107


Notes to Consolidated Financial Statements

 

Page Number   Note     

109

 

Note 1

  Nature of Operations and Significant Accounting Policies

116

 

Note 2

  Accounting and Reporting Changes

119

 

Note 3

  Invested Assets and Investment Income

127

 

Note 4

  Derivative and Hedging Instruments

133

 

Note 5

  Goodwill and Intangible Assets

135

 

Note 6

  Insurance Contract Liabilities and Reinsurance Assets

144

 

Note 7

  Investment Contract Liabilities

145

 

Note 8

  Risk Management

151

 

Note 9

  Long-Term Debt

152

 

Note 10

  Capital Instruments

153

 

Note 11

  Share Capital and Earnings Per Share

154

 

Note 12

  Capital Management

155

 

Note 13

  Revenue from Service Contracts

156

 

Note 14

  Stock-Based Compensation

158

 

Note 15

  Employee Future Benefits

162

 

Note 16

  Income Taxes

164

 

Note 17

  Interests in Structured Entities

166

 

Note 18

  Commitments and Contingencies

168

 

Note 19

  Segmented Information

170

 

Note 20

  Related Parties

170

 

Note 21

  Subsidiaries

172

 

Note 22

  Segregated Funds

174

 

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.)

178

 

Note 24

 

Comparatives

 

108        Manulife  Financial Corporation  |  2019 Annual Report  |  Notes to Consolidated Financial Statements


Notes to Consolidated Financial Statements

(Canadian $ in millions except per share amounts or unless otherwise stated)

Note 1    Nature of Operations and Significant Accounting Policies

(a) Reporting entity

Manulife Financial Corporation (“MFC”) is a publicly traded company and the holding company of The Manufacturers Life Insurance Company (“MLI”), a Canadian life insurance company. MFC and its subsidiaries (collectively, “Manulife” or the “Company”) is a leading financial services group with principal operations in Asia, Canada and the United States. Manulife’s international network of employees, agents and distribution partners offers financial protection and wealth management products and services to personal and business clients as well as asset management services to institutional customers. The Company operates as Manulife in Canada and Asia and as John Hancock in the United States.

MFC is domiciled in Canada and incorporated under the Insurance Companies Act (Canada) (“ICA”). These Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).

These Consolidated Financial Statements should be read in conjunction with “Risk Management” in the 2019 Management’s Discussion and Analysis (“MD&A”) dealing with IFRS 7 “Financial Instruments: Disclosures” as the discussion on market risk and liquidity risk includes certain disclosures that are considered an integral part of these Consolidated Financial Statements.

These Consolidated Financial Statements as at and for the year ended December 31, 2019 were authorized for issue by MFC’s Board of Directors on February 12, 2020.

(b) Basis of preparation

The preparation of Consolidated Financial Statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities as at the date of the Consolidated Financial Statements, and the reported amounts of revenue and expenses during the reporting periods. Actual results may differ from these estimates. The most significant estimation processes relate to assumptions used in measuring insurance and investment contract liabilities, assessing assets for impairment, determining of pension and other post-employment benefit obligation and expense assumptions, determining income taxes and uncertain tax positions and fair valuation of certain invested assets. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the year in which the estimates are revised and in any future years affected. Although some variability is inherent in these estimates, management believes that the amounts recorded are appropriate. The significant accounting policies used and the most significant judgments made by management in applying these accounting policies in the preparation of these Consolidated Financial Statements are summarized below.

(c) Fair value measurement

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (not a forced liquidation or distress sale) between market participants at the measurement date, that is, an exit value.

When available, quoted market prices are used to determine fair value. If quoted market prices are not available, fair value is typically based upon alternative valuation techniques such as discounted cash flows, matrix pricing, consensus pricing services and other techniques. Broker quotes are generally used when external public vendor prices are not available.

The Company has a process in place that includes a review of price movements relative to the market, a comparison of prices between vendors, and a comparison to internal matrix pricing which uses predominately external observable data. Judgment is applied in adjusting external observable data for items including liquidity and credit factors.

The Company categorizes its fair value measurements according to a three-level hierarchy. The hierarchy prioritizes the inputs used by the Company’s valuation techniques. A level is assigned to each fair value measurement based on the lowest level input significant to the fair value measurement in its entirety. The three levels of the fair value hierarchy are defined as follows:

Level 1 – Fair value measurements that reflect unadjusted, quoted prices in active markets for identical assets and liabilities that the Company can access at the measurement date reflecting market transactions.

Level 2 – Fair value measurements using inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in inactive markets, inputs that are observable that are not prices (such as interest rates, credit risks, etc.) and inputs that are derived from or corroborated by observable market data. Most debt securities are classified within Level 2. Also, included in the Level 2 category are derivative instruments that are priced using models with observable market inputs, including interest rate swaps, equity swaps, and foreign currency forward contracts.

Level 3 – Fair value measurements using significant non-market observable inputs. These include valuations for assets and liabilities that are derived using data, some or all of which is not market observable, including assumptions about risk. Level 3 securities include less liquid securities such as real estate investment property, other invested assets, timber investments held within segregated funds, certain long-duration bonds and other securities that have little or no price transparency. Certain derivative financial instruments are also included in Level 3.

 

Notes to Consolidated Financial Statements  |  Manulife Financial Corporation  |   2019 Annual Report        109


(d) Basis of consolidation

MFC consolidates the financial statements of all entities, including certain structured entities that it controls. Subsidiaries are entities controlled by the Company. The Company has control over an entity when the Company has the power to govern the financial and operating policies of the entity, is exposed to variable returns from its activities which are significant in relation to the total variable returns of the entity and the Company is able to use its power over the entity to affect its share of variable returns. In assessing control, significant judgment is applied while considering all relevant facts and circumstances. When assessing decision-making power, the Company considers the extent of its rights relative to the management of an entity, the level of voting rights held in an entity which are potentially or presently exercisable, the existence of any contractual management agreements which may provide the Company with power over an entity’s financial and operating policies and to the extent of other parties’ ownership in an entity, if any, the possibility for de facto control being present. When assessing returns, the Company considers the significance of direct and indirect financial and non-financial variable returns to the Company from an entity’s activities in addition to the proportionate significance of such returns. The Company also considers the degree to which its interests are aligned with those of other parties investing in an entity and the degree to which it may act in its own interest.

The financial statements of subsidiaries are included in MFC’s consolidated results from the date control is established and are excluded from consolidation from the date control ceases. The initial control assessment is performed at inception of the Company’s involvement with the entity and is reconsidered at a later date if the Company acquires or loses power over key operating and financial policies of the entity; acquires additional interests or disposes of interests in the entity; the contractual arrangements of the entity are amended such that the Company’s proportionate exposure to variable returns changes; or if the Company’s ability to use its power to affect its variable returns from the entity changes.

The Company’s Consolidated Financial Statements have been prepared using uniform accounting policies for like transactions and events in similar circumstances. Intercompany balances, and income and expenses arising from intercompany transactions, have been eliminated in preparing the Consolidated Financial Statements.

Non-controlling interests are interests of other parties in the equity of MFC’s subsidiaries and are presented within total equity, separate from the equity of MFC’s shareholders. Non-controlling interests in the net income and other comprehensive income (“OCI”) of MFC’s subsidiaries are included in total net income and total OCI, respectively. An exception to this occurs where the subsidiary’s shares are required to be redeemed for cash on a fixed or determinable date, in which case other parties’ interests in the subsidiary’s capital are presented as liabilities of the Company and other parties in the subsidiary’s income and OCI are recorded as expenses of the Company.

The equity method of accounting is used to account for entities over which the Company has significant influence or joint control (“associates” or “joint ventures”), whereby the Company records its share of the associate’s or joint venture’s net assets and financial results using uniform accounting policies for similar transactions and events. Significant judgment is used to determine whether voting rights, contractual management and other relationships with the entity, if any, provide the Company with significant influence or joint control over the entity. Gains and losses on the sale of associates or joint ventures are included in income when realized, while impairment losses are recognized immediately when there is objective evidence of impairment. Gains and losses on commercial transactions with associates or joint ventures are eliminated to the extent of the Company’s interest in the associate or joint venture. Investments in associates or joint ventures are included in other invested assets on the Company’s Consolidated Statements of Financial Position.

(e) Invested assets

Invested assets that are considered financial instruments are classified as fair value through profit or loss (“FVTPL”), loans and receivables, or as available-for-sale (“AFS”) financial assets. The Company determines the classification of its financial assets at initial recognition. Invested assets are recognized initially at fair value plus, in the case of investments not at FVTPL, directly attributable transaction costs. Invested assets are classified as financial instruments at FVTPL if they are held for trading, if they are designated by management under the fair value option, or if they are designated by management when they include one or more embedded derivatives. Invested assets classified as AFS are non-derivative financial assets that do not fall into any of the other categories described above.

Valuation methods for the Company’s invested assets are described above. All fair value valuations are performed in accordance with IFRS 13 “Fair Value Measurement”. Disclosure of financial instruments carried at fair value with the three levels of the fair value hierarchy and the disclosure of the fair value for financial instruments not carried at fair value on the Consolidated Statements of Financial Position are presented in note 3. Fair value valuations are performed by the Company and by third-party service providers. When third-party service providers are engaged, the Company performs a variety of procedures to corroborate pricing information. These procedures may include, but are not limited to, inquiry and review of valuation techniques, inputs to the valuation and vendor controls reports.

Cash and short-term securities comprise of cash, current operating accounts, overnight bank and term deposits, and fixed income securities held for meeting short-term cash commitments. Short-term securities are carried at fair value. Short-term securities are comprised of investments due to mature within one year of the date of purchase. Commercial paper and discount notes are classified as Level 2 because these securities are typically not actively traded. Net payments in transit and overdraft bank balances are included in other liabilities.

 

110        Manulife  Financial Corporation  |  2019 Annual Report  |  Notes to Consolidated Financial Statements


Debt securities are carried at fair value. Debt securities are generally valued by independent pricing vendors using proprietary pricing models incorporating current market inputs for similar instruments with comparable terms and credit quality (matrix pricing). The significant inputs include, but are not limited to, yield curves, credit risks and spreads, prepayment rates and volatility of these inputs. These debt securities are classified as Level 2 but can be Level 3 if significant inputs are market unobservable. Realized gains and losses on sale of debt securities and unrealized gains and losses on debt securities designated as FVTPL are recognized in investment income immediately. Unrealized gains and losses on AFS debt securities are recorded in OCI, except for unrealized gains and losses on foreign currency translation which are included in income. Impairment losses on AFS debt securities are recognized in income on an individual security basis when there is objective evidence of impairment. Impairment is considered to have occurred, based on management’s judgment, when it is deemed probable that the Company will not be able to collect all amounts due according to the debt security’s contractual terms.

Equities are comprised of common and preferred equities and are carried at fair value. Equities are generally classified as Level 1, as fair values are normally based on quoted market prices. Realized gains and losses on sale of equities and unrealized gains and losses on equities designated as FVTPL are recognized in investment income immediately. Unrealized gains and losses on AFS equities are recorded in OCI. Impairment losses on AFS equities are recognized in income on an individual security basis when there is objective evidence of impairment. Impairment is considered to have occurred when fair value has declined below cost by a significant amount or for a prolonged period of time. Judgment is applied in determining whether the decline is significant or prolonged.

Mortgages are carried at amortized cost and are classified as Level 3 for fair value purposes due to the lack of market observability of certain significant valuation inputs. Realized gains and losses are recorded in investment income immediately. Impairment losses are recorded on mortgages when there is no longer reasonable assurance as to the timely collection of the full amount of principal and interest and are measured based on the discounted value of expected future cash flows at the original effective interest rates inherent in the mortgage. Expected future cash flows of impaired mortgages are typically determined with reference to the fair value of collateral security underlying the mortgage, net of expected costs of realization and including any applicable insurance recoveries. Significant judgment is applied in the determination of impairment including the timing and amount of future collections.

The Company accounts for insured and uninsured mortgage securitizations as secured financing transactions since the criteria for sale accounting are not met. For these transactions, the Company continues to recognize the mortgages and records a liability in other liabilities for the amounts owed at maturity. Interest income from these mortgages and interest expense on the borrowings are recorded using the effective interest rate method.

Private placements, which include corporate loans for which there is no active market, are carried at amortized cost and are generally classified as Level 2 for fair value disclosure purposes or as Level 3 if significant inputs are market unobservable. Realized gains and losses are recorded in income immediately. Impairment losses are recorded on private placements when there is no longer assurance as to the timely collection of the full amount of principal and interest. Impairment is measured based on the discounted value of expected future cash flows at the original effective interest rate inherent in the loan. Significant judgment is applied in the determination of impairment including the timing and amount of future collections.

Policy loans are carried at an amount equal to their unpaid balances and are classified as Level 2 for fair value disclosure purposes. Policy loans are fully collateralized by the cash surrender value of the underlying policies.

Loans to Manulife Bank of Canada (“Manulife Bank” or “Bank”) clients are carried at amortized cost and are classified as Level 2 for fair value disclosure purposes. A loan to a Bank client is considered impaired when there is objective evidence of impairment because of one or more loss events that have occurred after initial recognition, with a negative impact on the estimated future cash flows of the loan.

Once established, allowances for impairment of mortgages, private placements and loans to Bank clients are reversed only if the conditions that caused the impairment no longer exist. Reversals of impairment charges on AFS debt securities are only recognized in income to the extent that increases in fair value can be attributed to events after the impairment loss being recorded. Impairment losses for AFS equity instruments are not reversed through income. On disposition of an impaired asset, any allowance for impairment is released.

In addition to impairments and provisions for loan losses (recoveries) reported in investment income, the measurement of insurance contract liabilities, via investment return assumptions, includes expected future credit losses on fixed income investments. Refer to note 6(d).

Interest income is recognized on debt securities, mortgages, private placements, policy loans and loans to Bank clients as it accrues and is calculated using the effective interest rate method. Premiums, discounts and transaction costs are amortized over the life of the underlying investment using the effective yield method for all debt securities as well as mortgages and private placements.

The Company records purchases and sales of invested assets on a trade date basis, except for loans originated by the Company, which are recognized on a settlement date basis.

Real estate consists of both own use and investment property. Own use property is carried at cost less accumulated depreciation and any accumulated impairment losses. Depreciation is calculated based on the cost of an asset less its residual value and is recognized in income on a straight-line basis over the estimated useful life ranging from 30 to 60 years. Impairment losses are recorded in income to the extent the recoverable amount is less than the carrying amount. Where own use property is included in assets backing insurance contract liabilities, the fair value of the property is used in the valuation of insurance contract liabilities. Own use property is classified as Level 3 for fair value disclosure purposes.

 

Notes to Consolidated Financial Statements  |  Manulife Financial Corporation  |   2019 Annual Report        111


An investment property is a property held to earn rental income, for capital appreciation, or both. Investment properties are measured at fair value, with changes in fair value recognized in income. Fair value is determined using external appraisals that are based on the highest and best use of the property. The valuation techniques include discounted cash flows, the direct capitalization method as well as comparable sales analysis and include both observable and unobservable inputs. Inputs include existing and assumed tenancies, market data from recent comparable transactions, future economic outlook and market risk assumptions, capitalization rates and internal rates of return. Investment properties are classified as Level 3 for fair value disclosure purposes.

When a property changes from own use to investment property, any gain or loss arising on the remeasurement of the property to fair value at the date of transfer is recognized in OCI, to the extent that it is not reversing a previous impairment loss. Reversals of impairment losses are recognized in income.

Other invested assets include private equity and property investments held in infrastructure and timber, as well as in agriculture and oil and gas sectors. Private equity investments are accounted for as associates or joint ventures using the equity method (as described in note 1(d) above) or are classified as FVTPL or AFS and carried at fair value. Investments in oil and gas exploration and evaluation activities are measured on the cost basis using the “successful efforts” method. Timber and agriculture properties are measured at fair value with changes in fair value recognized in income, except for buildings, equipment and bearer plants which are measured at amortized cost. The fair value of other invested assets is determined using a variety of valuation techniques as described in note 3. Other invested assets that are measured or disclosed at fair value are classified as Level 3.

Other invested assets also include investments in leveraged leases, which are accounted for using the equity method. The carrying value under the equity method reflects the amortized cost of the lease receivable and related non-recourse debt using the effective yield method.

(f) Goodwill and intangible assets

Goodwill represents the difference between the fair value of purchase consideration of an acquired business and the Company’s proportionate share of the net identifiable assets acquired. It is initially recorded at cost and subsequently measured at cost less any accumulated impairment.

Goodwill is tested for impairment at least annually and whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable at the cash generating unit (“CGU”) or group of CGUs level. The Company allocates goodwill to CGUs or groups of CGUs for impairment testing based on the lowest level within the entity in which the goodwill is monitored for internal management purposes. The allocation is made to those CGUs or groups of CGUs that are expected to benefit from the business combination in which the goodwill arose. Any potential impairment of goodwill is identified by comparing the recoverable amount with the carrying value of a CGU or group of CGUs. Goodwill is reduced by the amount of deficiency, if any. If the deficiency exceeds the carrying amount of goodwill, the carrying values of the remaining assets in the CGU or group of CGUs are subject to being reduced by the excess on a pro-rata basis.

The recoverable amount of a CGU is the higher of the estimated fair value less costs to sell or the value-in-use of the CGU. In assessing value-in-use, estimated future cash flows are discounted using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In some cases, the most recent detailed calculation made in a prior period of the recoverable amount of a CGU is used in the testing of impairment of goodwill in the current period. This is the case only if there are no significant changes to the CGU, the likelihood of impairment is remote based on the analysis of current events and circumstances, and the most recently calculated recoverable amount substantially exceeds the current carrying amount of the CGU.

Intangible assets with indefinite useful lives include the John Hancock brand name, certain investment management contracts and agricultural water rights. The indefinite useful life assessment for brand is based on the brand name being protected in markets where branded products are sold by trademarks, which are renewable indefinitely, and for certain investment management contracts due to the ability to renew these contracts indefinitely. In addition, there are no legal, regulatory or contractual provisions that limit the useful lives of these intangible assets. An intangible asset with an indefinite useful life is not amortized but is subject to an annual impairment test which is performed more frequently if an indication that it is not recoverable arises.

Intangible assets with finite useful lives include acquired distribution networks, customer relationships, capitalized software, certain investment management contracts and other contractual rights. Distribution networks, customer relationships, and other finite life intangible assets are amortized over their estimated useful lives, six to 68 years, either based on straight-line or in relation to other asset consumption metrics. Software intangible assets are amortized on a straight-line basis over their estimated useful lives of three to five years. Finite life intangible assets are assessed for indicators of impairment at each reporting period. If any indication of impairment exists, these assets are subject to an impairment test.

(g) Miscellaneous assets

Miscellaneous assets include assets held in a rabbi trust with respect to unfunded defined benefit obligations, defined benefit assets, if any (refer to note 1(o)), deferred acquisition costs and capital assets. Deferred acquisition costs are carried at cost less accumulated amortization. These costs are recognized over the period where redemption fees may be charged or over the period revenue is earned. Capital assets are carried at cost less accumulated amortization computed on a straight-line basis over their estimated useful lives, which vary from two to 10 years.

 

112        Manulife  Financial Corporation  |  2019 Annual Report  |  Notes to Consolidated Financial Statements


(h) Segregated funds

The Company manages segregated funds on behalf of policyholders. The investment returns on these funds are passed directly to policyholders. In some cases, the Company has provided guarantees associated with these funds.

Segregated funds net assets are measured at fair value and include investments in mutual funds, debt securities, equities, cash, short-term investments and other investments. With respect to the consolidation requirement of IFRS, in assessing the Company’s degree of control over the underlying investments, the Company considers the scope of its decision-making rights, the rights held by other parties, its remuneration as an investment manager and its exposure to variability of returns. The Company has determined that it does not have control over the underlying investments as it acts as an agent on behalf of segregated fund policyholders.

The methodology applied to determine the fair value of investments held in segregated funds is consistent with that applied to invested assets held by the general fund, as described above in note 1(e). Segregated funds liabilities are measured based on the value of the segregated funds net assets. Investment returns on segregated funds assets belong to policyholders and the Company does not bear the risk associated with these assets outside of guarantees offered on certain variable life and annuity products, for which the underlying investments are held within segregated funds. Accordingly, investment income earned by segregated funds and expenses incurred by segregated funds are offset and are not separately presented in the Consolidated Statements of Income. Fee income earned by the Company for managing the segregated funds is included in other revenue.

Liabilities related to guarantees associated with certain segregated funds, as a result of certain variable life and annuity contracts, are recorded within the Company’s insurance contract liabilities. The Company holds assets supporting these guarantees in the general fund, which are included in invested assets according to their investment type.

(i) Insurance and investment contract liabilities

Most contracts issued by the Company are considered insurance, investment or service contracts. Contracts under which the Company accepts significant insurance risk from a policyholder are classified as insurance contracts in the Consolidated Financial Statements. A contract is considered to have significant insurance risk if, and only if, an insured event could cause an insurer to make significant additional payments in any scenario, excluding scenarios that lack commercial substance at the inception of the contract. Contracts under which the Company does not accept significant insurance risk are either classified as investment contracts or considered service contracts and are accounted for in accordance with IAS 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.

Investment contract liabilities include contracts issued to retail and institutional investors that do not contain significant insurance risk. Investment contract liabilities and deposits are measured at amortized cost or at fair value by election. The election reduces accounting mismatches between assets supporting these contracts and the related policy liabilities. Investment contract liabilities are derecognized when the contract expires, is discharged or is cancelled.

Derivatives embedded within insurance contracts are separately accounted for as derivatives if they are not considered to be closely related to the host insurance contract and do not meet the definition of an insurance contract. These embedded derivatives are presented separately in other assets or other liabilities and are measured at fair value with changes in fair value recognized in income.

(j) Reinsurance assets

The Company uses reinsurance in the normal course of business to manage its risk exposure. Insurance ceded to a reinsurer does not relieve the Company from its obligations to policyholders. The Company remains liable to its policyholders for the portion reinsured to the extent that any reinsurer does not meet its obligations for reinsurance ceded to it under a reinsurance agreement.

Reinsurance assets represent the benefit derived from reinsurance agreements in-force at the reporting date, considering the financial condition of the reinsurer. Amounts recoverable from reinsurers are estimated in accordance with the terms of the relevant reinsurance contract.

Gains or losses on reinsurance transactions are recognized in income immediately on the transaction date and are not amortized. Premiums ceded and claims reimbursed are presented on a gross basis on the Consolidated Statements of Income. Reinsurance assets are not offset against the related insurance contract liabilities and are presented separately on the Consolidated Statements of Financial Position. Refer to note 6(a).

 

Notes to Consolidated Financial Statements  |  Manulife Financial Corporation  |   2019 Annual Report        113


(k) Other financial instruments accounted for as liabilities

The Company issues a variety of other financial instruments classified as liabilities, including notes payable, term notes, senior notes, senior debentures, subordinated notes, surplus notes and preferred shares. These financial liabilities are measured at amortized cost, with issuance costs deferred and amortized using the effective interest rate method.

(l) Income taxes

The provision for income taxes is calculated based on income tax laws and income tax rates substantively enacted as at the date of the Consolidated Statements of Financial Position. The income tax provision is comprised of current income taxes and deferred income taxes. Current and deferred income taxes relating to items recognized in OCI and directly in equity are similarly recognized in OCI and directly in equity, respectively.

Current income taxes are amounts expected to be payable or recoverable for the current year and any adjustments to taxes payable in respect of previous years.

Deferred income taxes are provided for using the liability method and result from temporary differences between the carrying values of assets and liabilities and their respective tax bases. Deferred income taxes are measured at the substantively enacted tax rates that are expected to be applied to temporary differences when they reverse.

A deferred tax asset is recognized to the extent that future realization of the tax benefit is probable. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the tax benefit will be realized. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax assets and liabilities and they relate to income taxes levied by the same tax authority on the same taxable entity.

Deferred tax liabilities are recognized for all taxable temporary differences, except in respect of taxable temporary differences associated with investments in subsidiaries, associates and joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

The Company records liabilities for uncertain tax positions if it is probable that the Company will make a payment on tax positions due to examinations by tax authorities. These provisions are measured at the Company’s best estimate of the amount expected to be paid. Provisions are reversed to income in the period in which management assesses they are no longer required or determined by statute.

The Company is subject to income tax laws in various jurisdictions. Tax laws are complex and potentially subject to different interpretations by the taxpayer and the relevant tax authority. The provision for current income taxes and deferred income taxes represents management’s interpretation of the relevant tax laws and its estimate of current and future income tax implications of the transactions and events during the year. The Company may be required to change its provision for income taxes or deferred income tax balances when the ultimate deductibility of certain items is successfully challenged by taxing authorities, or if estimates used in determining the amount of deferred tax balances to recognize change significantly, or when receipt of new information indicates the need for adjustment in the amount of deferred income taxes to be recognized. Additionally, future events, such as changes in tax laws, tax regulations, or interpretations of such laws or regulations, could have an impact on the provision for income taxes, deferred tax balances and the effective tax rate. Any such changes could materially affect the amounts reported in the Consolidated Financial Statements in the period these changes occur.

(m) Foreign currency translation

Items included in the financial statements of each of the Company’s subsidiaries, joint ventures and associates are measured by each entity using the currency of the primary economic environment in which the entity operates (the “functional currency”). If their functional currency is other than Canadian dollar, these entities are foreign operations of the Company.

Transactions in a foreign currency are translated to the functional currency at the exchange rate prevailing at the date of the transaction. Assets and liabilities denominated in foreign currencies are translated to the functional currency at the exchange rate in effect at the reporting date. Revenue and expenses denominated in foreign currencies are translated at the average exchange rate prevailing during the quarter reported. Exchange gains and losses are recognized in income except for translation of net investments in foreign operations and the results of hedging these positions, and for non-monetary items designated as AFS. These foreign exchange gains and losses are recognized in OCI until such time that the foreign operation or non-monetary item is disposed of or control or significant influence over it is lost.

The Consolidated Financial Statements are presented in Canadian dollars. The financial statements of the Company’s foreign operations are translated from their functional currencies to Canadian dollars; assets and liabilities are translated at the exchange rate at the reporting date, and revenue and expenses are translated using the average exchange rates for the period. These foreign exchange gains and losses are included in OCI.

(n) Stock-based compensation

The Company provides stock-based compensation to certain employees and directors as described in note 14. Compensation expense of equity instruments is accrued based on the best estimate of the number of instruments expected to vest, with revisions made to that estimate if subsequent information indicates that actual forfeitures are likely to differ from initial estimates, unless forfeitures are due to market-based conditions.

 

114        Manulife  Financial Corporation  |  2019 Annual Report  |  Notes to Consolidated Financial Statements


Stock options are expensed with a corresponding increase in contributed surplus. Restricted share units and deferred share units are expensed with a corresponding liability accrued based on the market value of MFC’s common shares at the end of each quarter. Performance share units are expensed with a corresponding liability accrued based on specific performance conditions and the market value of MFC’s common shares at the end of each quarter. The change in the value of the awards resulting from changes in the market value of MFC’s common shares or changes in the specific performance conditions and credited dividends is recognized in income, offset by the impact of total return swaps used to manage the variability of the related liability.

Stock-based compensation cost is recognized over the applicable vesting period, unless the employee is eligible to retire at the time of grant or will be eligible to retire during the vesting period. Compensation cost, attributable to stock options, restricted share units, and performance share units granted to employees who are eligible to retire on the grant date or who will become eligible to retire during the vesting period, is recognized at the grant date or over the period from the grant date to the date of retirement eligibility, respectively.

The Company’s contributions to the Global Share Ownership Plan (“GSOP”) (refer to note 14(d)), are expensed as incurred. Under the GSOP, subject to certain conditions, the Company will match a percentage of an employee’s eligible contributions to certain maximums. All contributions are used by the plan’s trustee to purchase MFC common shares in the open market.

(o) Employee future benefits

The Company maintains defined contribution and defined benefit pension plans and other post-employment plans for employees and agents including registered (tax qualified) pension plans that are typically funded as well as supplemental non-registered (non-qualified) pension plans for executives, retiree and disability welfare plans that are typically not funded.

The Company’s obligation in respect of defined benefit pension and other post-employment benefits is calculated for each plan as the estimated present value of future benefits that eligible employees have earned in return for their service up to the reporting date using the projected benefit method. The discount rate used is based on the yield, as at the reporting date, of high-quality corporate debt securities that have approximately the same term as the obligations and that are denominated in the same currency in which the benefits are expected to be paid.

To determine the Company’s net defined benefit asset or liability, the fair value of plan assets is deducted from the defined benefit obligations. When this calculation results in a surplus, the asset that can be recognized is limited to the present value of future economic benefit available in the form of future refunds from the plan or reductions in future contributions to the plan (the asset limit). Defined benefit assets are included in other assets and defined benefit liabilities are included in other liabilities.

Changes in the net defined benefit asset or liability due to re-measurement of pension and retiree welfare plans are recorded in OCI in the period in which they occur and are not reclassified to income in subsequent periods. They consist of actuarial gains and losses, the impact of the asset limit, if any, and the return on plan assets, excluding amounts included in net interest income or expense. Changes in the net defined benefit asset or liability due to re-measurement of disability welfare plans are recorded in income in the period in which they occur.

The cost of defined benefit pension plans is recognized over the employee’s years of service to retirement while the cost of retiree welfare plans is recognized over the employee’s years of service to their date of full eligibility. The net benefit cost for the year is recorded in income and is calculated as the sum of the service cost in respect of the fiscal year, the net interest income or expense and any applicable administration expenses, plus past service costs or credits resulting from plan amendments or curtailments. The net interest income or expense is determined by applying the discount rate to the net defined benefit asset or liability. The current year cost of disability welfare plans is the year-over-year change in the defined benefit obligation, including any actuarial gains or losses.

The cost of defined contribution plans is the contribution provided by the Company and is recorded in income in the periods during which services are rendered by employees.

(p) Derivative and hedging instruments

The Company uses derivative financial instruments (“derivatives”) including swaps, forward and futures agreements, and options to manage current and anticipated exposures to changes in interest rates, foreign exchange rates, commodity prices and equity market prices, and to replicate permissible investments. Derivatives embedded in other financial instruments are separately recorded as derivatives when their economic characteristics and risks are not closely related to those of the host instrument, the terms of the embedded derivative are the same as those of a standalone derivative and the host instrument itself is not recorded at FVTPL. Derivatives are recorded at fair value. Derivatives with unrealized gains are reported as derivative assets and derivatives with unrealized losses are reported as derivative liabilities.

A determination is made for each derivative as to whether to apply hedge accounting. Where hedge accounting is not applied, changes in the fair value of derivatives are recorded in investment income. Refer to note 3(c).

Where the Company has elected to apply hedge accounting, a hedging relationship is designated and documented at inception. Hedge effectiveness is evaluated at inception and throughout the term of the hedge. Hedge accounting is only applied when the Company expects that the hedging relationship will be highly effective in achieving offsetting changes in fair value or changes in cash flows attributable to the risk being hedged. The assessment of hedge effectiveness is performed at the end of each reporting period both prospectively and retrospectively. When it is determined that a hedging relationship is no longer effective, or the hedging instrument or the hedged item has been sold or terminated, the Company discontinues hedge accounting prospectively. In such cases,

 

Notes to Consolidated Financial Statements  |  Manulife Financial Corporation  |   2019 Annual Report        115


if the derivatives are not sold or terminated, any subsequent changes in fair value of the derivatives are recognized in investment income.

For derivatives that are designated as hedging instruments, changes in fair value are recorded according to the nature of the risks being hedged, as discussed below.

In a fair value hedging relationship, changes in fair value of the hedging instruments are recorded in investment income, offsetting changes in fair value of the hedged items, which would otherwise not be carried at fair value. Hedge ineffectiveness is recognized in investment income and arises from differences between changes in the fair values of hedging instruments and hedged items. When hedge accounting is discontinued, the carrying value of the hedged item is no longer adjusted and the cumulative fair value adjustments are amortized to investment income over the remaining term of the hedged item unless the hedged item is sold, at which time the balance is recognized immediately in investment income.

In a cash flow hedging relationship, the effective portion of the change in the fair value of the hedging instrument is recorded in OCI while the ineffective portion is recognized in investment income. Gains and losses in accumulated other comprehensive income (“AOCI”) are recognized in income during the same periods as the variability in the hedged cash flows or the hedged forecasted transactions are recognized in income. The reclassifications from AOCI are made to investment income, except for total return swaps that hedge restricted share units, which are reclassified to general expenses.

Gains and losses on cash flow hedges in AOCI are reclassified immediately to investment income when the hedged item is sold or the forecasted transaction is no longer expected to occur. When a hedge is discontinued, but the hedged forecasted transaction is expected to occur, the amounts in AOCI are reclassified to investment income in the periods during which variability in the cash flows hedged or the hedged forecasted transaction is recognized in income.

In a net investment in foreign operations hedging relationship, gains and losses relating to the effective portion of the hedge are recorded in OCI. Gains and losses in AOCI are recognized in income during the periods when gains or losses on the underlying hedged net investment in foreign operations are recognized in income.

(q) Premium income and related expenses

Gross premiums for all types of insurance contracts, and contracts with limited mortality or morbidity risk, are generally recognized as revenue when due. Premiums are reported gross of reinsurance ceded (refer to note 6).

(r) Revenue from service contracts

The Company recognizes revenue from service contracts in accordance with IFRS 15. The Company’s service contracts generally impose single performance obligations, each consisting of a series of similar related services for each customer. Revenue is recorded as performance obligations are satisfied over time because the customers simultaneously receive and consume the benefits of the services rendered, measured using an output method. Revenue for variable consideration is recognized to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty is subsequently resolved. Refer to note 13.

Note 2    Accounting and Reporting Changes

(a) Changes in accounting and reporting policy

(i) IFRS 16 “Leases”

Effective January 1, 2019, the Company adopted IFRS 16 “Leases” which was issued in January 2016 and replaces IAS 17 “Leases” and IFRIC 4 “Determining whether an arrangement contains a lease”. IFRS 16 sets out principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract. The standard brings most leases on-balance sheet under a single model and eliminates the previous classifications of operating and finance leases. Exemptions to this treatment are for lease contracts with low value assets or leases with duration of less than one year. Lessor accounting largely remains unchanged with previous classifications of operating and finance leases continuing.

The Company adopted IFRS 16 using the modified retrospective method with no restatement of comparative information. Right-of-use assets of $381 and lease liabilities of $410 were recognized within miscellaneous assets and other liabilities in the Consolidated Statements of Financial Position, respectively. The net post-tax impact of these adjustments was $22, of which $19 was recognized in shareholders’ retained earnings and $3 was recognized in participating policyholders’ equity. The assets and liabilities arise primarily from real estate lease contracts.

The Company applied the practical expedient of not reviewing lease classification under IFRS 16 for contracts not previously classified as leases. In addition, the Company has elected to expense lease payments on a straight-line basis for all leases with lease term of 12 months or less or the underlying asset has a low value.

(ii) IFRS Interpretation Committee (“IFRIC”) Interpretation 23 “Uncertainty over Income Tax Treatments”

Effective January 1, 2019, the Company adopted IFRIC 23 “Uncertainty over Income Tax Treatments” which was issued in June 2017. IFRIC 23 was applied retrospectively. IFRIC 23 provides guidance on applying the recognition and measurement requirements in IAS 12 when there is uncertainty over income tax treatments including whether uncertain tax treatments should be considered together or separately based on which approach better predicts resolution of the uncertainty. Adoption of IFRIC 23 did not have a significant impact on the Company’s Consolidated Financial Statements.

 

116        Manulife  Financial Corporation  |  2019 Annual Report  |  Notes to Consolidated Financial Statements


(iii) Amendments to IAS 28 “Investments in Associates and Joint Ventures”

Effective January 1, 2019, the Company adopted the amendments to IAS 28 “Investments in Associates and Joint Ventures” which were issued in October 2017. The amendments were applied retrospectively. The amendments clarify that an entity applies IFRS 9 “Financial Instruments” to financial interests in an associate or joint venture, aside from investments in equity, to which the equity method is not applied. IAS 39 will be applied to these interests until IFRS 9 is adopted. Adoption of these amendments did not have a significant impact on the Company’s Consolidated Financial Statements.

(iv) Annual Improvements 2015–2017 Cycle

Effective January 1, 2019, the Company adopted amendments issued within the Annual Improvements 2015 – 2017 Cycle which was issued in December 2017. The IASB issued four minor amendments to different standards as part of the Annual Improvements process, with the amendments to be applied prospectively. Adoption of these amendments did not have a significant impact on the Company’s Consolidated Financial Statements.

(v) Amendments to IAS 19 “Employee Benefits”

Effective January 1, 2019, the Company adopted amendments to IAS 19 “Employee Benefits” which were issued in February 2018. The amendments were applied prospectively. The amendments address the accounting for a plan amendment, curtailment or settlement that occurs within a reporting period. Updated actuarial assumptions must be used to determine current service cost and net interest for the remainder of the reporting period after such an event. The amendments also address how the accounting for asset ceilings are affected by such an event. Adoption of these amendments did not have a significant impact on the Company’s Consolidated Financial Statements.

(b) Future accounting and reporting changes

(i) IFRS 9 “Financial Instruments”

IFRS 9 “Financial Instruments” was issued in November 2009 and amended in October 2010, November 2013 and July 2014, and is effective for years beginning on or after January 1, 2018, to be applied retrospectively, or on a modified retrospective basis. Additionally, the IASB issued amendments in October 2017 that are effective for annual periods beginning on or after January 1, 2019. In June 2019, the exposure draft published for IFRS 17 proposed to extend the deferral date of IFRS 9 by one year to January 1, 2022.

The standard is intended to replace IAS 39 “Financial Instruments: Recognition and Measurement”.

The project has been divided into three phases: classification and measurement, impairment of financial assets, and hedge accounting. IFRS 9’s current classification and measurement methodology provides that financial assets are measured at either amortized cost or fair value on the basis of the entity’s business model for managing the financial assets and the contractual cash flow characteristics of the financial assets. The classification and measurement for financial liabilities remains generally unchanged; however, for a financial liability designated as at fair value through profit or loss, revisions have been made in the accounting for changes in fair value attributable to changes in the credit risk of that liability. Gains or losses caused by changes in an entity’s own credit risk on such liabilities are no longer recognized in profit or loss but instead are reflected in OCI.

Revisions to hedge accounting were issued in November 2013 as part of the overall IFRS 9 project. The amendment introduces a new hedge accounting model, together with corresponding disclosures about risk management activity for those applying hedge accounting. The new model represents a substantial overhaul of hedge accounting that will enable entities to better reflect their risk management activities in their financial statements.

Revisions issued in July 2014 replace the existing incurred loss model used for measuring the allowance for credit losses with an expected loss model. Changes were also made to the existing classification and measurement model designed primarily to address specific application issues raised by early adopters of the standard. They also address the income statement accounting mismatches and short-term volatility issues which have been identified as a result of the insurance contracts project.

The Company elected to defer IFRS 9 until January 1, 2021 as allowed under IFRS 4 “Insurance Contracts”. The Company is assessing the impact of this standard.

(ii) IFRS 17 “Insurance Contracts”

IFRS 17 was issued in May 2017 and is effective for years beginning on January 1, 2021, to be applied retrospectively. If full retrospective application to a group of contracts is impractical, the modified retrospective or fair value methods may be used. The standard will replace IFRS 4 “Insurance Contracts” and will materially change the recognition and measurement of insurance contracts and the corresponding presentation and disclosures in the Company’s Financial Statements.

Exposure Draft Amendments to IFRS 17 was published in June 2019, which proposed a number of targeted amendments for public consultation. The proposed amendments include a deferral of the effective date of IFRS 17 by one year, to January 1, 2022. The proposed amendments are subject to IASB’s re-deliberation process which is expected to conclude in mid-2020. The Company will continue to monitor IASB’s future developments related to IFRS 17.

IFRS 17 requires entities to measure insurance contract liabilities on the balance sheet as the total of (a) the fulfillment cash flows – the current estimates of amounts that the Company expects to collect from premiums and pay out for claims, benefits and expenses, including an adjustment for the timing and risk for those amounts; and (b) the contractual service margin – the future profit for providing insurance coverage.

 

Notes to Consolidated Financial Statements  |  Manulife Financial Corporation  |   2019 Annual Report        117


The principles underlying IFRS 17 differ from the CALM as permitted by IFRS 4. While there are many differences, the following outlines two of the key differences:

 

   

Under IFRS 17, the discount rate used to estimate the present value of insurance liabilities is based on the characteristics of the liability, whereas under CALM, the Company uses the rates of returns for current and projected assets supporting policy liabilities to value the liabilities. The difference in the discount rate approach also impacts the timing of investment-related experience earnings emergence. Under CALM, investment-related experience includes investment experience and the impact of investing activities. The impact of investing activities is directly related to the CALM methodology. Under IFRS 17, the impact of investing activities will emerge over the life of the new asset.

 

   

Under IFRS 17, new business gains are recorded on the Consolidated Statements of Financial Position and amortized into income as services are provided. Under CALM, new business gains (and losses) are recognized in income immediately.

The Company is assessing the implications of this standard including proposed amendments and expects that it will have a significant impact on the Company’s Consolidated Financial Statements. In addition, in certain jurisdictions, including Canada, it could have a material effect on tax and regulatory capital positions and other financial metrics that are dependent upon IFRS accounting values.

(iii) Amendments to IFRS 3 “Business Combinations”

Amendments to IFRS 3 “Business Combinations” were issued in October 2018 and are effective for business combinations occurring on or after January 1, 2020, with earlier application permitted. The amendments revise the definition of a business and permit a simplified assessment of whether an acquired set of activities and assets qualifies as a business. Application of the amendments are expected to result in fewer acquisitions qualifying as business combinations. Adoption of these amendments is not expected to have a significant impact on the Company’s Consolidated Financial Statements.

(iv) Amendments to IAS 1 “Presentation of Financial Statements” and IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors”

Amendments to IAS 1 “Presentation of Financial Statements” and IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors” were issued in October 2018. The amendments are effective for annual periods beginning on or after January 1, 2020 and are to be applied prospectively. The amendments update the definition of material. Adoption of these amendments is not expected to have a significant impact on the Company’s Consolidated Financial Statements.

(v) Interest Rate Benchmark Reform Amendments to IFRS 9, IAS 39 and IFRS 7

Amendments to IFRS 9, IAS 39 and IFRS 7 were issued in September 2019 related to interest rate benchmark reform and are effective retrospectively for annual periods beginning on or after January 1, 2020. The amendments provide temporary relief for hedge accounting to continue during the period of uncertainty before replacement of an existing interest rate benchmark with an alternative risk-free rate. The amendments apply to all hedge accounting relationships that are affected by the interest rate benchmark reform. The IASB is expected to issue further guidance addressing various accounting issues that will arise when the existing interest rate benchmark has been replaced. The Company is assessing the implications of these amendments.

 

118        Manulife  Financial Corporation  |  2019 Annual Report  |  Notes to Consolidated Financial Statements


Note 3    Invested Assets and Investment Income

(a) Carrying values and fair values of invested assets

 

As at December 31, 2019    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

     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(8)

                   1,926        1,926        3,275  

Investment property

                   11,002        11,002        11,002  

Other invested assets

              

Alternative long-duration assets(9),(10)

     15,252        99        9,492        24,843        25,622  

Various other (11)

     149               3,768        3,917        3,918  

Total invested assets

   $   203,627      $   47,789      $   127,111      $   378,527      $   386,496  
As at December 31, 2018      FVTPL(1)        AFS(2)        Other(3)       
Total carrying
value(4)
 
 
    
Total fair
value(5)
 
 

Cash and short-term securities(6)

   $ 1,080      $ 10,163      $ 4,972      $ 16,215      $ 16,215  

Debt securities(7)

              

Canadian government and agency

     16,445        7,342               23,787        23,787  

U.S. government and agency

     11,934        13,990               25,924        25,924  

Other government and agency

     16,159        4,101               20,260        20,260  

Corporate

     107,425        5,245               112,670        112,670  

Mortgage/asset-backed securities

     2,774        179               2,953        2,953  

Public equities

     16,721        2,458               19,179        19,179  

Mortgages

                   48,363        48,363        48,628  

Private placements

                   35,754        35,754        36,103  

Policy loans

                   6,446        6,446        6,446  

Loans to Bank clients

                   1,793        1,793        1,797  

Real estate

              

Own use property(8)

                   2,016        2,016        3,179  

Investment property

                   10,761        10,761        10,761  

Other invested assets

              

Alternative long-duration assets(9),(10)

     14,720        101        8,617        23,438        24,211  

Various other (11)

     151               3,954        4,105        4,104  

Total invested assets

   $ 187,409      $ 43,579      $ 122,676      $ 353,664      $ 356,217  

 

(1)

FVTPL classification was elected for securities backing insurance contract liabilities to substantially reduce any accounting mismatch arising from changes in the fair value of these assets and changes in the value of the related insurance contract liabilities. If this election had not been made and instead the AFS classification was selected, there would be an accounting mismatch because changes in insurance contract liabilities are recognized in net income rather than in OCI.

(2)

Securities that are designated as AFS are not actively traded by the Company but sales do occur as circumstances warrant. Such sales result in a reclassification of any accumulated unrealized gain (loss) in AOCI to net income as a realized gain (loss).

(3)

Primarily includes assets classified as loans and carried at amortized cost, own use properties, investment properties, equity method accounted investments, oil and gas investments, and leveraged leases. Refer to note 1(e) for further details regarding accounting policy.

(4)

Fixed income invested assets above include debt securities, mortgages, private placements and approximately $179 (2018 – $116) other invested assets, which primarily have contractual cash flows that qualify as SPPI. Fixed income invested assets which do not have SPPI qualifying cash flows as at December 31, 2019 include debt securities, private placements and other invested assets with fair values of $98, $257 and $373, respectively (2018 – $105, $230 and $465). The change in the fair value of these invested assets during the year was $71 (2018 – $21).

(5)

The methodologies used in determining fair values of invested assets are described in note 1(c) and note 3(g).

(6)

Includes short-term securities with maturities of less than one year at acquisition amounting to $3,806 (2018 – $2,530), cash equivalents with maturities of less than 90 days at acquisition amounting to $11,136 (2018 – $8,713) and cash of $5,358 (2018 – $4,972).

(7)

Debt securities include securities which were acquired with maturities of less than one year and less than 90 days of $537 and $69, respectively (2018 – $870 and $40, respectively).

(8)

Includes accumulated depreciation of $414 (2018 – $391).

(9)

Alternative long-duration assets (“ALDA”) include investments in private equity of $6,396, infrastructure of $8,854, oil and gas of $3,245, timber and agriculture of $4,669 and various other invested assets of $1,679 (2018 – $6,769, $7,970, $3,416, $4,493 and $790, respectively). During the year, a group of investments in hydro-electric power of $418 was sold. This group of investments was previously classified as held for sale.

(10)

In 2019, the Company sold $1,112 of North American Private Equity investments to Manulife Private Equity Partners, L.P, a closed-end pooled fund of funds. The Company provides management services to the fund. In 2018, the Company sold the following invested assets to related parties: $1,422 of infrastructure ALDA was sold to the John Hancock Infrastructure Master Fund L.P. in the USA, an associate of the Company which is a structured entity based on partnership voting rights, the Company provides management services to the fund and owns less than 1% of the ownership interest; $510 of U.S. commercial real estate was sold to the Manulife US Real Estate Investment Trust in Singapore, an associate of the Company which is a structured entity based on unitholder voting rights, the Company provides

 

Notes to Consolidated Financial Statements  |  Manulife Financial Corporation  |   2019 Annual Report        119


  management services to the trust and owns approximately 8.5% of its units; and $1,314 of U.S. commercial real estate was sold to three joint ventures which are structured entities based on voting rights.
(11)

Includes $3,371 (2018 – $3,575) 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.

 

     2019            2018  
As at December 31,    Carrying
value
     % of total            Carrying
value
    % of total  

Leveraged leases

   $   3,371        43        $   3,575       51  

Timber and agriculture

     668        9          599       9  

Real estate

     1,031        13          725       11  

Other

     2,716        35          1,959       29  

Total

   $ 7,786        100        $ 6,858       100  

The Company’s share of profit and dividends from these investments for the year ended December 31, 2019 were $369 and $5, respectively (2018 – $369 and $13).

 

120        Manulife  Financial Corporation  |  2019 Annual Report  |  Notes to Consolidated Financial Statements


(c) Investment income

 

For the year ended December 31, 2019   

 

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  

Recovery (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 (impairment loss), 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  

 

Notes to Consolidated Financial Statements  |  Manulife Financial Corporation  |   2019 Annual Report        121


For the year ended December 31, 2018    FVTPL      AFS      Other(1)      Total  

Cash and short-term securities

           

Interest income

   $ 18      $ 250      $      $ 268  

Gains (losses)(2)

     (74      62               (12

Debt securities

           

Interest income

     5,432        646               6,078  

Gains (losses)(2)

     (5,993      (310             (6,303

Recovery (impairment loss), net

     18                      18  

Public equities

           

Dividend income

     484        72               556  

Gains (losses)(2)

     (1,596      330               (1,266

Impairment loss, net

            (43             (43

Mortgages

           

Interest income

                   1,824        1,824  

Gains (losses)(2)

                   56        56  

Provision, net

                   (8      (8

Private placements

           

Interest income

                   1,729        1,729  

Gains (losses)(2)

                   (83      (83

Impairment loss, net

                   (10      (10

Policy loans

                   371        371  

Loans to Bank clients

           

Interest income

                   81        81  

Provision, net

                   (1      (1

Real estate

           

Rental income, net of depreciation(3)

                   515        515  

Gains (losses)(2)

                   445        445  

Derivatives

           

Interest income, net

     689               (33      656  

Gains (losses)(2)

     (2,251             27        (2,224

Other invested assets

           

Interest income

                   74        74  

Oil and gas, timber, agriculture and other income

                   1,758        1,758  

Gains (losses)(2)

     283               (110      173  

Impairment loss, net

     (2      (4      (114      (120

Total investment income

   $ (2,992    $   1,003      $   6,521      $ 4,532  

Investment income

           

Interest income

   $ 6,139      $ 896      $ 4,046      $   11,081  

Dividend, rental and other income

     484        72        2,273        2,829  

Impairments, provisions and recoveries, net

     16        (47      (133      (164

Other

     (271      58        27        (186
       6,368        979        6,213        13,560  

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

           

Debt securities

     (6,012      18               (5,994

Public equities

     (1,454      10               (1,444

Mortgages

                   55        55  

Private placements

                   (83      (83

Real estate

                   449        449  

Other invested assets

     357        (4      (140      213  

Derivatives, including macro equity hedging program

     (2,251             27        (2,224
       (9,360      24        308        (9,028

Total investment income

   $   (2,992)      $ 1,003      $ 6,521      $ 4,532  

 

(1)

Primarily includes investment income on loans carried at amortized cost, own use properties, investment properties, derivative and hedging instruments in cash flow hedging relationships, equity method accounted investments, oil and gas investments, and leveraged leases.

(2)

Includes net realized and unrealized gains (losses) for financial instruments at FVTPL, real estate investment properties, and other invested assets measured at fair value. Also includes net realized gains (losses) for financial instruments at AFS and other invested assets carried at amortized cost.

(3)

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

 

122        Manulife  Financial Corporation  |  2019 Annual Report  |  Notes to Consolidated Financial Statements


(d) Investment expenses

The following table presents total investment expenses.

 

For the years ended December 31,    2019      2018  

Related to invested assets

   $ 627      $ 638  

Related to segregated, mutual and other funds

     1,121        1,070  

Total investment expenses

   $   1,748      $   1,708  

(e) Investment properties

The following table presents the rental income and direct operating expenses of investment properties.

 

For the years ended December 31,    2019      2018  

Rental income from investment properties

   $ 864      $   1,013  

Direct operating expenses of rental investment properties

       (464)        (582

Total

   $ 400      $ 431  

(f) Mortgage securitization

The Company securitizes certain insured and uninsured fixed and variable rate residential mortgages and Home Equity Lines of Credit (“HELOC”) through creation of mortgage-backed securities under the Canadian Mortgage Bond Program (“CMB”), and the HELOC securitization program.

Benefits received from the securitization include interest spread between the asset and associated liability. There are no expected credit losses on securitized mortgages under the Canada Mortgage and Housing Corporation (“CMHC”) sponsored CMB and the Platinum Canadian Mortgage Trust (“PCMT”) HELOC securitization programs as they are insured by CMHC and other third-party insurance programs against borrowers’ default. Mortgages securitized in the Platinum Canadian Mortgage Trust II (“PCMT II”) program are uninsured.

Cash flows received from the underlying securitized assets/mortgages are used to settle the related secured borrowing liability. For CMB transactions, receipts of principal are deposited into a trust account for settlement of the liability at time of maturity. These transferred assets and related cash flows cannot be transferred or used for other purposes. For the HELOC transactions, investors are entitled to periodic interest payments, and the remaining cash receipts of principal are allocated to the Company (the “Seller”) during the revolving period of the deal and are accumulated for settlement during an accumulation period or repaid to the investor monthly during a reduction period, based on the terms of the note.

Securitized assets and secured borrowing liabilities

 

As at December 31, 2019    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  
As at December 31, 2018    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

     1,525               1,525        1,524  

Total

   $ 3,810        $  8      $ 3,818        $  3,774  

 

(1)

Manulife Bank, a subsidiary, securitizes a portion of its HELOC receivables through Platinum Canadian Mortgage Trust (“PCMT”), and Platinum Canadian Mortgage Trust II (“PCMT II”). PCMT funds the purchase of the co-ownership interests from Manulife Bank by issuing term notes collateralized by an underlying pool of CMHC insured HELOCs to institutional investors. PCMT II funds the purchase of the co-ownership interests from Manulife Bank by issuing term notes collateralized by an underlying pool of uninsured HELOCs to institutional investors. The restricted cash balance for the HELOC securitization reflects a cash reserve fund established in relation to the transactions. The reserve will be drawn upon only in the event of insufficient cash flows from the underlying HELOCs to satisfy the secured borrowing liability.

(2)

Secured borrowing liabilities primarily comprise of Series 2011-1 notes with a floating rate which are expected to mature on December 15, 2021, and the Series 2016-1 notes with a floating rate which are expected to mature on May 15, 2022. Manulife Bank also securitizes insured amortizing mortgages under the National Housing Act Mortgage-Backed Securities (“NHA MBS”) program sponsored by CMHC. Manulife Bank participates in CMB programs by selling NHA MBS securities to Canada Housing Trust (“CHT”), as a source of fixed rate funding.

As at December 31, 2019, the fair value of securitized assets and associated liabilities were $3,950 and $3,879, respectively (2018 – $3,843 and $3,756).

 

Notes to Consolidated Financial Statements  |  Manulife Financial Corporation  |   2019 Annual Report        123


(g) Fair value measurement

The following table presents the fair values of invested assets and segregated funds net assets measured at fair value categorized by the fair value hierarchy.

 

As at December 31, 2019    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        293,903        44,693        4,512  

Total

   $   613,577      $   322,199      $   257,113      $   34,265  
As at December 31, 2018    Total fair
value
     Level 1      Level 2      Level 3  

Cash and short-term securities

           

FVTPL

   $ 1,080      $      $ 1,080      $  

AFS

     10,163               10,163         

Other

     4,972        4,972                

Debt securities

           

FVTPL

           

Canadian government and agency

     16,445               16,445         

U.S. government and agency

     11,934               11,934         

Other government and agency

     16,159               15,979        180  

Corporate

     107,425               106,641        784  

Residential mortgage-backed securities

     13               6        7  

Commercial mortgage-backed securities

     1,344               1,344         

Other asset-backed securities

     1,417               1,417         

AFS

           

Canadian government and agency

     7,342               7,342         

U.S. government and agency

     13,990               13,990         

Other government and agency

     4,101               4,064        37  

Corporate

     5,245               5,125        120  

Residential mortgage-backed securities

     2                      2  

Commercial mortgage-backed securities

     128               128         

Other asset-backed securities

     49               49         

Public equities

           

FVTPL

     16,721        16,718               3  

AFS

     2,458        2,456        2         

Real estate – investment property(1)

     10,761                      10,761  

Other invested assets(2)

     17,562                      17,562  

Segregated funds net assets(3)

     313,209        273,840        34,922        4,447  

Total

   $   562,520      $   297,986      $   230,631      $   33,903  

 

(1)

For investment properties, the significant unobservable inputs are capitalization rates (ranging from 2.75% to 8.75% during the year and ranging from 2.75% to 8.75% during 2018) and terminal capitalization rates (ranging from 3.80% to 9.25% during the year and ranging from 3.80% to 9.25% during 2018). Holding other factors constant, a lower capitalization or terminal capitalization rate will tend to increase the fair value of an investment property. Changes in fair value based on variations in unobservable inputs generally cannot be extrapolated because the relationship between the directional changes of each input is not usually linear.

 

124        Manulife  Financial Corporation  |  2019 Annual Report  |  Notes to Consolidated Financial Statements


(2)

Other invested assets measured at fair value are held primarily in infrastructure and timber sectors. The significant inputs used in the valuation of the Company’s infrastructure investments are primarily future distributable cash flows, terminal values and discount rates. Holding other factors constant, an increase to future distributable cash flows or terminal values would tend to increase the fair value of an infrastructure investment, while an increase in the discount rate would have the opposite effect. Discount rates during the year ranged from 7.00% to 16.5% (2018 – ranged from 8.95% to 16.5%). Disclosure of distributable cash flow and terminal value ranges are not meaningful given the disparity in estimates by project. The significant inputs used in the valuation of the Company’s investments in timberland are timber prices and discount rates. Holding other factors constant, an increase to timber prices would tend to increase the fair value of a timberland investment, while an increase in the discount rates would have the opposite effect. Discount rates during the year ranged from 5.0% to 7.0% (2018 – ranged from 5.0% to 7.0%). A range of prices for timber is not meaningful as the market price depends on factors such as property location and proximity to markets and export yards.

(3)

Segregated funds net assets are measured at fair value. The Company’s Level 3 segregated funds assets are predominantly in investment properties and timberland properties valued as described above.

The following table presents fair value of invested assets not measured at fair value by the fair value hierarchy.

 

As at December 31, 2019    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  
As at December 31, 2018     
Carrying
value
 
 
     Fair value        Level 1        Level 2        Level 3  

Mortgages(1)

   $ 48,363      $ 48,628      $      $      $ 48,628  

Private placements(2)

     35,754        36,103               30,325        5,778  

Policy loans(3)

     6,446        6,446               6,446         

Loans to Bank clients(4)

     1,793        1,797               1,797         

Real estate – own use property(5)

     2,016        3,179                      3,179  

Other invested assets(6)

     9,981        10,753        121               10,632  

Total invested assets disclosed at fair value

   $   104,353      $   106,906      $   121      $   38,568      $   68,217  

 

(1)

Fair value of commercial mortgages is determined through an internal valuation methodology using both observable and unobservable inputs. Unobservable inputs include credit assumptions and liquidity spread adjustments. Fair value of fixed-rate residential mortgages is determined using the discounted cash flow method. Inputs used for valuation are primarily comprised of prevailing interest rates and prepayment rates, if applicable. Fair value of variable-rate residential mortgages is assumed to be their carrying value.

(2)

Fair value of private placements is determined through an internal valuation methodology using both observable and unobservable inputs. Unobservable inputs include credit assumptions and liquidity spread adjustments. Private placements are classified within Level 2 unless the liquidity adjustment constitutes a significant price impact, in which case the securities are classified as Level 3.

(3)

Fair value of policy loans is equal to their unpaid principal balances.

(4)

Fair value of fixed-rate loans to Bank clients is determined using the discounted cash flow method. Inputs used for valuation are primarily comprised of current interest rates. Fair value of variable-rate loans is assumed to be their carrying value.

(5)

Fair value of own use real estate and the fair value hierarchy are determined in accordance with the methodologies described for real estate – investment property in note 1.

(6)

Primarily include leveraged leases, oil and gas properties and equity method accounted other invested assets. Fair value of leveraged leases is disclosed at their carrying values as fair value is not routinely calculated on these investments. Fair value for oil and gas properties is determined using external appraisals based on discounted cash flow methodology. Inputs used in valuation are primarily comprised of forecasted price curves, planned production, as well as capital expenditures, and operating costs. Fair value of equity method accounted other invested assets is determined using a variety of valuation techniques including discounted cash flows and market comparable approaches. Inputs vary based on the specific investment.

Transfers between Level 1 and Level 2

The Company records transfers of assets and liabilities between Level 1 and Level 2 at their fair values as at the end of each reporting period. Assets are transferred out of Level 1 when they are no longer transacted with sufficient frequency and volume in an active market. Conversely, assets are transferred from Level 2 to Level 1 when transaction volume and frequency are indicative of an active market. The Company had $nil of assets transferred between Level 1 and Level 2 during the years ended December 31, 2019 and 2018.

For segregated funds net assets, the Company had $nil transfers from Level 1 to Level 2 for the year ended December 31, 2019 (2018 – $nil). The Company had $nil transfers from Level 2 to Level 1 for the year ended December 31, 2019 (2018 – $2).

Invested assets and segregated funds net assets measured at fair value using significant unobservable inputs (Level 3)

The Company classifies fair values of invested assets and segregated funds net assets as Level 3 if there are no observable markets for these assets or, in the absence of active markets, most of the inputs used to determine fair value are based on the Company’s own assumptions about market participant assumptions. The Company prioritizes the use of market-based inputs over entity-based assumptions in determining Level 3 fair values. The gains and losses in the tables below include the changes in fair value due to both observable and unobservable factors.

 

Notes to Consolidated Financial Statements  |  Manulife Financial Corporation  |   2019 Annual Report        125


The following table presents a roll forward for invested assets, derivatives and segregated funds net assets measured at fair value using significant unobservable inputs (Level 3) for the years ended December 31, 2019 and 2018.

 

For the year ended
December 31, 2019
  Balance,
January 1,
2019
    Net
realized/
unrealized
gains
(losses)
included
in net
income(1)
    Net
realized/
unrealized
gains
(losses)
included
in AOCI(2)
    Purchases     Sales     Settlements    

Transfer

into

Level 3(3),(4)

   

Transfer

out of

Level 3(3,(4)

    Currency
movement
    Balance,
December 31,
2019
    Change in
unrealized
gains
(losses) on
assets still
held
 

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                  
      971       36             59       (107     (18     514       (788     (34     633       47  

AFS

                     

Other government & agency

    37       1             5       (12                 (31                  

Corporate

    120       1             13       (21     (4           (93     (2     14        

Residential mortgage-backed securities

    2                                           (1           1        

Commercial mortgage-backed securities

                      37                         (37                  
      159       2             55       (33     (4           (162     (2     15        

Public equities

                     

FVTPL

    3       1,739                   (1,679                       (63           1,510  
      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
      28,323       (522     2       3,841       (601     (1,031     17             (924     29,105       (455

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  

 

126        Manulife  Financial Corporation  |  2019 Annual Report  |  Notes to Consolidated Financial Statements


For the year ended December 31, 2018   Balance,
January 1,
2018
    Net
realized/
unrealized
gains
(losses)
included in
net
income(1)
    Net
realized/
unrealized
gains
(losses)
included
in AOCI(2)
    Purchases     Sales     Settlements    

Transfer

into

Level 3(3),(4)

   

Transfer

out of

Level 3(3,(4)

    Currency
movement
    Balance,
December 31,
2018
    Change in
unrealized
gains
(losses) on
assets still
held
 

Debt securities

                     

FVTPL

                     

Other government & agency

  $ 239     $ (2   $     $ 27     $ (85   $ (14   $     $     $ 15     $ 180     $ (3

Corporate

    710       3             190       (61     (18           (93     53       784       (10

Residential mortgage-backed securities

    1       6                                                 7       6  

Other asset-backed securities

    25                   31                         (56                  
      975       7             248       (146     (32           (149     68       971       (7

AFS

                     

Other government & agency

    47                   6       (15     (4                 3       37        

Corporate

    88                   49       (12     (4           (7     6       120        

Residential mortgage-backed securities

                1                                     1       2        

Other asset-backed securities

    1                                           (1                  
      136             1       55       (27     (8           (8     10       159        

Public equities

                     

FVTPL

    3                                                       3        
      3                                                       3        

Real estate – investment property

    12,529       291             615       (2,578                 (706     610       10,761       244  

Other invested assets

    16,203       (1,168     1       3,926       (1,636     (841           (35     1,112       17,562       (434
      28,732       (877     1       4,541       (4,214     (841           (741     1,722       28,323       (190

Derivatives

    769       (666     (48     12             18       9       (13     25       106       (460

Segregated funds net assets

    4,255       226             155       (367     1       3       (17     191       4,447       161  

Total

  $   34,870     $   (1,310   $   (46   $   5,011     $   (4,754   $   (862   $   12     $   (928   $   2,016     $   34,009     $   (496

 

(1)

These amounts are included in net investment income on the Consolidated Statements of Income except for the amount related to segregated funds net assets, where the amount is recorded in changes in segregated funds net assets, refer to note 22.

(2)

These amounts are included in AOCI on the Consolidated Statements of Financial Position.

(3)

The Company uses fair values of the assets at the beginning of the year for assets transferred into and out of Level 3 except for derivatives, refer to footnote 4 below.

(4)

For derivatives transfer into or out of Level 3, the Company uses fair value at the end of the year and at the beginning of the year, respectively.

Transfers into Level 3 primarily result from securities that were impaired during the year or securities where a lack of observable market data (versus the previous period) resulted in reclassifying assets into Level 3. Transfers from Level 3 primarily result from observable market data now being available for the entire term structure of the debt security.

Note 4    Derivative and Hedging Instruments

Derivatives are financial contracts, the value of which is derived from underlying interest rates, foreign exchange rates, other financial instruments, commodity prices or indices. The Company uses derivatives including swaps, forward and futures agreements, and options to manage current and anticipated exposures to changes in interest rates, foreign exchange rates, commodity prices and equity market prices, and to replicate permissible investments.

Swaps are over-the-counter (“OTC”) contractual agreements between the Company and a third party to exchange a series of cash flows based upon rates applied to a notional amount. For interest rate swaps, counterparties generally exchange fixed or floating interest rate payments based on a notional value in a single currency. Cross currency swaps involve the exchange of principal amounts between parties as well as the exchange of interest payments in one currency for the receipt of interest payments in another currency. Total return swaps are contracts that involve the exchange of payments based on changes in the values of a reference asset, including any returns such as interest earned on these assets, in return for amounts based on reference rates specified in the contract.

Forward and futures agreements are contractual obligations to buy or sell a financial instrument, foreign currency or other underlying commodity on a predetermined future date at a specified price. Forward contracts are OTC contracts negotiated between counterparties, whereas futures agreements are contracts with standard amounts and settlement dates that are traded on regulated exchanges.

Options are contractual agreements whereby the holder has the right, but not the obligation, to buy (call option) or sell (put option) a security, exchange rate, interest rate, or other financial instrument at a predetermined price/rate within a specified time.

See variable annuity dynamic hedging strategy in the “Risk Management” section of the Company’s 2019 MD&A for an explanation of the Company’s dynamic hedging strategy for its variable annuity product guarantees.

(a) Fair value of derivatives

The pricing models used to value OTC derivatives are based on market standard valuation methodologies and the inputs to these models are consistent with what a market participant would use when pricing the instruments. Derivative valuations can be affected

 

Notes to Consolidated Financial Statements  |  Manulife Financial Corporation  |   2019 Annual Report        127


by changes in interest rates, currency exchange rates, financial indices, credit spreads, default risk (including the counterparties to the contract), and market volatility. The significant inputs to the pricing models for most OTC derivatives are inputs that are observable or can be corroborated by observable market data and are classified as Level 2. Inputs that are observable generally include interest rates, foreign currency exchange rates and interest rate curves. However, certain OTC derivatives may rely on inputs that are significant to the fair value that are not observable in the market or cannot be derived principally from, or corroborated by, observable market data and these derivatives are classified as Level 3. Inputs that are unobservable generally include broker quoted prices, volatilities and inputs that are outside of the observable portion of the interest rate curve or other relevant market measures. These unobservable inputs may involve significant management judgment or estimation. Even though unobservable, these inputs are based on assumptions deemed appropriate given the circumstances and consistent with what market participants would use when pricing such instruments. The Company’s use of unobservable inputs is limited and the impact on derivative fair values does not represent a material amount as evidenced by the limited amount of Level 3 derivatives. The credit risk of both the counterparty and the Company are considered in determining the fair value for all OTC derivatives after considering the effects of netting agreements and collateral arrangements.

The following table presents gross notional amount and fair value of derivative instruments by the underlying risk exposure.

 

As at December 31,    2019             2018  
         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

   $ 350      $      $ 5         $ 519      $      $ 13  
 

Foreign currency swaps

     86        3        1           91        5         

Cash flow hedges

 

Foreign currency swaps

     1,790        39        407           1,834        80        367  
 

Forward contracts

                             80               9  
 

Equity contracts

     132        16                  101               12  

Net investment hedges

 

Forward contracts

     2,822        7        22           1,864        21        65  

Total derivatives in qualifying hedge accounting relationships

     5,180        65        435           4,489        106        466  

Derivatives not designated in qualifying hedge

accounting relationships

                    
 

Interest rate swaps

     283,172        15,159        8,140           300,704        11,204        5,675  
 

Interest rate futures

     13,069                         14,297                
 

Interest rate options

     12,248        423                  11,736        314         
 

Foreign currency swaps

     26,329        606        1,399           23,156        747        1,341  
 

Currency rate futures

     3,387                         4,052                
 

Forward contracts

     33,432        2,337        273           29,248        670        158  
 

Equity contracts

     14,582        853        37           15,492        653        163  
 

Credit default swaps

     502        6                  652        9         
   

Equity futures

     10,576                         10,908                

Total derivatives not designated in qualifying hedge accounting relationships

     397,297        19,384        9,849           410,245        13,597        7,337  

Total derivatives

   $   402,477      $   19,449      $   10,284         $   414,734      $   13,703      $   7,803  

The following table presents fair values of derivative instruments by the remaining term to maturity. The fair values disclosed below do not incorporate the impact of master netting agreements. Refer to note 8.

 

     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      
     Remaining term to maturity     
As at December 31, 2018     

Less than

1 year

 

 

    

1 to 3

years

 

 

    

3 to 5

years

 

 

    

Over 5

years

 

 

     Total      

Derivative assets

   $ 649      $   671      $   795      $   11,588      $   13,703      

Derivative liabilities

     359        229        227        6,988        7,803      

 

128        Manulife  Financial Corporation  |  2019 Annual Report  |  Notes to Consolidated Financial Statements


The following table presents gross notional amount by the remaining term to maturity, total fair value (including accrued interest), credit risk equivalent and risk-weighted amount by contract type.

 

     Remaining term to maturity (notional amounts)             Fair value                      
As at December 31, 2019   

Under 1

year

    

1 to 5

years

    

Over

5 years

     Total              Positive      Negative      Net             

Credit risk

equivalent(1)

           

Risk-    
weighted    

amount(2)    

 

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           </