| Responsibility for Financial Reporting |
| The accompanying consolidated financial statements of Manulife Financial Corporation are the responsibility of management and havebeen approved by the Board of Directors. It is also the responsibility of management to ensure that all information in the annual report toshareholders is consistent with these consolidated financial statements. |
| The consolidated financial statements have been prepared by management in accordance with International Financial Reporting Standardsand the accounting requirements of the Office of the Superintendent of Financial Institutions, Canada. When alternative accountingmethods exist, or when estimates and judgment are required, management has selected those amounts that present the Company’sfinancial 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 relevantand reliable. The systems of internal control are assessed on an ongoing basis by management and the Company’s internal auditdepartment. |
| The actuary appointed by the Board of Directors (the “Appointed Actuary”) is responsible for ensuring that assumptions and methods usedin the determination of policy liabilities are appropriate to the circumstances and that reserves will be adequate to meet the Company’sfuture obligations under insurance and annuity contracts. |
| The Board of Directors is responsible for ensuring that management fulfills its responsibility for financial reporting and is ultimatelyresponsible for reviewing and approving the consolidated financial statements. These responsibilities are carried out primarily through anAudit Committee of unrelated and independent directors appointed by the Board of Directors. |
| The Audit Committee meets periodically with management, the internal auditors, the peer reviewers, the external auditors and theAppointed Actuary to discuss internal control over the financial reporting process, auditing matters and financial reporting issues. TheAudit Committee reviews the consolidated financial statements prepared by management, and then recommends them to the Board ofDirectors for approval. The Audit Committee also recommends to the Board of Directors and shareholders the appointment of externalauditors and approval of their fees. |
| The consolidated financial statements have been audited by the Company’s external auditors, Ernst & Young LLP, in accordance withCanadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States).Ernst & Young LLP has full and free access to management and the Audit Committee. |
| Roy GoriPresident and Chief Executive Officer | Philip WitheringtonChief Financial Officer |
| Toronto, CanadaFebruary 15, 2023 |
| Appointed Actuary’s Report to the Shareholders |
| I have valued the policy liabilities and reinsurance recoverables of Manulife Financial Corporation for its Consolidated Statements ofFinancial Position as at December 31, 2022 and 2021 and their change in the Consolidated Statements of Income for the years then endedin 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 obligationsand the consolidated financial statements fairly present the results of the valuation. |
| Steven FinchAppointed Actuary |
| Toronto, CanadaFebruary 15, 2023 |
| | | |
| | 131 |
| Report of Independent Registered Public Accounting Firm |
| To the Shareholders and Board of Directors of Manulife Financial Corporation |
| Opinion |
| We have audited the consolidated financial statements of Manulife Financial Corporation (the Company), which comprise the ConsolidatedStatements of Financial Position as at December 31, 2022 and 2021, and the Consolidated Statements of Income, ConsolidatedStatements of Comprehensive Income, Consolidated Statements of Changes in Equity and Consolidated Statements of Cash Flows for theyears then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies. |
| In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financialposition of the Company as at December 31, 2022 and 2021, and its consolidated financial performance and its consolidated cash flowsfor the years then ended in accordance with International Financial Reporting Standards as issued by the International AccountingStandards Board. |
| Basis for Opinion |
| We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standardsare further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We areindependent of the Company in accordance with the ethical requirements that are relevant to our audit of the consolidated financialstatements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that theaudit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. |
| Key Audit Matters |
| Key audit matters are those matters that, in our professional judgment, were of most significance in the audit of the consolidated financialstatements of the current period. These matters were addressed in the context of the audit of the consolidated financial statements as awhole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. For each matter below, ourdescription of how our audit addressed the matter is provided in that context. |
| We have fulfilled the responsibilities described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statementssection of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed torespond to our assessment of the risks of material misstatement of the consolidated financial statements. The results of our auditprocedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on theaccompanying consolidated financial statements. |
| Valuation of Insurance Contract Liabilities |
| Key AuditMatter | The Company recorded insurance contract liabilities of $371 billion at December 31, 2022 on its consolidated statement of financialposition. Insurance contract liabilities are reported gross of reinsurance ceded and represent management’s estimate of the amountwhich, 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 contractliabilities are determined using the Canadian Asset Liability Method (CALM), as required by the Canadian Institute of Actuaries (CIA).The valuation of insurance contract liabilities is based on an explicit projection of cash flows using current assumptions for eachmaterial cash flow item. Cash flows related to insurance contract liabilities have two major components: a best estimate assumptionand a provision for adverse deviation. Best estimates are made with respect to key assumptions including mortality, morbidity,investment returns, policy termination rates, premium persistency, expenses, and taxes. A provision for adverse deviation is recordedto reflect the inherent uncertainty related to the timing and amount of the best estimate assumptions and is determined by includinga margin of conservatism for each assumption. Disclosures on this matter are found in Note 1 ‘Nature of Operations and SignificantAccounting Policies’ and Note 7 ‘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 judgment dueto the complexity of the cash flow models, the selection and use of assumptions, and the interrelationship of these variables inmeasuring insurance contract liabilities. The audit effort involved professionals with specialized skill and knowledge to assist inevaluating the audit evidence obtained. |
| 132 | 2022 Annual Report | Consolidated Financial Statements |
| Valuation of Insurance Contract Liabilities |
| How Our AuditAddressed theKey AuditMatter | We obtained an understanding, evaluated the design, and tested the operating effectiveness of management’s controls over thevaluation of insurance contract liabilities. The controls we tested related to, among other areas, actuarial methodology, integrity ofdata used, controls over relevant information technology, and the assumption setting and implementation processes used bymanagement. |
| To test the valuation of insurance contract liabilities, our audit procedures included, among other procedures, involving our actuarialspecialists to assess the methodology and assumptions with respect to compliance with the Company’s policies. We performed auditprocedures over key assumptions, including the implementation of those assumptions into the models. These procedures includedtesting underlying support and documentation, including reviewing a sample of experience studies supporting specific assumptions,challenging the nature, timing, and completeness of changes recorded, assessing whether individual changes were errors orrefinements of estimates, and comparing the level of margins for adverse deviation to suggested ranges established by the CIA. Wealso tested the methodology and calculation of the insurance contract liabilities through both review of the calculation logic within themodels, and through calculating an independent estimate of the insurance contract liability for a sample of insurance contracts andcomparing the results to the Company’s results. In addition, we assessed the adequacy of the disclosures provided in the notes to theconsolidated financial statements. |
| Valuation of Invested Assets with Significant Non-Observable Market Inputs |
| Key AuditMatter | The Company recorded invested assets of $17.5 billion at December 31, 2022 on its consolidated statement of financial positionwhich are both (a) measured at fair value and (b) subject to a valuation estimate that includes significant non-observable marketinputs. These invested assets are classified as level 3 within the Company’s hierarchy of fair value measurements and include realestate, timber and agriculture, high estimation uncertainty bonds, and private equities which are valued using internal models. Thereis increased measurement uncertainty in determining the fair value of these invested assets due to volatility in the current economicenvironment. These assets are valued based on internal models or third-party pricing sources that incorporate assumptions with ahigh-level of subjectivity. Examples of such assumptions include interest rates, yield curves, credit ratings and related spreads,expected future cash flows and transaction prices of comparable assets. Disclosures on this matter are found in Note 1 ‘Nature ofOperations and Significant Accounting Policies’ and Note 4 ‘Invested Assets and Investment Income’ of the consolidated financialstatements. |
| Auditing the valuation of these invested assets was complex and required the application of significant auditor judgment in assessingthe valuation methodologies and non-observable inputs used. The valuation of these assets is sensitive to the significantnon-observable market inputs described above, which are inherently forward-looking and could be affected by future economic andmarket conditions. The audit effort involved professionals with specialized skill and knowledge to assist in evaluating the auditevidence obtained. |
| How Our AuditAddressed theKey AuditMatter | We obtained an understanding, evaluated the design, and tested the operating effectiveness of management’s controls over theinvestment valuation process. The controls we tested related to, among other areas, management’s determination and approval ofassumptions and methodologies used in model-based valuations and management’s review of valuations provided by third-partypricing sources. |
| To test the valuation of these invested assets, our audit procedures included, among other procedures, involving our valuationspecialists to assess the methodologies and significant assumptions used by management. These procedures included assessing thevaluation methodologies used with respect to the Company’s policies, valuation guidelines, and industry practice and comparing asample of valuation assumptions used against benchmarks, including comparable transactions and independent pricing sourceswhere available. We also performed independent investment valuations on a sample of investments with high estimation uncertaintyto evaluate management’s recorded values. In addition, we assessed the adequacy of the disclosures provided in the notes to theconsolidated financial statements. |
| IFRS 17 Insurance Contracts Adoption Disclosure |
| Key AuditMatter | International Financial Reporting Standards 17, Insurance Contracts (IFRS 17) is effective for years beginning on January 1, 2023.As described in Note 2 of the accompanying financial statements, the Company will apply the Full Retrospective Approach to mostcontracts issued on or after January 1, 2021, applying the Fair Value Approach for contracts issued prior to this date. The Companydiscloses that the IFRS 17 adoption will result in a $12.0 billion net of tax reduction in total equity as at January 1, 2022. Note 2 ofthe accompanying financial statements also provides quantitative and qualitative information on the impact of the new standard andcertain accounting policy choices made by the Company. |
| Auditing the Company’s disclosure of the effects of applying IFRS 17 was complex as it related to the measurement of the Company’sinsurance contract liabilities including the transition Contractual Service Margin (transition CSM) included therein. This required theapplication of significant auditor judgement due to the complexity of the cash flow models, the determination of the discount rate andrisk adjustment relating to the measurement of the insurance contract liabilities, and the development of fair value assumptions usedin the determination of the transition CSM. The audit effort involved professionals with specialized skills and knowledge to assist inevaluating the audit evidence obtained. |
| | | |
| | 133 |
| IFRS 17 Insurance Contracts Adoption Disclosure |
| How Our AuditAddressed theKey AuditMatter | We obtained an understanding, evaluated the design, and tested the operating effectiveness of management’s controls over thedisclosure of the effects of applying the new standard to insurance contract liabilities including the transition CSM. The controls wetested included, among others, controls related to management’s selection of accounting policies and the related determination ofthe transition approach, as well as controls related to the development of fair value and actuarial models, the integrity of data used,implementation of new systems and models, and assumption setting and implementation processes. |
| To test the Company’s disclosure of the impact of IFRS 17 on the insurance contract liabilities including the transition CSM, our auditprocedures included, among others, involving our actuarial specialists to evaluate the related accounting policies, the electionsinvolved in transition, and to assess the appropriateness of the determination of where the Full Retrospective Approach wasimpracticable. In relation to the assumptions used in the measurement of the insurance contract liabilities including the transitionCSM, disclosed in Note 2, we assessed the appropriateness and consistency of key assumptions by comparing to publicly availablemarket data, our knowledge of the products and the requirements of IFRS 17. Key assumptions assessed by us, with the involvementof our actuarial specialists, included the discount rate and risk adjustment used in the measurement of the insurance contractliabilities and the fair value assumptions used in the determination of the transition CSM. These procedures also included testingunderlying support and documentation, such as executed policyholder insurance contracts. We tested the methodology andcalculations of the IFRS 17 insurance contract liabilities and transition CSM either through review of the calculation logic within thenewly implemented models, or through calculating an independent estimate of the insurance contract liability for a sample ofinsurance contracts and comparing the results to the Company’s results. |
| Other Information |
| Management is responsible for the other information. The other information comprises: |
| • Management’s Discussion and Analysis; and• The information, other than the consolidated financial statements and our auditor’s report thereon, in the 2022 Annual Report. |
| Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assuranceconclusion thereon. |
| In connection with our audit of the consolidated financial statements, our responsibility is to read the other information, and in doing so,consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained inthe audit or otherwise appears to be materially misstated. |
| We obtained Management’s Discussion and Analysis prior to the date of this auditor’s report. If, based on the work we have performed, weconclude that there is a material misstatement of this other information, we are required to report that fact in this auditor’s report. We havenothing to report in this regard. |
| The 2022 Annual Report is expected to be made available to us after the date of the auditor’s report. If based on the work we will performon this other information, we conclude there is a material misstatement of other information, we are required to report that fact to thosecharged with governance. |
| 134 | 2022 Annual Report | Consolidated Financial Statements |
| Responsibilities of Management and Those Charged with Governance for the ConsolidatedFinancial StatementsManagement is responsible for the preparation and fair presentation of the consolidated financial statements in accordance withInternational Financial Reporting Standards, and for such internal control as management determines is necessary to enable thepreparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.In preparing the consolidated financial statements, management is responsible for assessing the Company’s ability to continue as agoing concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unlessmanagement either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.Those charged with governance are responsible for overseeing the Company’s financial reporting process. |
| Auditor’s Responsibilities for the Audit of the Consolidated Financial StatementsOur objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free frommaterial misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonableassurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generallyaccepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or errorand are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economicdecisions of users taken on the basis of these consolidated financial statements.As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment andmaintain professional skepticism throughout the audit. We also:• Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, |
| design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate toprovide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for oneresulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override ofinternal control. |
| • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the |
| circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. |
| • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related |
| disclosures made by management. |
| • Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit |
| evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on theCompany’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to drawattention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures areinadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’sreport. However, future events or conditions may cause the Company to cease to continue as a going concern. |
| • Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and |
| whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fairpresentation. |
| • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the |
| Company to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision andperformance of the group audit. We remain solely responsible for our audit opinion. |
| We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the auditand significant audit findings, including any significant deficiencies in internal control that we identify during our audit.We also provide those charged with governance with a statement that we have complied with relevant ethical requirementsregarding independence and communicate with them all relationships and other matters that may reasonably be thought to bear onour independence, and where applicable, related safeguards.From the matters communicated with those charged with governance, we determine those matters that were of most significancein the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describethese matters in our report of independent registered public accounting firm unless law or regulation precludes public disclosureabout the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our reportbecause the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of suchcommunication.The partner in charge of the audit resulting in this report of independent registered public accounting firm is Michael Cox. |
| Chartered Professional AccountantsLicensed Public Accountants |
| | |
| Toronto, CanadaFebruary 15, 2023 |
| 135 |
| 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 ofDecember 31, 2022 and 2021, 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 allmaterial respects, the consolidated financial position of the Company at December 31, 2022 and 2021, its consolidated financialperformance and its consolidated cash flows for the years then ended, in accordance with International Financial Reporting Standards asissued by the International Accounting Standards Board. |
| We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), theCompany’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – IntegratedFramework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report datedFebruary 15, 2023, 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 opinionon the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB andare required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rulesand 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 toobtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Ouraudits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error orfraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regardingthe amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significantestimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our auditsprovide 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 statementsthat were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that arematerial to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. Thecommunication 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 theaccounts or disclosures to which they relate. |
| Valuation of Insurance Contract Liabilities |
| Description ofthe matter | The Company recorded insurance contract liabilities of $371 billion at December 31, 2022 on its consolidated statement offinancial position. Insurance contract liabilities are reported gross of reinsurance ceded and represent management’s estimate ofthe amount which, together with estimated future premiums and net investment income, will be sufficient to pay estimated futurebenefits, 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 CanadianInstitute of Actuaries (CIA). The valuation of insurance contract liabilities is based on an explicit projection of cash flows usingcurrent assumptions for each material cash flow item. Cash flows related to insurance contract liabilities have two majorcomponents: a best estimate assumption and a provision for adverse deviation. Best estimates are made with respect to keyassumptions including mortality, morbidity, investment returns, policy termination rates, premium persistency, expenses, andtaxes. A provision for adverse deviation is recorded to reflect the inherent uncertainty related to the timing and amount of thebest estimate assumptions and is determined by including a margin of conservatism for each assumption. Disclosures on thismatter are found in Note 1 ‘Nature of Operations and Significant Accounting Policies’ and Note 7 ‘Insurance Contract Liabilitiesand Reinsurance Assets’ of the consolidated financial statements. |
| Auditing the valuation of insurance contract liabilities was complex and required the application of significant auditor judgmentdue to the complexity of the cash flow models, the selection and use of assumptions, and the interrelationship of these variablesin measuring insurance contract liabilities. The audit effort involved professionals with specialized skill and knowledge to assist inevaluating the audit evidence obtained. |
| 136 | 2022 Annual Report | Consolidated Financial Statements |
| Valuation of Insurance Contract Liabilities |
| How we addressedthe matter in ouraudit | We obtained an understanding, evaluated the design, and tested the operating effectiveness of management’s controls over thevaluation of insurance contract liabilities. The controls we tested related to, among other areas, actuarial methodology, integrityof data used, controls over relevant information technology, and the assumption setting and implementation processes used bymanagement. |
| To test the valuation of insurance contract liabilities, our audit procedures included, among other procedures, involving ouractuarial specialists to assess the methodology and assumptions with respect to compliance with the Company’s policies. Weperformed audit procedures over key assumptions, including the implementation of those assumptions into the models. Theseprocedures included testing underlying support and documentation, including reviewing a sample of experience studiessupporting specific assumptions, challenging the nature, timing, and completeness of changes recorded, assessing whetherindividual changes were errors or refinements of estimates, and comparing the level of margins for adverse deviation tosuggested ranges established by the CIA. We also tested the methodology and calculation of the insurance contract liabilitiesthrough both review of the calculation logic within the models, and through calculating an independent estimate of the insurancecontract liability for a sample of insurance contracts and comparing the results to the Company’s results. In addition, weassessed the adequacy of the disclosures provided in the notes to the consolidated financial statements. |
| Valuation of Invested Assets with Significant Non-Observable Market Inputs |
| Description ofthe matter | The Company recorded invested assets of $17.5 billion at December 31, 2022 on its consolidated statement of financial positionwhich are both (a) measured at fair value and (b) subject to a valuation estimate that includes significant non-observable marketinputs. These invested assets are classified as level 3 within the Company’s hierarchy of fair value measurements and include realestate, timber and agriculture, high estimation uncertainty bonds, and private equities which are valued using internal models.There is increased measurement uncertainty in determining the fair value of these invested assets due to volatility in the currenteconomic environment. These assets are valued based on internal models or third-party pricing sources that incorporateassumptions with a high-level of subjectivity. Examples of such assumptions include interest rates, yield curves, credit ratings andrelated spreads, expected future cash flows and transaction prices of comparable assets. Disclosures on this matter are found inNote 1 ‘Nature of Operations and Significant Accounting Policies’ and Note 4 ‘Invested Assets and Investment Income’ of theconsolidated financial statements. |
| Auditing the valuation of these invested assets was complex and required the application of significant auditor judgment inassessing the valuation methodologies and non-observable inputs used. The valuation of these assets is sensitive to thesignificant non-observable market inputs described above, which are inherently forward-looking and could be affected by futureeconomic and market conditions. The audit effort involved professionals with specialized skill and knowledge to assist inevaluating the audit evidence obtained. |
| How we addressedthe matter in ouraudit | We obtained an understanding, evaluated the design, and tested the operating effectiveness of management’s controls over theinvestment valuation process. The controls we tested related to, among other areas, management’s determination and approvalof 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 valuationspecialists to assess the methodologies and significant assumptions used by management. These procedures included assessingthe valuation methodologies used with respect to the Company’s policies, valuation guidelines, and industry practice andcomparing a sample of valuation assumptions used against benchmarks, including comparable transactions and independentpricing sources where available. We also performed independent investment valuations on a sample of investments with highestimation uncertainty to evaluate management’s recorded values. In addition, we assessed the adequacy of the disclosuresprovided in the notes to the consolidated financial statements. |
| IFRS 17 Insurance Contracts Adoption Disclosure |
| Description ofthe matter | International Financial Reporting Standards 17, Insurance Contracts (IFRS 17) is effective for years beginning on January 1,2023. As described in Note 2 of the accompanying financial statements, the Company will apply the Full Retrospective Approachto most contracts issued on or after January 1, 2021, applying the Fair Value Approach for contracts issued prior to this date.The Company discloses that the IFRS 17 adoption will result in a $12.0 billion net of tax reduction in total equity as at January 1,2022. Note 2 of the accompanying financial statements also provides quantitative and qualitative information on the impact ofthe new standard and certain accounting policy choices made by the Company. |
| Auditing the Company’s disclosure of the effects of applying IFRS 17 was complex as it related to the measurement of theCompany’s insurance contract liabilities including the transition Contractual Service Margin (transition CSM) included therein.This required the application of significant auditor judgement due to the complexity of the cash flow models, the determination ofthe discount rate and risk adjustment relating to the measurement of the insurance contract liabilities, and the development offair value assumptions used in the determination of the transition CSM. The audit effort involved professionals with specializedskills and knowledge to assist in evaluating the audit evidence obtained. |
| | | |
| | 137 |
| IFRS 17 Insurance Contracts Adoption Disclosure |
| How we addressedthe matter in ouraudit | We obtained an understanding, evaluated the design, and tested the operating effectiveness of management’s controls over thedisclosure of the effects of applying the new standard to insurance contract liabilities including the transition CSM. The controlswe tested included, among others, controls related to management’s selection of accounting policies and the relateddetermination of the transition approach, as well as controls related to the development of fair value and actuarial models, theintegrity of data used, implementation of new systems and models, and assumption setting and implementation processes. |
| To test the Company’s disclosure of the impact of IFRS 17 on the insurance contract liabilities including the transition CSM, ouraudit procedures included, among others, involving our actuarial specialists to evaluate the related accounting policies, theelections involved in transition, and to assess the appropriateness of the determination of where the Full Retrospective Approachwas impracticable. In relation to the assumptions used in the measurement of the insurance contract liabilities including thetransition CSM, disclosed in Note 2, we assessed the appropriateness and consistency of key assumptions by comparing topublicly available market data, our knowledge of the products and the requirements of IFRS 17. Key assumptions assessed by us,with the involvement of our actuarial specialists, included the discount rate and risk adjustment used in the measurement of theinsurance contract liabilities and the fair value assumptions used in the determination of the transition CSM. These proceduresalso included testing underlying support and documentation, such as executed policyholder insurance contracts. We tested themethodology and calculations of the IFRS 17 insurance contract liabilities and transition CSM either through review of thecalculation logic within the newly implemented models, or through calculating an independent estimate of the insurance contractliability for a sample of insurance contracts and comparing the results to the Company’s results. |
| We have served as Manulife Financial Corporation’s auditor since 1905. |
| Chartered Professional AccountantsLicensed Public Accountants |
| Toronto, Canada |
| February 15, 2023 |
| 138 | 2022 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 Internal Control over Financial Reporting |
| We have audited Manulife Financial Corporation’s internal control over financial reporting as of December 31, 2022, based on criteriaestablished 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, 2022, 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, 2022 and 2021, and the related ConsolidatedStatements of Income, Consolidated Statements of Comprehensive Income, Consolidated Statements of Changes in Equity andConsolidated Statements of Cash Flows for the years then ended, and the related notes and our report dated February 15, 2023,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 theeffectiveness of internal control over financial reporting included in Management’s Report on Internal Control Over Financial Reportingcontained in the Management’s Discussion and Analysis. Our responsibility is to express an opinion on the Company’s internal control overfinancial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent withrespect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities andExchange 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 toobtain 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 weaknessexists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing suchother 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 offinancial reporting and the preparation of financial statements for external purposes in accordance with International Financial ReportingStandards as issued by the International Accounting Standards Board. A company’s internal control over financial reporting includes thosepolicies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessaryto permit preparation of financial statements in accordance with International Financial Reporting Standards as issued by the InternationalAccounting Standards Board, and that receipts and expenditures of the company are being made only in accordance with authorizations ofmanagement and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection ofunauthorized 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 ofany evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes inconditions, or that the degree of compliance with the policies or procedures may deteriorate. |
| Chartered Professional AccountantsLicensed Public Accountants |
| Toronto, Canada |
| February 15, 2023 |
| | |
| 139 |
| Consolidated Statements of Financial Position |
| As at December 31,(Canadian $ in millions) |
| 2022 | 2021 |
| AssetsCash and short-term securities |
| | | $ | 19,153 | | | $ | 22,594 |
| Debt securities | 203,904 | 224,139 |
| Public equities | 23,519 | 28,067 |
| Mortgages | 54,638 | 52,014 |
| Private placements | 47,057 | 42,842 |
| Policy loans | 6,894 | 6,397 |
| Loans to Bank clients | 2,781 | 2,506 |
| Real estate | 13,272 | 13,233 |
| Other invested assets | 42,783 | 35,306 |
| Total invested assets (note 4) | 414,001 | 427,098 |
| Other assetsAccrued investment income |
| 2,813 | 2,641 |
| Outstanding premiums | 1,448 | 1,294 |
| Derivatives (note 5) | 8,588 | 17,503 |
| Reinsurance assets (notes 7 and 8) | 47,712 | 44,579 |
| Deferred tax assets (note 17) | 5,423 | 5,254 |
| Goodwill and intangible assets (note 6) | 10,519 | 9,915 |
| Miscellaneous | 9,875 | 9,571 |
| Total other assets | 86,378 | 90,757 |
| Segregated funds net assets (note 23) | 348,562 | 399,788 |
| Total assets | | | $ 848,941 | $ 917,643 |
| Liabilities and EquityLiabilitiesInsurance contract liabilities (note 7) |
| | | $ 371,405 | $ 392,275 |
| Investment contract liabilities (note 8) | 3,248 | 3,117 |
| Deposits from Bank clients | 22,507 | 20,720 |
| Derivatives (note 5) | 14,289 | 10,038 |
| Deferred tax liabilities (note 17) | 2,774 | 2,769 |
| Other liabilities | 17,421 | 18,205 |
| 431,644 | 447,124 |
| Long-term debt (note 10) | 6,234 | 4,882 |
| Capital instruments (note 11) | 6,122 | 6,980 |
| Segregated funds net liabilities (note 23) | 348,562 | 399,788 |
| Total liabilities | 792,562 | 858,774 |
| EquityPreferred shares and other equity (note 12) |
| 6,660 | 6,381 |
| Common shares (note 12) | 22,178 | 23,093 |
| Contributed surplus | 238 | 262 |
| Shareholders’ and other equity holders’ retained earnings | 27,010 | 23,492 |
| Shareholders’ accumulated other comprehensive income (loss) (“AOCI”): |
| Pension and other post-employment plans | (97) | (114) |
| Available-for-sale securities | (6,472) | 848 |
| Cash flow hedges | 8 | (156) |
| Real estate revaluation reserve | 22 | 23 |
| Translation of foreign operations | 6,514 | 4,579 |
| Total shareholders’ and other equity | 56,061 | 58,408 |
| Participating policyholders’ equity | (1,346) | (1,233) |
| Non-controlling interests | 1,664 | 1,694 |
| Total equity | 56,379 | 58,869 |
| Total liabilities and equity | | | $ 848,941 | $ 917,643 |
| The accompanying notes are an integral part of these Consolidated Financial Statements. |
| Roy GoriPresident and Chief Executive Officer | | | | | John CassadayChairman of the Board of Directors |
| 140 | 2022 Annual Report | Consolidated Financial Statements |
| Consolidated Statements of IncomeFor the years ended December 31,(Canadian $ in millions except per share amounts) |
| 2022 | 2021 |
| RevenuePremium income |
| Gross premiums | | | $ | 44,102 | $ 44,344 |
| Premiums ceded to reinsurers | (6,249) | (5,279) |
| Net premiums | 37,853 | 39,065 |
| Investment income (note 4) |
| Investment income | 15,207 | 15,627 |
| Realized and unrealized gains (losses) on assets supporting insurance and investment |
| | | | contract liabilities and on the macro hedge program | (45,077) | (4,003) |
| Net investment income (loss) | (29,870) | 11,624 |
| Other revenue (note 14) | 9,164 | 11,132 |
| Total revenue | 17,147 | 61,821 |
| Contract benefits and expensesTo contract holders and beneficiaries |
| Gross claims and benefits (note 7) | 33,320 | 31,110 |
| Increase (decrease) in insurance contract liabilities (note 7) | (34,971) | 10,719 |
| Increase (decrease) in investment contract liabilities (note 8) | 41 | 44 |
| Benefits and expenses ceded to reinsurers | (7,016) | (6,805) |
| (Increase) decrease in reinsurance assets (note 7) | (673) | 754 |
| Net benefits and claims | (9,299) | 35,822 |
| General expenses | 7,782 | 7,828 |
| Investment expenses (note 4) | 1,863 | 1,980 |
| Commissions | 6,260 | 6,638 |
| Interest expense | 1,350 | 1,011 |
| Net premium taxes | 444 | 417 |
| Total contract benefits and expenses | 8,400 | 53,696 |
| Income before income taxes | 8,747 | 8,125 |
| Income tax expense (note 17) | (1,565) | (1,213) |
| Net income | | | $ | 7,182 | $ | 6,912 |
| Net income (loss) attributed to: |
| Non-controlling interests | | | $ | (1) | $ | 255 |
| Participating policyholders | (111) | (448) |
| Shareholders and other equity holders | 7,294 | 7,105 |
| | | $ | 7,182 | $ | 6,912 |
| Net income attributed to shareholders | 7,294 | 7,105 |
| Preferred share dividends and other equity distributions | (260) | (215) |
| Common shareholders’ net income | | | $ | 7,034 | $ | 6,890 |
| Earnings per share |
| Basic earnings per common share (note 12) | | | $ | 3.68 | $ | 3.55 |
| Diluted earnings per common share (note 12) | 3.68 | 3.54 |
| Dividends per common share | 1.32 | 1.17 |
| The accompanying notes are an integral part of these Consolidated Financial Statements. |
| | | | | |
| | 141 |
| Consolidated Statements of Comprehensive IncomeFor the years ended December 31,(Canadian $ in millions) |
| 2022 | 2021 |
| Net income | $ 7,182 | $ 6,912 |
| 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 | 2,350 | (514) |
| Net investment hedges | (415) | 100 |
| Available-for-sale financial securities: |
| Unrealized gains (losses) arising during the year | (7,608) | (980) |
| Reclassification of net realized (gains) losses and impairments to net income | 288 | (13) |
| Cash flow hedges: |
| Unrealized gains (losses) arising during the year | 161 | 77 |
| Reclassification of realized gains (losses) to net income | 3 | (4) |
| Share of other comprehensive income (losses) of associates | (5) | (1) |
| Total items that may be subsequently reclassified to net income | (5,226) | (1,335) |
| Items that will not be reclassified to net income: |
| Change in actuarial gains (losses) on pension and other post-employment plans | 17 | 199 |
| Real estate revaluation reserve | (1) | (11) |
| Total items that will not be reclassified to net income | 16 | 188 |
| Other comprehensive income (loss), net of tax | (5,210) | (1,147) |
| Total comprehensive income (loss), net of tax | $ 1,972 | $ 5,765 |
| Total comprehensive income (loss) attributed to: |
| Non-controlling interests | $ | (4) | $ | 252 |
| Participating policyholders | (113) | (449) |
| Shareholders and other equity holders | 2,089 | 5,962 |
| Income Taxes included in Other Comprehensive IncomeFor the years ended December 31,(Canadian $ in millions) |
| 2022 | 2021 |
| Income tax expense (recovery) on:Unrealized gains (losses) on available-for-sale financial securities |
| $ (1,254) | $ (181) |
| Reclassification of net realized (gains) losses and impairments to net income on available-for-sale financial securities | 30 | 21 |
| Unrealized gains (losses) on cash flow hedges | 55 | 15 |
| Reclassification of realized gains (losses) to net income on cash flow hedges | 1 | (1) |
| Unrealized foreign exchange gains (losses) on translation of foreign operations | 2 | – |
| Unrealized foreign exchange gains (losses) on net investment hedges | (29) | 21 |
| Share of other comprehensive income (loss) of associates | (1) | – |
| Change in actuarial gains (losses) on pension and other post-employment plans | 9 | 61 |
| Real estate revaluation reserve | 1 | – |
| Total income tax expense (recovery) | $ (1,186) | $ | (64) |
| The accompanying notes are an integral part of these Consolidated Financial Statements. |
| 142 | 2022 Annual Report | Consolidated Financial Statements |
| Consolidated Statements of Changes in Equity |
| For the years ended December 31,(Canadian $ in millions) |
| 2022 | 2021 |
| Preferred shares and other equityBalance, beginning of year |
| $ | 6,381 | $ | 3,822 |
| Issued (note 12) | 1,000 | 3,200 |
| Redeemed (note 12) | (711) | (612) |
| Issuance costs, net of tax | (10) | (29) |
| Balance, end of year | 6,660 | 6,381 |
| Common sharesBalance, beginning of year |
| 23,093 | 23,042 |
| Repurchased (note 12) | (938) | – |
| Issued on exercise of stock options and deferred share units | 23 | 51 |
| Balance, end of year | 22,178 | 23,093 |
| Contributed surplusBalance, beginning of year |
| 262 | 261 |
| Exercise of stock options and deferred share units | (4) | (8) |
| Stock option expense | 5 | 9 |
| Acquisition of non-controlling interest | (25) | – |
| Balance, end of year | 238 | 262 |
| Shareholders’ and other equity holders’ retained earningsBalance, beginning of year |
| 23,492 | 18,887 |
| Net income attributed to shareholders and other equity holders | 7,294 | 7,105 |
| Common shares repurchased (note 12) | (946) | – |
| Preferred share dividends and other equity distributions | (260) | (215) |
| Preferred shares redeemed (note 12) | (14) | (13) |
| Common share dividends | (2,513) | (2,272) |
| Acquisition of non-controlling interest | (43) | – |
| Balance, end of year | 27,010 | 23,492 |
| Shareholders’ accumulated other comprehensive income (loss) (“AOCI”)Balance, beginning of year |
| 5,180 | 6,323 |
| Change in unrealized foreign exchange gains (losses) on net foreign operations | 1,935 | (414) |
| Change in actuarial gains (losses) on pension and other post-employment plans | 17 | 199 |
| Change in unrealized gains (losses) on available-for-sale financial securities | (7,315) | (989) |
| Change in unrealized gains (losses) on derivative instruments designated as cash flow hedges | 164 | 73 |
| Change in real estate revaluation reserve | (1) | (11) |
| Share of other comprehensive income (losses) of associates | (5) | (1) |
| Balance, end of year | (25) | 5,180 |
| Total shareholders’ and other equity, end of year | 56,061 | 58,408 |
| Participating policyholders’ equityBalance, beginning of year |
| (1,233) | (784) |
| Net income (loss) attributed to participating policyholders | (111) | (448) |
| Other comprehensive income (losses) attributed to participating policyholders | (2) | (1) |
| Balance, end of year | (1,346) | (1,233) |
| Non-controlling interestsBalance, beginning of year |
| 1,694 | 1,455 |
| Net income attributed to non-controlling interests | (1) | 255 |
| Other comprehensive income (losses) attributed to non-controlling interests | (3) | (3) |
| Contributions (distributions and acquisition), net | (26) | (13) |
| Balance, end of year | 1,664 | 1,694 |
| Total equity, end of year | $ 56,379 | $ 58,869 |
| The accompanying notes are an integral part of these Consolidated Financial Statements. |
| | | |
| | 143 |
| Consolidated Statements of Cash FlowsFor the years ended December 31,(Canadian $ in millions) |
| 2022 | 2021 |
| Operating activitiesNet income |
| | | $ | 7,182 | | | $ | 6,912 |
| Adjustments: |
| Increase (decrease) in insurance contract liabilities | (33,413) | 10,719 |
| Increase (decrease) in investment contract liabilities | 41 | 44 |
| (Increase) decrease in reinsurance assets excluding coinsurance transactions (note 7) | 159 | 754 |
| Amortization of (premium) discount on invested assets | (32) | 181 |
| Other amortization | 538 | 529 |
| Net realized and unrealized (gains) losses and impairment on assets | 47,270 | 4,824 |
| Gain on U.S. variable annuity reinsurance transaction (pre-tax) (note 7) | (1,070) | – |
| Gain on derecognition of Joint Venture interest during Manulife TEDA acquisition (pre-tax) (notes 3 & 6) | (95) | – |
| Deferred income tax expense (recovery) | 731 | (127) |
| Stock option expense | 5 | 9 |
| Cash provided by operating activities before undernoted items | 21,316 | 23,845 |
| Cash decrease due to U.S. variable annuity reinsurance transaction (note 7) | (1,377) | – |
| Changes in policy related and operating receivables and payables | (2,204) | (690) |
| Cash provided by (used in) operating activities | 17,735 | 23,155 |
| Investing activitiesPurchases and mortgage advances |
| (111,768) | (120,965) |
| Disposals and repayments | 93,407 | 96,728 |
| Change in investment broker net receivables and payables | (67) | (186) |
| Net cash increase (decrease) from sale (purchase) of subsidiary (notes 3 & 6) | (182) | (19) |
| Cash provided by (used in) investing activities | (18,610) | (24,442) |
| Financing activitiesIssue of long-term debt, net (note 10) |
| 946 | – |
| Redemption of long-term debt (note 10) | – | (1,250) |
| Redemption of capital instruments (note 11) | (1,000) | (818) |
| Secured borrowings (note 4(f)) | 437 | 26 |
| Change in repurchase agreements and securities sold but not yet purchased | (551) | 186 |
| Change in deposits from Bank clients, net | 1,703 | (164) |
| Lease payments | (120) | (124) |
| Shareholders’ dividends and other equity distributions | (2,787) | (2,500) |
| Common shares repurchased (note 12) | (1,884) | – |
| Common shares issued, net (note 12) | 23 | 51 |
| Preferred shares and other equity issued, net (note 12) | 990 | 3,171 |
| Preferred shares redeemed, net (note 12) | (711) | (612) |
| Contributions from (distributions to, acquisition of) non-controlling interests, net | (51) | (13) |
| Cash provided by (used in) financing activities | (3,005) | (2,047) |
| Cash and short-term securitiesIncrease (decrease) during the year |
| (3,880) | (3,334) |
| Effect of foreign exchange rate changes on cash and short-term securities | 585 | (319) |
| Balance, beginning of year | 21,930 | 25,583 |
| Balance, December 31 | 18,635 | 21,930 |
| Cash and short-term securitiesBeginning of yearGross cash and short-term securities |
| 22,594 | 26,167 |
| Net payments in transit, included in other liabilities | (664) | (584) |
| Net cash and short-term securities, January 1 | 21,930 | 25,583 |
| End of yearGross cash and short-term securities |
| 19,153 | 22,594 |
| Net payments in transit, included in other liabilities | (518) | (664) |
| Net cash and short-term securities, December 31 | | | $ | 18,635 | | | $ | 21,930 |
| Supplemental disclosures on cash flow informationInterest received |
| | | $ | 12,133 | | | $ | 11,376 |
| Interest paid | 1,248 | 981 |
| Income taxes paid | 1,238 | 571 |
| The accompanying notes are an integral part of these Consolidated Financial Statements. |
| 144 | 2022 Annual Report | 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 entityManulife Financial Corporation (“MFC”) is a publicly traded company and the holding company of The Manufacturers Life InsuranceCompany (“MLI”), a Canadian life insurance company. MFC and its subsidiaries (collectively, “Manulife” or the “Company”) is a leadingfinancial 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 businessclients as well as asset management services to institutional customers. The Company operates as Manulife in Asia and Canada and asJohn Hancock in the United States. |
| MFC is domiciled in Canada and incorporated under the Insurance Companies Act (Canada) (“ICA”). These Consolidated FinancialStatements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the InternationalAccounting Standards Board (“IASB”). |
| These Consolidated Financial Statements should be read in conjunction with “Risk Management and Risk Factors” in the 2022Management’s Discussion and Analysis (“MD&A”) dealing with IFRS 7 “Financial Instruments: Disclosures” as the discussion on market riskand 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, 2022 were authorized for issue by MFC’s Board ofDirectors on February 15, 2023. |
| (b) Basis of preparationThe preparation of Consolidated Financial Statements in conformity with IFRS requires management to make judgments, estimates andassumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, and the disclosure ofcontingent assets and liabilities as at the date of the Consolidated Financial Statements, and the reported amounts of revenue andexpenses during the reporting periods. Actual results may differ from these estimates. The most significant estimation processes relate toevaluating assumptions used in measuring insurance and investment contract liabilities, assessing assets for impairment, determiningpension and other post-employment benefit obligation and expense assumptions, determining income taxes and uncertain tax positions,and estimating fair values of certain invested assets. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions toaccounting estimates are recognized in the year in which the estimates are revised and in any future years affected. Although somevariability is inherent in these estimates, management believes that the amounts recorded are appropriate. The significant accountingpolicies used and the most significant judgments made by management in applying these accounting policies in the preparation of theseConsolidated Financial Statements are summarized below. |
| The Company’s results and operations have been and may continue to be adversely impacted by COVID-19 and the economic environment.The adverse effects include but are not limited to recessionary economic trends in markets the Company operates in, significant marketvolatility, increase in credit risk, strain on commodity markets and alternative long duration asset (“ALDA”) prices, foreign currencyexchange rate volatility, increases in insurance claims, persistency and redemptions, and disruption of business operations. The breadthand depth of these events and their duration contribute additional uncertainty around estimates used in determining the carrying value ofcertain assets and liabilities included in these Consolidated Financial Statements. |
| The Company has applied appropriate measurement techniques using reasonable judgment and estimates from the perspective of amarket participant to reflect current economic conditions. The impact of these techniques has been reflected in these ConsolidatedFinancial Statements. Changes in the inputs used could materially impact the respective carrying values. |
| (c) Fair value measurementFair 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 forcedliquidation or distress sale) between market participants at the measurement date; fair value is an exit value. |
| When available, quoted market prices are used to determine fair value. If quoted market prices are not available, fair value is typicallybased upon alternative valuation techniques such as discounted cash flows, matrix pricing, consensus pricing services and othertechniques. Broker quotes are generally used when external public vendor prices are not available. |
| The Company has a valuation process in place that includes a review of price movements relative to the market, a comparison of pricesbetween vendors, and a comparison to internal matrix pricing which uses predominately external observable data. Judgment is applied inadjusting external observable data for items including liquidity and credit factors. |
| 146 | 2022 Annual Report | Notes to Consolidated Financial Statements |
| The Company categorizes its fair value measurement results according to a three-level hierarchy. The hierarchy prioritizes the inputs usedby the Company’s valuation techniques based on their reliability. A level is assigned to each fair value measurement based on the lowestlevel 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 theCompany 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 orliability, either directly or indirectly. These include quoted prices for similar assets and liabilities in active markets, quoted prices foridentical or similar assets and liabilities in inactive markets, inputs that are observable that are not prices (such as interest rates, creditrisks, 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, includinginterest rate swaps, equity swaps, credit default swaps and foreign currency forward contracts. |
| Level 3 – Fair value measurements using significant non-market observable inputs. These include valuations for assets and liabilities thatare derived using data, some or all of which is not market observable, including assumptions about risk. Level 3 security valuations includeless liquid securities such as real estate properties, other invested assets, timber investments held within segregated funds, certain long-duration bonds and other securities that have little or no price transparency. Certain derivative financial instrument valuations are alsoincluded in Level 3. |
| (d) Basis of consolidationMFC consolidates the financial statements of all entities it controls, including certain structured entities. Subsidiaries are entitiescontrolled by the Company. The Company has control over an entity when the Company has the power to govern the financial andoperating policies of the entity and is exposed to variable returns from its activities which are significant in relation to the total variablereturns of the entity and the Company is able to use its power over the entity to affect the Company’s share of variable returns of the entity.In assessing control, significant judgment is applied while considering all relevant facts and circumstances. When assessing decisionmaking power over an entity, the Company considers the extent of its rights relative to the management of the entity, the level of votingrights held over the entity which are potentially or presently exercisable, the existence of any contractual management agreements whichmay provide the Company with power over the entity’s financial and operating policies, and to the extent of other parties’ ownership in theentity, if any, the possibility for de facto control being present. When assessing variable returns from an entity, the Company considers thesignificance of direct and indirect financial and non-financial variable returns to the Company from the entity’s activities in addition to theproportionate significance of such returns to the total variability of the entity. The Company also considers the degree to which its interestsare aligned with those of other parties investing in the entity and the degree to which the Company may act in its own interest whileinteracting with the entity. |
| The financial statements of subsidiaries are included in MFC’s consolidated results from the date control is established and are excludedfrom consolidation from the date control ceases. The initial control assessment is performed at inception of the Company’s involvementwith the entity and is reconsidered if the Company acquires or loses power over key operating and financial policies of the entity; acquiresadditional interests or disposes of interests in the entity; the contractual arrangements of the entity are amended such that the Company’sproportionate exposure to variable returns changes; or if the Company’s ability to use its power to affect its variable returns from the entitychanges. A change in control may lead to gains or losses on derecognition of a subsidiary when losing control, or on derecognition ofprevious interests in a subsidiary when gaining control. |
| The Company’s Consolidated Financial Statements have been prepared using uniform accounting policies for like transactions and eventsin similar circumstances. Intercompany balances, and revenue and expenses arising from intercompany transactions, have beeneliminated 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, separatefrom the equity of MFC’s participating policyholders and shareholders. Non-controlling interests in the net income and othercomprehensive income (“OCI”) of MFC’s subsidiaries are included in total net income and total OCI, respectively. An exception to thisoccurs where the subsidiary’s shares are either puttable by the other parties or are redeemable for cash on a fixed or determinable date, inwhich case other parties’ interests in the subsidiary’s capital are presented as liabilities of the Company and other parties’ interests in thesubsidiary’s net income and OCI are recorded as expenses of the Company. |
| The equity method of accounting is used to account for entities over which the Company has significant influence or joint control(“associates” or “joint ventures”), whereby the Company records its share of the associate’s or joint venture’s net assets and financialresults using uniform accounting policies for similar transactions and events. Significant judgment is used to determine whether votingrights, contractual management rights and other relationships with the entity, if any, provide the Company with significant influence orjoint control over the entity. Gains and losses on the sale of associates or joint ventures are included in income when realized, whileimpairment losses are recognized immediately when there is objective evidence of impairment. Gains and losses on commercialtransactions with associates or joint ventures are eliminated to the extent of the Company’s interest in the equity of the associate or jointventure. Investments in associates and joint ventures are included in other invested assets on the Company’s Consolidated Statements ofFinancial Position. |
| | |
| 147 |
| (e) Invested assetsInvested 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 underthe fair value option, or if they are designated by management when they include one or more embedded derivatives. Invested assetsclassified 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 IFRS13 “Fair Value Measurement”. Disclosure of fair value valuations within the three levels of the fair value hierarchy for invested assets carriedat fair value or not carried at fair value on the Consolidated Statements of Financial Position are presented in note 4. Fair value valuationsare performed by the Company and by third-party service providers. When third-party service providers are engaged, the Companyperforms a variety of procedures to corroborate pricing information. These procedures may include, but are not limited to, inquiry andreview 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 debt securities heldfor meeting short-term cash commitments. Short-term securities are comprised of investments due to mature within one year of the dateof purchase. Short-term securities are carried at fair value. Commercial paper and discount notes are classified as Level 2 for fair valuedisclosure purposes because these securities are typically not actively traded. Net payments in transit and overdraft bank balances areincluded in other liabilities. |
| Debt securities are carried at fair value or amortized cost. Debt securities are generally valued by independent pricing vendors usingproprietary pricing models incorporating current market inputs for similar instruments with comparable terms and credit quality (matrixpricing). The significant inputs include, but are not limited to, yield curves, credit risks and spreads, prepayment rates and volatility ofthese inputs. These debt securities are classified as Level 2 for fair value disclosure purposes but can be Level 3 if significant inputs aremarket unobservable. Realized gains and losses on sale of debt securities and unrealized gains and losses on debt securities designatedas 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 debtsecurities are recognized in income on an individual security basis when there is objective evidence of impairment. Impairment isconsidered to have occurred, based on management’s judgment, when it is deemed probable that the Company will not be able to collectall amounts due according to the debt security’s contractual terms. Debt securities which are classified as held-to-maturity are carried atamortized cost. This includes debt securities with fixed or determinable payments and fixed maturities, for which the Company has bothpositive intention and ability to hold to maturity, and which the Company has not designated at initial recognition as FVTPL or AFS. |
| Public equities are comprised of common and preferred equities and mutual fund shares and are carried at fair value. Public equities aregenerally classified as Level 1 for fair value disclosure purposes, as fair values are normally based on quoted market prices. Realized gainsand losses on sale of equities and unrealized gains and losses on equities designated as FVTPL are recognized in investment incomeimmediately. Unrealized gains and losses on AFS equities are recorded in OCI. Impairment losses on AFS equities are recognized in incomeon an individual security basis when there is objective evidence of impairment. Impairment is considered to have occurred when fair valuehas declined below cost by a significant amount or for a prolonged period. Significant judgment is applied in determining whether thedecline is significant or prolonged. |
| Mortgages are carried at amortized cost and are classified as Level 3 for fair value disclosure purposes due to the lack of marketobservability of certain significant valuation inputs. Realized gains and losses are recorded in investment income immediately. Impairmentlosses are recorded on mortgages when there is no longer reasonable assurance as to the timely collection of the full amount of principaland interest and are measured based on the discounted value of expected future cash flows at the original effective interest rates inherentin the mortgage. Expected future cash flows of impaired mortgages are typically determined with reference to the fair value of collateralsecurity underlying the mortgage, net of expected costs of realization and including any applicable insurance recoveries. Significantjudgment 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 saleaccounting are not met. For these transactions, the Company continues to recognize the mortgages and records liabilities within otherliabilities for the amounts owed at maturity. Interest income from these mortgages and interest expense on the borrowings are recordedusing 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 generallyclassified as Level 2 for fair value disclosure purposes or Level 3 if significant inputs are market unobservable. Realized gains and lossesare recorded in income immediately. Impairment losses are recorded on private placements when there is no longer assurance as to thetimely collection of the full amount of principal and interest. Impairment is measured based on the discounted value of expected futurecash flows at the original effective interest rate inherent in the loan. Significant judgment is applied in the determination of impairmentincluding 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. Policyloans are fully collateralized by the cash surrender value of the underlying policies. |
| 148 | 2022 Annual Report | Notes to Consolidated Financial Statements |
| Loans to Manulife Bank of Canada (“Manulife Bank” or “Bank”) clients are carried at amortized cost and are classified as Level 2 for fairvalue disclosure purposes. A loan to a Bank client is considered impaired when there is objective evidence of impairment because of one ormore 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 theconditions that caused the impairment no longer exist. Reversals of impairment charges on AFS debt securities are only recognized inincome to the extent that subsequent 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 forimpairment is released. |
| In addition to impairments and provisions for loan losses (recoveries) reported in investment income, the measurement of insurancecontract liabilities, via investment return assumptions, includes expected future credit losses on fixed income investments. Refer tonote 7(d). |
| Interest income is recognized on debt securities, mortgages, private placements, policy loans, loans to Bank clients and certain otherinvested assets as it accrues and is calculated using the effective interest rate method. Premiums, discounts and transaction costs areamortized over the life of the underlying investment using the effective yield method for all debt securities as well as mortgages and privateplacements. |
| The Company records purchases and sales of invested assets on a trade date basis. Loans originated by the Company are recognized on asettlement date basis. |
| Real estate consists of both own use property and investment property. Own use property, held for use for the Company’s operations, iscarried at cost less accumulated depreciation and any accumulated impairment losses. Depreciation is calculated based on the cost of anasset 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 propertyis included in assets backing insurance contract liabilities, the fair value of the property is used in the valuation of insurance contractliabilities. Fair value of own use property is determined using the same processes as for investment property, described below. Own useproperty is classified as Level 3 for fair value disclosure purposes. |
| An investment property is a property held to earn rental income, for capital appreciation, or both. Investment properties are measured atfair value, with changes in fair value recognized in income. Fair value is determined using external appraisals that are based on the highestand best use of the property. The valuation techniques include discounted cash flows, the direct capitalization method as well ascomparable sales analysis and include both observable and unobservable inputs. Inputs include existing and assumed tenancies, marketdata from recent comparable transactions, future economic outlook and market risk assumptions, capitalization rates and internal rates ofreturn. 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 valueat the date of transfer is recognized in OCI, to the extent that it is not reversing a previous impairment loss. Reversals of impairment lossesare recognized in income. |
| Other invested assets include private equity and property investments held in infrastructure and timber, as well as in agriculture and oiland gas sectors. Private equity investments are accounted for as associates or joint ventures using the equity method (as described in note1(d) above) or are classified as FVTPL or AFS and carried at fair value. Investments in oil and gas exploration and evaluation activities aremeasured on the cost basis using the “successful efforts” method. Timber and agriculture properties are measured at fair value withchanges in fair value recognized in income, except for buildings, equipment and bearer plants which are measured at amortized cost. Thefair value of other invested assets is determined using a variety of valuation techniques as described in note 4. Other invested assets thatare measured or disclosed at fair value are primarily classified as Level 3. |
| Other invested assets also include investments in leveraged leases, which are accounted for using the equity method. The carrying valueunder 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 assetsGoodwill represents the difference between the fair value of purchase consideration of an acquired business and the Company’sproportionate share of the net identifiable assets acquired. It is initially recorded at cost and subsequently measured at cost less anyaccumulated impairment. |
| Goodwill is tested for impairment at least annually and whenever events or changes in circumstances indicate that the carrying amountsmay not be recoverable at the cash generating unit (“CGU”) or group of CGUs level. The Company allocates goodwill to CGUs or group ofCGUs for impairment testing at the lowest level within the entity where the goodwill is monitored for internal management purposes. Theallocation is made to those CGUs or group 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 theremaining assets in the CGU or group of CGUs are subject to being reduced by the remaining deficiency on a pro-rata basis. |
| | |
| 149 |
| The recoverable amount of a CGU or group of CGUs is the higher of the estimated fair value less costs to sell or the value-in-use of the CGUor group of CGUs. In assessing value-in-use, estimated future cash flows are discounted using a pre-tax discount rate that reflects currentmarket assessments of the time value of money and the risks specific to the CGU or group of CGUs. In some cases, the most recentdetailed calculation made in a prior period of a recoverable amount is used in the current period impairment testing. This is the case only ifthere are no significant changes to the CGU or group of CGUs, the likelihood of impairment is remote based on the analysis of currentevents and circumstances, and the most recently calculated recoverable amount substantially exceeded the current carrying amount ofthe CGU or group of CGUs. |
| Intangible assets with indefinite useful lives include the John Hancock brand name, certain investment management contracts and certainagricultural water rights. The indefinite useful life assessment for the John Hancock brand name is based on the brand name being protectedby indefinitely renewable trademarks in markets where branded products are sold, and for certain investment management contracts basedon the ability to renew these contracts indefinitely. In addition, there are no legal, regulatory or contractual provisions that limit the usefullives of these intangible assets. Certain agricultural water rights are held in perpetuity. An intangible asset with an indefinite useful life is notamortized but is subject to an annual impairment test which is performed more frequently if an indication that it is not recoverable arises. |
| Intangible assets with finite useful lives include acquired distribution networks, customer relationships, capitalized software, and certaininvestment management contracts and other contractual rights. Distribution networks, customer relationships, and other finite lifeintangible assets are amortized over their estimated useful lives, six to 68 years, either based on straight-line or in relation to other assetconsumption metrics. Software intangible assets are amortized on a straight-line basis over their estimated useful lives of three to 10years. Finite life intangible assets are assessed for indicators of impairment at each reporting period. If indications of impairment arise,these assets are tested for impairment. |
| (g) Miscellaneous assetsMiscellaneous assets include assets held in a rabbi trust with respect to unfunded defined benefit obligations, defined benefit assets, ifany, deferred acquisition costs and capital assets. Rabbi trust assets are carried at fair value. Defined benefit assets carrying value isexplained in note 1(o). Deferred acquisition costs are carried at cost less accumulated amortization and are amortized over the periodredemption fees may be charged or over the period revenue is earned. Capital assets are carried at cost less accumulated amortizationcomputed on a straight-line basis over their estimated useful lives, which vary from two to 10 years. |
| (h) Segregated fundsThe Company manages segregated funds on behalf of policyholders, which are presented as segregated fund net assets with offsettingsegregated funds net liabilities to policyholders in the amount of their account balances. Amounts invested by the Company in segregatedfunds for seed purposes are presented within invested asset categories based on the nature of the underlying investments. The investmentreturns on these funds are passed directly to policyholders. In some cases, the Company has provided guarantees associated with thesefunds. |
| 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 ofcontrol over the underlying investments, the Company considers the scope of its decision-making rights, the rights held by other parties,its remuneration as an investment manager and its exposure to variability of returns from the investments. The Company has determinedthat 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 investedassets held by the general fund, as described above in note 1(e). Segregated funds liabilities are measured based on the value of thesegregated funds net assets. Investment returns on segregated funds assets belong to policyholders and the Company does not bear therisk associated with these assets outside of guarantees offered on certain variable life and annuity products, for which the underlyinginvestments are held within segregated funds. Accordingly, investment income earned by segregated funds and expenses incurred bysegregated funds are offset and are not separately presented in the Consolidated Statements of Income. Fee income earned by theCompany for managing and administering 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, arerecorded 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 liabilitiesMost contracts issued by the Company are considered insurance, investment or service contracts. Contracts under which the Companyaccepts significant insurance risk from a policyholder are classified as insurance contracts in the Consolidated Financial Statements. Acontract is considered to have significant insurance risk if, and only if, an insured event could cause an insurer to make significantadditional payments in any scenario, excluding scenarios that lack commercial substance at the inception of the contract. Contracts underwhich the Company does not accept significant insurance risk are either classified as investment contracts or considered service contractsand are accounted for in accordance with IAS 39 “Financial Instruments: Recognition and Measurement” or IFRS 15 “Revenue fromContracts with Customers”, respectively. |
| 150 | 2022 Annual Report | Notes to Consolidated Financial Statements |
| Once a contract has been classified as an insurance contract it remains an insurance contract even if the insurance risk reducessignificantly. 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 netinvestment 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 Statementsof Financial Position. The Company’s Appointed Actuary is responsible for determining the amount of insurance contract liabilities inaccordance 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 7. |
| Investment contract liabilities include contracts issued to retail and institutional investors that do not contain significant insurance risk.Investment contract liabilities and deposits are measured at amortized cost or at FVTPL by election. The election reduces accountingmismatches between FVTPL assets supporting these contracts and the related contract liabilities. Investment contract liabilities arederecognized 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 closelyrelated to the host insurance contract and do not meet the definition of an insurance contract. These embedded derivatives are presentedseparately in other assets or other liabilities and are measured at FVTPL. |
| (j) Reinsurance assetsThe Company uses reinsurance in the normal course of business to manage its risk exposure. Insurance ceded to a reinsurer does notrelieve the Company from its obligations to policyholders. The Company remains liable to its policyholders for the portion reinsured to theextent 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 financialcondition of the reinsurer. Amounts recoverable from reinsurers are estimated in accordance with the terms of the relevant reinsurancecontract. |
| 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 assetsare not offset against the related insurance contract liabilities and are presented separately on the Consolidated Statements of FinancialPosition. Refer to note 7(a). |
| (k) Other financial instruments accounted for as liabilitiesThe 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, withissuance costs deferred and amortized using the effective interest rate method. |
| (l) Income taxesThe provision for income taxes is calculated based on income tax laws and income tax rates substantively enacted as at the date of theConsolidated 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 inequity, respectively. |
| Current income taxes are amounts expected to be payable or recoverable for the current year and any adjustments to taxes payable inrespect of previous years. |
| Deferred income taxes are provided for using the liability method and result from temporary differences between the carrying values ofassets and liabilities and their respective tax bases. Deferred income taxes are measured at the substantively enacted tax rates that areexpected 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 ateach reporting date and are reduced to the extent that it is no longer probable that the tax benefit will be realized. Deferred tax assets andliabilities are offset if there is a legally enforceable right to offset current tax assets and liabilities and they relate to income taxes levied bythe 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 associatedwith investments in subsidiaries, associates and joint ventures, where the timing of the reversal of the temporary differences can becontrolled 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 toexaminations 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. |
| | |
| 151 |
| The Company is subject to income tax laws in various jurisdictions. Tax laws are complex and potentially subject to different interpretationsby the taxpayer and the relevant tax authority. The provision for current income taxes and deferred income taxes representsmanagement’s interpretation of the relevant tax laws and its estimate of current and future income tax implications of the transactions andevents during the year. The Company may be required to change its provision for income taxes or deferred income tax balances when theultimate deductibility of certain items is successfully challenged by taxing authorities, or if estimates used in determining the amount ofdeferred tax balances to recognize change significantly, or when receipt of new information indicates the need for adjustment in theamount of deferred income taxes to be recognized. Additionally, future events, such as changes in tax laws, tax regulations, orinterpretations of such laws or regulations, could have an impact on the provision for income taxes, deferred tax balances and the effectivetax rate. Any such changes could materially affect the amounts reported in the Consolidated Financial Statements in the period thesechanges occur. |
| (m) Foreign currency translationItems included in the financial statements of each of the Company’s subsidiaries, joint ventures and associates are measured by eachentity using the currency of the primary economic environment in which the entity operates (the “functional currency”). If their functionalcurrency 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 thereporting date. Revenue and expenses denominated in foreign currencies are translated at the average exchange rate prevailing during thequarter reported. Exchange gains and losses are recognized in income except for translation of net investments in foreign operations andthe results of hedging these positions, and for non-monetary items designated as AFS. These foreign exchange gains and losses arerecognized in OCI until such time that the foreign operation or non-monetary item is disposed of or control or significant influence over it islost. |
| The Consolidated Financial Statements are presented in Canadian dollars. The financial statements of the Company’s foreign operationsare translated from their functional currencies to Canadian dollars; assets and liabilities are translated at the exchange rate at thereporting date, and revenue and expenses are translated using the average exchange rates for the period. Foreign exchange gains andlosses on these translations are recognized in OCI, subject to reclassification to income upon disposal of a foreign operation. |
| (n) Stock-based compensationThe Company provides stock-based compensation to certain employees and directors as described in note 15. Compensation expense ofequity instruments granted is accrued based on the best estimate of the number of instruments expected to vest, with revisions made tothat estimate if subsequent information indicates that actual forfeitures are likely to differ from initial forfeiture estimates, unlessforfeitures are due to market-based conditions. |
| Stock options are expensed with a corresponding increase in contributed surplus. Restricted share units and deferred share units areexpensed 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 marketvalue of MFC’s common shares at the end of each quarter. The change in the value of the awards resulting from changes in the marketvalue of MFC’s common shares or changes in the specific performance conditions and credited dividends is recognized in income, offset bythe impact of total return swaps used to manage the variability of the related liabilities. |
| Stock-based compensation cost is recognized over the applicable vesting period, unless the employee is eligible to retire at the time ofgrant or will be eligible to retire during the vesting period. Compensation costs attributable to stock options, restricted share units, andperformance share units granted to employees who are eligible to retire on the grant date or who will become eligible to retire during thevesting period, are recognized at the grant date or over the period from the grant date to the date of retirement eligibility, respectively. |
| The Company’s contributions to the Global Share Ownership Plan (“GSOP”) (refer to note 15(d)), are expensed as incurred. Under theGSOP, subject to certain conditions, the Company will match a percentage of an employee’s eligible contributions to certain maximums. Allcontributions are used by the plan’s trustee to purchase MFC common shares in the open market on behalf of participating employees. |
| (o) Employee future benefitsThe Company maintains defined contribution and defined benefit pension plans and other post-employment plans for employees andagents 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 theestimated present value of future benefits that eligible employees have earned in return for their service up to the reporting date using theprojected benefit method. The discount rate used is based on the yield, as at the reporting date, of high-quality corporate debt securitiesthat have approximately the same term as the benefit obligations and that are denominated in the same currency in which the benefits areexpected to be paid. |
| 152 | 2022 Annual Report | Notes to Consolidated Financial Statements |
| To determine the Company’s net defined benefit asset or liability, the fair value of plan assets is deducted from the defined benefitobligations. When this calculation results in a surplus, the asset that can be recognized is limited to the present value of future economicbenefit available in the form of future refunds from the plan or reductions in future contributions to the plan (the asset limit). Definedbenefit 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 theperiod in which they occur and are not reclassified to income in subsequent periods. They consist of actuarial gains and losses, the impactof the asset limit, if any, and the return on plan assets, excluding amounts included in net interest income or expense. Changes in the netdefined 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 welfareplans is recognized over the employee’s years of service to their date of full eligibility. The net benefit cost for the year is recorded inincome and is calculated as the sum of the service cost in respect of the fiscal year, the net interest income or expense and any applicableadministration expenses, plus past service costs or credits resulting from plan amendments or curtailments. The net interest income orexpense is determined by applying the discount rate to the net defined benefit asset or liability. The current year cost of disability welfareplans 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 whichservices are rendered by employees. |
| (p) Derivative and hedging instrumentsThe Company uses derivative financial instruments (“derivatives”) including swaps, forward and futures agreements, and options tomanage current and anticipated exposures to changes in interest rates, foreign exchange rates, commodity prices and equity marketprices, and to replicate permissible investments. Derivatives embedded in other financial instruments are separately recorded asderivatives when their economic characteristics and risks are not closely related to those of the host instrument, the terms of theembedded derivative are the same as those of a standalone derivative and the host instrument itself is not recorded at FVTPL. Derivativeswhich are separate financial instruments are recorded at fair value, and those with unrealized gains reported as derivative assets and thosewith unrealized losses reported as derivative liabilities. |
| A determination is made for each derivative as to whether to apply hedge accounting. Where hedge accounting is not applied, changes inthe fair value of derivatives are recorded in investment income. Refer to note 4(c). |
| Where the Company has elected to apply hedge accounting, a hedging relationship is designated and documented at inception. Hedgeeffectiveness is evaluated at inception and throughout the term of the hedge. Hedge accounting is only applied when the Company expectsthat the hedging relationship will be highly effective in achieving offsetting changes in fair value or changes in cash flows attributable to therisk being hedged. The assessment of hedge effectiveness is performed at the end of each reporting period both prospectively andretrospectively. When it is determined that a hedging relationship is no longer effective, or the hedging instrument or the hedged item hasbeen sold or terminated, the Company discontinues hedge accounting prospectively. In such cases, if the derivatives are not sold orterminated, 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 beinghedged, as discussed below. |
| In a fair value hedging relationship, changes in fair value of the hedging instruments are recorded in investment income, offsettingchanges in fair value of the hedged items, which would otherwise not be carried at fair value. Hedge ineffectiveness is recognized ininvestment income and arises from differences between changes in the fair values of hedging instruments and hedged items. When hedgeaccounting is discontinued, the carrying value of the hedged item is no longer adjusted and the cumulative fair value adjustments areamortized to investment income over the remaining term of the hedged item unless the hedged item is sold, at which time the balance isrecognized 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 whilethe ineffective portion is recognized in investment income. Gains and losses in accumulated other comprehensive income (“AOCI”) arerecognized in income during the same periods that the variability in the hedged cash flows or the hedged forecasted transactions arerecognized in income. The reclassifications from AOCI are made to investment income, except for total return swaps that hedge stock-based compensation awards, which are reclassified to general expenses. |
| Gains and losses on cash flow hedges in AOCI are reclassified immediately to investment income when the hedged item is sold or theforecasted transaction is no longer expected to occur. When a hedge is discontinued, but the hedged forecasted transaction is expected tooccur, the amounts in AOCI are reclassified to investment income in the periods during which variability in the cash flows hedged or thehedged 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 recordedin OCI. Gains and losses in AOCI are recognized in income during the periods when gains or losses on the underlying hedged netinvestment in foreign operations are recognized in income upon disposal of the foreign operation. |
| 153 |
| (q) Premium income and related expensesGross premiums for all types of insurance contracts, and contracts with limited mortality or morbidity risk, are generally recognized asrevenue when due. Premiums are reported gross of reinsurance ceded (refer to note 7). |
| (r) Revenue from service contractsThe Company recognizes revenue from service contracts in accordance with IFRS 15. The Company’s service contracts generally imposesingle performance obligations, each consisting of a series of similar related services for each customer. Revenue is recorded asperformance obligations are satisfied over time because the customers simultaneously receive and consume the benefits of the servicesrendered, measured using an output method. Revenue for variable consideration is recognized to the extent that it is highly probable that asignificant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty is subsequently resolved. Refer tonote 14. |
| Note 2 | Accounting and Reporting Changes |
| (a) Changes in accounting and reporting policy |
| (i) Annual Improvements 2018 – 2020 CycleAnnual Improvements 2018–2020 Cycle was issued in May 2020 and is effective on or after January 1, 2022. The IASB issued four minoramendments to different standards as part of the Annual Improvements process, to be applied prospectively. Adoption of theseamendments did not have a significant impact on the Company’s Consolidated Financial Statements. |
| (ii) Amendments to IFRS 3 “Business Combinations”Amendments to IFRS 3 “Business Combinations” were issued in May 2020, and are effective on or after January 1, 2022, with earlierapplication permitted. The amendments update references within IFRS 3 to the 2018 Conceptual Framework and require that theprinciples in IAS 37 “Provisions, Contingent Liabilities and Contingent Assets” be used to identify liabilities and contingent assets arisingfrom a business combination. Adoption of these amendments did not have a significant impact on the Company’s Consolidated FinancialStatements. |
| (iii) Amendments to IAS 37 “Provisions, Contingent Liabilities and Contingent Assets”Amendments to IAS 37 “Provisions, Contingent Liabilities and Contingent Assets” were issued in May 2020, and are effective on or afterJanuary 1, 2022, with earlier application permitted. The amendments address identifying onerous contracts and specify the cost offulfilling a contract which includes all costs directly related to the contract. These include incremental direct costs and allocations of othercosts that relate directly to fulfilling the contract. Adoption of these amendments did not have a significant impact on the Company’sConsolidated Financial Statements. |
| (b) Future accounting and reporting changes |
| (i) IFRS 17 “Insurance Contracts”IFRS 17 “Insurance Contracts” was issued in May 2017 to be effective for years beginning on January 1, 2021. Amendments to IFRS 17“Insurance Contracts” were issued in June 2020 and include a two-year deferral of the effective date. IFRS 17 as amended, is effective foryears beginning on January 1, 2023, to be applied retrospectively. If full retrospective application to a group of contracts is impracticablethe modified retrospective or fair value methods may be used. The standard replaced IFRS 4 “Insurance Contracts” and therefore replacedthe Canadian Asset Liability Method (“CALM”) and materially changed the recognition and measurement of insurance contracts and thecorresponding presentation and disclosures in the Company’s Consolidated Financial Statements. |
| Narrow-scope amendments to IFRS 17 “Insurance Contracts” were issued in December 2021 and were effective on initial application ofIFRS 17 and IFRS 9 “Financial Instruments” which the Company has adopted on January 1, 2023. The amendments reduce accountingmismatches between insurance contract liabilities and financial assets in scope of IFRS 9 within comparative prior periods when initiallyapplying IFRS 17 and IFRS 9. The amendments allow insurers to present comparative information on financial assets as if IFRS 9 were fullyapplicable during the comparative period. The amendments do not permit application of IFRS 9 hedge accounting principles to thecomparative period. |
| The principles underlying IFRS 17 differ from CALM as permitted by IFRS 4. While there are many differences, the following outlines someof the key measurement differences: |
| • Under IFRS 17 new business gains are recorded on the Consolidated Statements of Financial Position (in the Contractual Service Margin |
| (“CSM”) component of the insurance contract liability) and amortized into income as services are provided. New business losses arerecorded into income immediately. Under CALM, both new business gains and new business losses were recognized in incomeimmediately. |
| • Under IFRS 17 the Company aggregates insurance contracts that are subject to similar risks and managed together into portfolios. |
| Since new business gains and losses have different accounting treatments, insurance contracts are further aggregated into groups by |
| 154 | 2022 Annual Report | Notes to Consolidated Financial Statements |
| profitability and issuance period to limit offsetting of new business gains and losses. Such aggregation of contracts into groups isrequired on initial recognition and not reassessed subsequently. Under CALM, new business gains and new business losses offset eachother in income. |
| • Under IFRS 17 the discount rate used to estimate the present value of insurance contract liabilities is based on the characteristics of the |
| liabilities. Under CALM, the rates of returns for current and projected assets supporting insurance contract liabilities were used to valuethe liabilities. The difference in the discount rate approach also impacts the timing of investment results. Under IFRS 17, the impact ofinvesting activities will emerge into earnings over the life of the assets. Under CALM, the impact of investing activities was capitalizedinto reserves and therefore earnings in the period they occurred. |
| • Under IFRS 17 the insurance contract liability discount rate is not related to the expected return on Alternative Long-Duration Assets |
| (“ALDA”) and public equity assets, and as a result, the earnings sensitivity of a change in return assumptions for ALDA and public equityassets will be significantly reduced. |
| • Under IFRS 17 the Company has elected the option to record changes in insurance contract liabilities arising from changes in interest |
| rates through other comprehensive income, for substantially all insurance products, and classify debt instruments supporting theseinsurance contract liabilities as fair value through other comprehensive income (“FVOCI”) under IFRS 9. Under CALM, changes ininsurance contract liabilities were recorded in income and supporting debt instruments were classified as FVTPL. |
| • Under IFRS 17 the Company separates specific embedded derivatives and distinct investment components from insurance contracts |
| and accounts for them under IFRS 9. Under IFRS 4 the treatment of embedded derivatives is consistent with IFRS 17, however underIFRS 4 the Company did not separate deposit components as this was not required by the standard. |
| • Under IFRS 17 insurance contracts with different features are measured by one of the three measurement models: General |
| Measurement Model (“GMM”), Premium Allocation Approach (“PAA”) and Variable Fee Approach (“VFA”). Under IFRS 4, insurancecontracts were generally valued by one measurement model, although an unearned premium reserve method similar to PAA wasallowed and used by Manulife for certain short duration / annually renewable business. |
| In addition, there are significant changes to presentation and disclosure of the financial statements. The following outlines some of the keypresentation and disclosure changes: |
| • Consolidated Statements of Financial Position: Under IFRS 17 the Company presents portfolios of insurance and reinsurance contracts |
| issued separately from portfolios of reinsurance contracts held, and portfolios in asset position are further presented separately fromportfolios in liability position. Under CALM, contracts were not split and presented by asset and liability position. |
| • Consolidated Statements of Comprehensive Income: Under IFRS 17 the Company separately presents insurance revenue, insurance |
| service expense, insurance finance income or expenses, and income or expenses from reinsurance contracts held. Under CALM theCompany reported premium income, gross claims and benefits, changes in insurance contract liabilities, benefits and expenses cededto reinsurers, and changes in reinsurance assets. |
| IFRS 17 TransitionThe Company is required to prepare an opening balance sheet as at January 1, 2022, the date of transition to IFRS 17, which forms thestarting point for its financial reporting in accordance with IFRS 17. Any differences between the carrying value and the presentation ofassets, liabilities and equity determined in accordance with CALM and IFRS 17, as at January 1, 2022, will be recorded in opening retainedearnings and accumulated other comprehensive income. |
| On the transition date, January 1, 2022, the Company; |
| • Identified, recognized, and measured each group of contracts as if IFRS 17 had always applied, unless it was impracticable (see Full |
| Retrospective Approach and Fair Value Approach below); |
| • Identified, recognized, and measured assets for insurance acquisition cash flows as if IFRS 17 had always applied, unless it was |
| impracticable. However, no recoverability assessment was performed before the transition date; |
| • Derecognized any balances that would not exist had IFRS 17 always applied; |
| • Measured own use real estate properties that were underlying items of insurance contracts with direct participation features at fair |
| value; and |
| • Recognized any resulting net difference in equity. |
| Full Retrospective ApproachThe Company has adopted IFRS 17 retrospectively unless the full retrospective approach was deemed impracticable. The Company hasapplied the full retrospective approach to most contracts issued on or after January 1, 2021, except for participating insurance contractsand variable annuity contracts for which the fair value approach was used. |
| | |
| 155 |
| Fair Value ApproachThe Company has applied the fair value approach to all insurance contracts issued prior to January 1, 2021, as obtaining reasonable andsupportable information to apply the full retrospective approach was deemed impracticable. |
| IFRS 17 allows the use of the fair value approach for groups of insurance contracts with direct participation features if the risk mitigationoption is applied prospectively from the transition date and the Company used derivatives, reinsurance contracts held or non-derivativefinancial instruments held at FVTPL to mitigate financial risk on these groups of contracts. With these conditions met, the Company haselected to apply the fair value approach to participating insurance contracts and variable annuity contracts issued on or after January 1,2021. |
| Under the fair value approach, the Company has determined the CSM of the GMM and VFA liabilities for remaining coverage at thetransition date as the difference between the fair value of the groups of insurance contracts and the fulfilment cash flows measured at thatdate. In determining the fair value, the Company has applied the requirements of IFRS 13 “Fair Value Measurement”, except for the demanddeposit floor requirement. The Company used the income approach to determine the fair value of the insurance contracts at the transitiondate, in which future cash flows are discounted to a single amount that reflects current market expectations about those future amounts. |
| To determine groups of insurance contracts under the fair value approach the Company has aggregated contracts issued more than oneyear apart as it did not have reasonable and supportable information to divide groups into those including only contracts issued within oneyear or less. |
| For the application of the fair value approach, the Company has used reasonable and supportable information available at the transitiondate in order to: |
| • Identify groups of insurance contracts; |
| • Determine whether an insurance contract meets the definition of an insurance contract with direct participation features; |
| • Identify discretionary cash flows for insurance contracts without direct participation features; and |
| • Determine whether an investment contract meets the definition of an investment contract with discretionary participation features. |
| For insurance contracts where the fair value approach was applied, the discount rate used to determine the fair value of the group ofinsurance contracts was determined at the transition date. For cash flows of insurance contracts that do not vary based on the returns onunderlying items, the Company determines discount rates by adjusting a liquid risk-free yield curve to reflect the differences between theliquidity characteristics of the financial instruments that underlie the rates observed in the market and the liquidity characteristics of theinsurance contracts (a bottom-up approach). |
| Other Comprehensive Income at TransitionUnder IFRS 17 changes in the carrying amount of insurance contracts arising from the effect of and changes in the time value of moneyand in financial risk are presented as insurance finance income or expense (except for some changes for insurance contracts with directparticipation features under certain circumstances). Under IFRS 17 the Company has the option to present all insurance finance income orexpense in profit or loss or disaggregated between profit or loss and OCI (the “OCI option”). The Company has elected the OCI option anddetermined the cumulative OCI balance at transition as follows: |
| • For some GMM and PAA groups of contracts where the fair value approach was applied, the cumulative OCI was set retrospectively only |
| if reasonable and supportable information was available, otherwise it was set to zero at the transition date. |
| • For GMM groups of contracts where the full retrospective approach was applied, the cumulative balance was calculated as if the |
| Company had been applying the OCI option since inception of the contracts. |
| • For VFA contracts, the cumulative OCI at transition was set equal to the difference between the market value and carrying value of the |
| underlying items. |
| Reclassification of Financial Assets for the Comparative Period of IFRS 17 AdoptionUnder the amendments to IFRS 17 with regard to the “Initial Application of IFRS 17 and IFRS 9 – Comparative Information” (“IFRS 17amendments”), the Company has elected the option to reclassify financial assets, including those held in respect of activities notconnected to contracts within the scope of IFRS 17, on an instrument-by-instrument basis, for the comparative period in alignment with theexpected classification on initial application of IFRS 9 as at January 1, 2023. These reclassification changes also led the Company topresent certain investment results previously reported in net investment income or OCI under IAS 39, within OCI or net investment incomein alignment with the expected classifications of IFRS 9, respectively. |
| 156 | 2022 Annual Report | Notes to Consolidated Financial Statements |
| The following table presents invested assets by type and measurement category as at December 31, 2021, with transitional measurementdifferences and presentation differences and then invested assets by type and category as at January 1, 2022. |
| | Impact of IFRS 17 |
| December 31, 2021 | Amendments | January 1, 2022 |
| | | | IAS 39 |
| Measurement | | | | Total carrying | Measurement | | | | | Presentation | Total carrying | | | | | | MeasurementCategory |
| | | | Category | | value | Differences | | | | | Differences | value |
| Cash and short-term securities | | | | AFS | $ | 14,339 | $ | – | | | | | $ | 2,214 | $ | | | | | 16,553 | FVOCI(1) |
| | | | FVTPL | 2,214 | – | | | | | (2,214) | – | FVTPL(2) |
| Amortized cost | | | | 6,041 | – | | | | | | | | – | 6,041 | Amortized cost(3) |
| | | | | 22,594 | – | | | | | | | | – | 22,594 |
| Debt securities | | | | AFS | 33,097 | – | | | | | 184,365 | 217,462 | | | | | | FVOCI(1) |
| | | | FVTPL | 189,722 | – | | | | | (184,365) | 5,357 | FVTPL(2) |
| Amortized cost | | | | 1,320 | – | | | | | | | | – | 1,320 | Amortized cost(3) |
| | | | | 224,139 | – | | | | | | | | – | 224,139 |
| Public equities | | | | AFS | 2,351 | – | | | | | (2,351) | – |
| | | | FVTPL | 25,716 | – | | | | | 2,351 | 28,067 | FVTPL(2) |
| | | | | 28,067 | – | | | | | | | | – | 28,067 |
| MortgagesAFS | | – | 1,897 | | | | | 29,901 | 31,798 | FVOCI(1) |
| | | | FVTPL | | – | 37 | | | | | 1,166 | 1,203 | FVTPL(2) |
| Amortized cost | | | | 52,014 | – | | | | | (31,067) | 20,947 | Amortized cost(3) |
| | | | | 52,014 | 1,934 | | | | | | | | – | 53,948 |
| Private placements | | | | AFS | | – | 4,407 | | | | | 42,175 | 46,582 | FVOCI(1) |
| | | | FVTPL | | – | 40 | | | | | | | | 667 | 707 | FVTPL(2) |
| Amortized cost | | | | 42,842 | – | | | | | (42,842) | – | Amortized cost(3) |
| | | | | 42,842 | 4,447 | | | | | | | | – | 47,289 |
| Policy loans | Amortized cost | | | | 6,397 | – | | | | | (6,397) | – | N/A(4) |
| Loans to Bank clients | Amortized cost | | | | 2,506 | – | | | | | | | | – | 2,506 | Amortized cost(3) |
| Other invested assets | | | | AFS | | 89 | (4) | | | | | | | | 238 | 323 | FVOCI(1) |
| | | | FVTPL | 21,157 | (10) | | | | | | | | 617 | 21,764 | FVTPL(2) |
| Amortized cost | | | | | 855 | – | | | | | | | | (855) | – | Amortized cost(3) |
| | | | | 22,101 | (14) | | | | | | | | – | 22,087 |
| Total in-scope invested |
| assets | | | | | 400,660 | 6,367 | | | | | (6,397) | 400,630 |
| Out-of-scope invested assets(5) | | | | Other | 26,438 | 1,035 | | | | | | | | – | 27,473 | Other(5) |
| Total Invested Assets | | | | | $ 427,098 | $ 7,402 | | | | | $ | (6,397) | $ 428,103 |
| (1) | The reclassification of unrealized gains (losses), net of tax, of $11,868 from retained earnings to accumulated other comprehensive income (AOCI) related to FVOCIclassification of debt investments classified as FVTPL under IAS 39. |
| (2) | The reclassification of unrealized gains (losses), net of tax, of $268 from AOCI to retained earnings related to FVTPL classification of debt securities classified as FVOCI underIAS 39. |
| (3) | The remeasurement of debt securities from amortized cost to FVOCI or FVTPL resulted in an increase in carrying value of $6,367. The impact on AOCI and retained earnings,net of tax, was $5,041 and $952, respectively. |
| (4) | Policy loans were reclassified from invested assets to insurance contract liabilities under IFRS 17 with no remeasurement and no impact to equity. |
| (5) | Own use real estate properties which are underlying items for insurance contracts with direct participating features were remeasured to fair value as if they were investmentproperties, as permitted by IFRS 17. This remeasurement resulted in an increase of carrying value of $1,035. The impact to retained earnings, net of tax, was $915. |
| The Company has elected to apply the impairment requirements of IAS 39 (incurred losses) for the comparative period as provided forunder IFRS 17. Accordingly, for assets that were classified as FVTPL under IAS 39, where no impairment was required, but werereclassified to FVOCI or amortized cost under IFRS 9 for the comparative period, the Company did not measure any impairment for thecomparative period since IAS 39 impairment was not calculated. |
| | | | | | | | | | | | |
| | | | | | | | | | | 157 |
| Opening balance sheet under IFRS 17 “Insurance Contracts” including classification and measurement changes of financial assets |
| Effects from applying IFRS 17 resulted in a reduction of total equity of $11,997, net of tax, as at January 1, 2022. The opening IFRS 17balance sheet and related adjustments as at January 1, 2022 are presented below: |
| | OPENING IFRS BALANCE SHEET ADJUSTMENTS |
| IFRS 4 & | | IFRS 17 & |
| | Measurement Differences |
| IAS 39 | | IAS 39 |
| December 31, | | January 1, | Transition | | | Contract | Presentation |
| 2021 | | 2022 | CSM | Measurement | Differences |
| AssetsTotal invested assets |
| $ 427,098 | $ | | – | $ | 7,402 | $ | (6,397) | $ 428,103 |
| Total other assets | 90,757 | 2,877 | | | 5,617 | 1,078 | 100,329 |
| Segregated funds net assets | 399,788 | | | – | | – | – | 399,788 |
| Total assets | $ 917,643 | $ | 2,877 | | | $ 13,019 | $ | (5,319) | $ 928,220 |
| Liabilities and Equity |
| Insurance contract liabilities | $ 392,275 | $ 21,466(1) | | | $ 10,014 | $ (18,134) | $ 405,621 |
| Segregated funds insurance net liabilities | | – | | – | | – | 130,836 | 130,836 |
| Total insurance contract liabilities | 392,275 | 21,466 | | | 10,014 | 112,702 | 536,457 |
| Total investment contract liabilities | 3,116 | | | – | | – | 275,900 | 279,016 |
| Other liabilities | 63,595 | (2,823) | | | (784) | 5,867 | 65,855 |
| Segregated funds net liabilities | 399,788 | | | – | | – | (399,788) | | – |
| Total liabilities | 858,774 | 18,643 | | | 9,230 | (5,319) | 881,328 |
| EquityShareholders’ retained earnings |
| 23,492 | (13,607) | | | (229) | | – | 9,656 |
| Shareholders’ accumulated other comprehensive income (loss) |
| Net insurance finance expenses | | – | | – | (17,117) | | – | (17,117) |
| Net reinsurance finance income | | – | | – | 984 | | – | 984 |
| FVOCI investments | 848 | | | – | 16,916 | | – | 17,764 |
| Other equity items | 34,068 | | | – | | – | 34,068 |
| Total shareholders’ equity | 58,408 | (13,607) | | | 554 | | – | 45,355 |
| Participating policyholders’ equity | (1,233) | (1,440)(1) | | | 2,774 | | – | 101 |
| Non-controlling interests | 1,694 | (719)(1) | | | 461 | | – | 1,436 |
| Total equity | 58,869 | (15,766) | | | 3,789 | | – | 46,892 |
| Total liabilities and equity | $ 917,643 | $ | 2,877 | | | $ 13,019 | $ | (5,319) | $ 928,220 |
| (1) | The post-tax CSM in the participating policyholders’ fund of $1.4 billion is expected to be recognized in shareholder net income over time. In addition, $0.7 billion of post-taxCSM is attributable to non-controlling interests. |
| The following table shows the nature and amount of the measurement adjustments made to the opening balance sheet: |
| MeasurementDifferences |
| | | | | | | | | Description |
| TransitionCSM | | | | | | | | | Contractual Service Margin (CSM) is a new liability that represents future unearned profits on insurance contracts written. For thismeasurement step, the amount recognized as at the transition date, January 1, 2022, was $21,466. The impact on equity was$15,766, net of tax. |
| ContractMeasurement | | | | | | | | | Under IFRS 17 other components of insurance contracts, aside from the CSM, are also remeasured. This measurement stepincludes the following changes: |
| | | | | | | | | Risk Adjustment (+2.1 billion to equity)(1): Changes to the provisions held within the Company’s insurance liabilities fornon-economic risk on application of the IFRS 17 standard; |
| | | | | | | | | Discount Rates (-1.5 billion to equity)(1): Changes in the economic assumptions used in the determination of the Company’sinsurance liabilities from the IFRS 4 CALM framework to IFRS 17, and changes in the carrying value of the Company’s assets backinginsurance liabilities under IFRS 9; |
| | | | | | | | | Other Revaluation Changes (+3.1 billion to equity): Includes other changes in equity created by the application of IFRS 17. Thisincludes changes to accounting for contract classifications, variable annuity guarantee contracts, and contract boundaries whichincreases the capitalization of future profits into the CSM, changes to the provisions for future taxes, and other changes related tothe application of IFRS 17. |
| ParticipatingandNon-ControllingInterest (NCI)Equity | | | | | | | | | In previous steps all impacts to equity were shown in shareholders’ equity. This step shows the geography of the impacts betweenshareholders’ equity, participating policyholders’ equity and non-controlling interests. |
| (1) | Excluding impacts on variable annuity guarantee contracts |
| 158 | 2022 Annual Report | Notes to Consolidated Financial Statements |
| The presentation differences are mainly comprised of the following: |
| • Policy loans invested assets – Reclassified to insurance contract liabilities as they are insurance contract related.• Contract classification – Some contracts were reclassified from insurance contracts to investment contracts or service contracts, with |
| some contracts reclassified from investment contracts to insurance contracts. The amount shown in presentation differences in thetable above relates to where they appear in the opening balance sheet. Any changes to these contracts’ measurement value are shownin the contract measurement step. |
| • Insurance receivables & payables – These amounts were previously reported either as separate line items in the financial statements |
| or recorded in miscellaneous assets and liabilities. These amounts have been reclassified to insurance contract liabilities as they areinsurance contract related. |
| • Embedded derivatives – These amounts were previously reported in miscellaneous assets and have been reclassified to insurance |
| contract liabilities as they are insurance contract related. |
| • Reinsurance funds withheld – These amounts were previously reported in other liabilities and have been reclassified to reinsurance |
| contract assets as they are reinsurance contract related. |
| • Deferred acquisition cost – These were previously reported in miscellaneous assets and have been reclassified to insurance contract |
| liabilities as they are insurance contract related. |
| • Segregated fund net liabilities – Segregated fund net liabilities were previously reported together, and have been separated into |
| segregated fund insurance net liabilities (those associated with insurance contracts) and segregated funds investment contract netliabilities (those associated with investment contracts) which form part of total investment contract liabilities. |
| (ii) IFRS 9 “Financial Instruments”IFRS 9 “Financial Instruments” was issued in November 2009 and amended in October 2010, November 2013 and July 2014, and iseffective 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 conjunctionwith the amendments to IFRS 17 “Insurance Contracts” issued in June 2020, the IASB amended IFRS 4 “Insurance Contracts” to permiteligible insurers to apply IFRS 9 effective January 1, 2023, alongside IFRS 17. The standard replaced 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 fairvalue on the basis of the entity’s business model for managing the financial assets and the contractual cash flow characteristics of thefinancial assets. The classification and measurement for financial liabilities remains generally unchanged; however, for a financial liabilitydesignated as at fair value through profit or loss, revisions have been made in the accounting for changes in fair value attributable tochanges 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 longerrecognized 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 newhedge 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 managementactivities in their financial statements. When IFRS 9 is first adopted, entities have the option to apply the hedge accounting requirementsunder IFRS 9 or to continue to apply the hedge accounting requirements under IAS 39. Such option will apply to all hedge accountingrelationships. |
| Revisions issued in July 2014 replaced the existing incurred loss model used for measuring the allowance for credit losses with anexpected loss model. Changes were also made to the existing classification and measurement model designed primarily to addressspecific application issues raised by early adopters of the standard. They also addressed the income statement accounting mismatchesand short-term volatility issues which have been identified as a result of the insurance contracts project. |
| The Company has adopted IFRS 9 beginning on January 1, 2023, as permitted under the June 2020 amendments to IFRS 4 “InsuranceContracts”. Consistent with IFRS 17 amendments, the adoption of IFRS 9 resulted in certain differences in the classification andmeasurement of financial assets when compared to their classification and measurement under IAS 39. The most significant changesincluded approximately $184 billion of debt securities previously classified as FVTPL which are classified as FVOCI (see note 2(b)(i)). |
| The Company has elected to apply the hedge accounting requirements under IFRS 9 to all hedge accounting relationships prospectively.As at January 1, 2023, all existing IAS 39 hedge accounting relationships were assessed and qualify for hedge accounting under IFRS 9.These existing relationships are treated as continuing hedge accounting relationships under IFRS 9 beginning on January 1, 2023; and willbe disclosed with comparative information for 2022 under IAS 39. |
| The Company will also be designating new hedge accounting relationships with the objective to reduce accounting mismatches betweenexisting derivatives’ changes in income and financial risk changes in OCI for IFRS 17 insurance liabilities and IFRS 9 financial assets. Newhedge accounting relationships are effective prospectively on January 1, 2023; and will not have comparative disclosure in the financialstatements for 2022. |
| | |
| 159 |
| Note 3 | Acquisitions |
| (a) Manulife TEDA Fund ManagementIn November, 2022 the Company acquired control of Manulife TEDA Fund Management Co., LTD through the purchase of the remaining51% of shares that it did not already own from its joint venture partner. The transaction furthers the Company’s goals of expanding both itsAsian and asset management businesses. |
| The transaction included $334 of cash consideration and derecognition of the Company’s previous joint venture interest with a fair value of$321. The Company recorded a gain of $95 on derecognition of the previous joint venture interest. The Company recognized $160 oftangible net assets, $240 of intangible assets and $255 of goodwill. |
| Note 4 | Invested Assets and Investment Income |
| (a) Carrying values and fair values of invested assets |
| | | | | Total carrying | Total fair |
| As at December 31, 2022 | | FVTPL(1) | AFS(2) | Other(3) | value(4) | value(5) |
| Cash and short-term securities(6) | | $ | 1,933 | $ 10,926 | $ | 6,294 | $ | 19,153 | $ | 19,153 |
| Debt securities(3),(7),(8) |
| Canadian government and agency | | 14,798 | 6,468 | – | 21,266 | 21,266 |
| U.S. government and agency | | 9,440 | 14,384 | 912 | 24,736 | 24,494 |
| Other government and agency | | 22,986 | 3,487 | – | 26,473 | 26,473 |
| Corporate | | 120,897 | 7,745 | 499 | 129,141 | 128,972 |
| Mortgage/asset-backed securities | | 2,152 | 136 | – | 2,288 | 2,288 |
| Public equities(9) | | 21,989 | 1,530 | – | 23,519 | 23,519 |
| Mortgages | | – | – | 54,638 | 54,638 | 51,429 |
| Private placements(8) | | – | – | 47,057 | 47,057 | 41,968 |
| Policy loans | | – | – | 6,894 | 6,894 | 6,894 |
| Loans to Bank clients | | – | – | 2,781 | 2,781 | 2,760 |
| Real estate |
| Own use property(10) | | – | – | 1,878 | 1,878 | 3,033 |
| Investment property | | – | – | 11,394 | 11,394 | 11,394 |
| Other invested assets |
| Alternative long-duration assets(11) | | 26,348 | 79 | 12,012 | 38,439 | 39,225 |
| Various other (12) | | 131 | – | 4,213 | 4,344 | 4,344 |
| Total invested assets | | $ 220,674 | $ 44,755 | $ 148,572 | $ 414,001 | $ 407,212 |
| 160 | 2022 Annual Report | Notes to Consolidated Financial Statements |
| | | | Total carrying | Total fair |
| As at December 31, 2021 | FVTPL(1) | AFS(2) | Other(3) | value(4) | value(5) |
| Cash and short-term securities(6) | $ | 2,214 | $ 14,339 | $ | 6,041 | $ | 22,594 | $ | 22,594 |
| Debt securities(7),(8) |
| Canadian government and agency | 18,706 | 3,964 | – | 22,670 | 22,670 |
| U.S. government and agency | 12,607 | 18,792 | 852 | 32,251 | 32,254 |
| Other government and agency | 21,888 | 2,871 | – | 24,759 | 24,759 |
| Corporate | 133,763 | 7,332 | 468 | 141,563 | 141,560 |
| Mortgage/asset-backed securities | 2,758 | 138 | – | 2,896 | 2,896 |
| Public equities(9) | 25,716 | 2,351 | – | 28,067 | 28,067 |
| Mortgages | – | – | 52,014 | 52,014 | 54,089 |
| Private placements(8) | – | – | 42,842 | 42,842 | 47,276 |
| Policy loans | – | – | 6,397 | 6,397 | 6,397 |
| Loans to Bank clients | – | – | 2,506 | 2,506 | 2,503 |
| Real estate |
| Own use property(10) | – | – | 1,812 | 1,812 | 3,024 |
| Investment property | – | – | 11,421 | 11,421 | 11,421 |
| Other invested assets |
| Alternative long-duration assets(11) | 21,022 | 89 | 10,093 | 31,204 | 31,863 |
| Various other (12) | 135 | – | 3,967 | 4,102 | 4,102 |
| Total invested assets | $ 238,809 | $ 49,876 | $ 138,413 | $ 427,098 | $ 435,475 |
| (1) | FVTPL classification was elected for securities backing insurance contract liabilities to substantially reduce any accounting mismatch arising from changes in the fair value ofthese assets and changes in the value of the related insurance contract liabilities. If this election had not been made and instead the available-for-sale (“AFS”) classification wasselected, 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 anyaccumulated 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, and leveragedleases. Also includes debt securities classified as held-to-maturity which are accounted for at amortized cost. Refer to note 1(e). |
| (4) | Invested assets above include debt securities, mortgages, private placements and approximately $302 (2021 – $323) of other invested assets, which primarily havecontractual cash flows that qualify as Solely Payment of Principal and Interest (“SPPI”). Invested assets which do not have SPPI qualifying cash flows as at December 31, 2022include debt securities, private placements and other invested assets with fair values of $nil, $98 and $507, respectively (2021 – $nil, $181 and $518, respectively). Thechange in the fair value of these invested assets during the year was $(94) (2021 – $15). |
| (5) | The methodologies used in determining fair values of invested assets are described in note 1(c) and note 4(g). |
| (6) | Includes short-term securities with maturities of less than one year at acquisition amounting to $4,148 (2021 – $7,314) cash equivalents with maturities of less than 90 daysat acquisition amounting to $8,711 (2021 – $9,239) and cash of $6,294 (2021 – $6,041). |
| (7) | Debt securities include securities which were acquired with maturities of less than one year and less than 90 days of $1,787 and $870, respectively (2021 – $2,196 and$347, respectively). |
| (8) | Floating rate invested assets above which are subject to interest rate benchmark reform, but have not yet transitioned to replacement reference rates, include debt securitiesbenchmarked to CDOR, USD LIBOR and AUD BBSW of $173, $892 and $15 (2021 – $176, $1,002 and $nil respectively), and private placements benchmarked to USDLIBOR, AUD BBSW and NZD BKBM of $1,613, $199 and $43 (2021 – $1,984, $166 and $43, respectively). Exposures indexed to USD LIBOR represent floating rate investedassets with maturity dates beyond June 30, 2023 while exposures to CDOR represent floating rate invested assets with maturity dates beyond June 28, 2024. The interest ratebenchmark reform is expected to have an impact on the valuation of invested assets whose value is tied to the affected interest rate benchmarks. The Company has assessed itsexposure at the contract level, by benchmark and instrument type. The Company is monitoring market developments with respect to alternative reference rates and the timehorizon during which they will evolve. As at December 31, 2022, the interest rate benchmark reform has not resulted in significant changes in the Company’s risk managementstrategy. |
| (9) | Includes $1 (2021 – $5) of public equities that are managed in conjunction with the Company’s ALDA strategy. |
| (10) | Includes accumulated depreciation of $411 (2021 – $407). |
| (11) | ALDA include investments in private equity of $14,279, infrastructure of $12,761, oil and gas of $2,221, timber and agriculture of $5,979 and various other invested assets |
| of $3,199 (2021 – $11,598, $9,824, $1,950, $5,259 and $2,573, respectively). |
| (12) | Includes $3,840 (2021 – $3,457) of leveraged leases. Refer to note 1(e). |
| (b) Equity method accounted invested assetsOther invested assets include investments in associates and joint ventures which are accounted for using the equity method of accountingas presented in the following table. |
| | | 2022 | | 2021 |
| | Carrying | | | | | Carrying |
| As at December 31, | | | | | | value | % of total | | | | value | % of total |
| Leveraged leases | | $ | 3,840 | | 37 | | | $ 3,457 | 40 |
| Timber and agriculture | | | | | | 822 | 8 | | | 808 | 9 |
| Real estate | | 1,845 | | 18 | | | 1,528 | 17 |
| Other | | 3,785 | | 37 | | | 3,025 | 34 |
| Total | | $ 10,292 | 100 | | | | $ 8,818 | 100 |
| The Company’s share of profit and dividends from these investments for the year ended December 31, 2022 were $851 and $nil,respectively (2021 – $1,300 and $2). | | | | | | | | | |
| | | | | | | | 161 |
| For the year ended December 31, 2021 | FVTPL | AFS | Other(1) | Total |
| Cash and short-term securities |
| Interest income | $ | 12 | | | | $ | 84 | $ | – | | | $ | 96 |
| Gains (losses)(2) | 85 | (22) | – | 63 |
| Debt securities |
| Interest income | 5,645 | 576 | 9 | 6,230 |
| Gains (losses)(2) | (5,600) | (266) | – | (5,866) |
| Impairment loss, net | 28 | 1 | – | 29 |
| Public equities |
| Dividend income | 670 | 61 | – | 731 |
| Gains (losses)(2) | 3,221 | 250 | – | 3,471 |
| Impairment loss, net | – | (3) | – | (3) |
| Mortgages |
| Interest income | – | – | 1,709 | 1,709 |
| Gains (losses)(2) | – | – | 133 | 133 |
| Provision, net | – | – | 1 | 1 |
| Private placements |
| Interest income | – | – | 1,931 | 1,931 |
| Gains (losses)(2) | – | – | 270 | 270 |
| Impairment loss, net | – | – | 45 | 45 |
| Policy loans | – | – | 366 | 366 |
| Loans to Bank clients |
| Interest income | – | – | 77 | 77 |
| Provision, net | – | – | (2) | (2) |
| Real estate |
| Rental income, net of depreciation(3) | – | – | 453 | 453 |
| Gains (losses)(2) | – | – | 677 | 677 |
| Derivatives |
| Interest income, net | 1,085 | – | (35) | 1,050 |
| Gains (losses)(2) | (5,925) | – | (14) | (5,939) |
| Other invested assets |
| Interest income | – | – | 57 | 57 |
| Oil and gas, timber, agriculture and other income | – | – | 2,996 | 2,996 |
| Gains (losses)(2) | 2,554 | 23 | 527 | 3,104 |
| Impairment loss, net | – | – | (55) | (55) |
| Total investment income | $ | 1,775 | | | | $ | 704 | $ | 9,145 | | | $ 11,624 |
| Investment income |
| Interest income | $ | 6,742 | | | | $ | 661 | $ | 4,114 | | | $ 11,517 |
| Dividend, rental and other income | 670 | 61 | 3,449 | 4,180 |
| Impairments, provisions and recoveries, net | 28 | (2) | (11) | 15 |
| Other | (76) | (66) | 57 | (85) |
| 7,364 | 654 | 7,609 | 15,627 |
| Realized and unrealized gains (losses) on assets supporting insurance and investment contract |
| liabilities and on the macro hedge program |
| Debt securities | (5,605) | 20 | – | (5,585) |
| Public equities | 3,187 | 33 | – | 3,220 |
| Mortgages | – | – | 133 | 133 |
| Private placements | – | – | 270 | 270 |
| Real estate | – | – | 696 | 696 |
| Other invested assets | 2,628 | (3) | 451 | 3,076 |
| Derivatives, including macro hedge program | (5,799) | – | (14) | (5,813) |
| (5,589) | 50 | 1,536 | (4,003) |
| Total investment income | $ | 1,775 | | | | $ | 704 | $ | 9,145 | | | $ 11,624 |
| (1) | Primarily includes investment income on loans carried at amortized cost, own use real estate properties, investment properties, derivative and hedging instruments in cash flowhedging 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, investment properties, and other invested assets measured at fair value. Also includes netrealized 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. |
| | | | | | | |
| | | | 163 |
| (d) Investment expensesThe following table presents total investment expenses. |
| For the years ended December 31, | 2022 | 2021 |
| Related to invested assets | $ | 718 | $ | 633 |
| Related to segregated, mutual and other funds | 1,145 | 1,347 |
| Total investment expenses | $ 1,863 | $ 1,980 |
| (e) Investment propertiesThe following table presents the rental income and direct operating expenses of investment properties. |
| For the years ended December 31, | 2022 | 2021 |
| Rental income from investment properties | $ 825 | $ 837 |
| Direct operating expenses of rental investment properties | (458) | (464) |
| Total | $ 367 | $ 373 |
| (f) Mortgage securitizationThe 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 HELOCsecuritization program. |
| Benefits received from the securitization include interest spread between the asset and associated liability. There is no credit exposurefrom securitized mortgages under the Canada Mortgage and Housing Corporation (“CMHC”) sponsored CMB securitization program asthey are insured by CMHC and other third-party insurance programs against borrowers’ default. Mortgages securitized in the PlatinumCanadian 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 CMBtransactions, receipts of principal are deposited into a trust account for settlement of the liability at time of maturity. These transferredassets and related cash flows cannot be transferred or used for other purposes. For the HELOC transactions, investors are entitled toperiodic interest payments, and the remaining cash receipts of principal are allocated to the Company (the “Seller”) during the revolvingperiod of the deal and are accumulated for settlement during an accumulation period or repaid to the investor monthly during a reductionperiod, based on the terms of the note. |
| Securitized assets and secured borrowing liabilities |
| As at December 31, 2022 | | | Securitized assets |
| | | | Securitized | Restricted cash and | Secured borrowing |
| Securitization program | | | | mortgages | short-term securities | | Total | liabilities(2) |
| HELOC securitization(1) | | | | $ 2,880 | | $ 44 | $ 2,924 | $ 2,750 |
| CMB securitization | | | | 2,318 | | – | 2,318 | 2,273 |
| Total | | | | $ 5,198 | | $ 44 | $ 5,242 | $ 5,023 |
| As at December 31, 2021 | | | Securitized assets |
| | | | Securitized | Restricted cash and | Secured borrowing |
| Securitization program | | | | mortgages | short-term securities | | Total | liabilities(2) |
| HELOC securitization(1) | | | | $ 2,618 | | $ | 1 | $ 2,619 | $ 2,500 |
| CMB securitization | | | | 2,075 | | – | 2,075 | 2,098 |
| Total | | | | $ 4,693 | | $ | 1 | $ 4,694 | $ 4,598 |
| (1) | Manulife Bank, a subsidiary, securitizes a portion of its HELOC receivables through Platinum Canadian Mortgage Trust II (“PCMT II”). PCMT II funds the purchase of theco-ownership interests from Manulife Bank by issuing term notes collateralized by an underlying pool of uninsured HELOCs to institutional investors. The restricted cash balancefor 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 flowsfrom the underlying HELOCs to satisfy the secured borrowing liability. |
| (2) | The PCMT II notes payable have floating rates of interest and are secured by the PCMT II assets. Under the terms of the agreements, no principal is expected to be repaid withinone year, $1,209 within 1-3 years, $1,049 within 3-5 years and $492 beyond 5 years. There is no specific maturity date for the contractual agreements. Under the terms ofthe notes, additional collateral must be provided to the series as added credit protection and the Series Purchase Agreements govern the amount of over-collateralization foreach of the term notes outstanding. 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, 2022, the fair value of securitized assets and associated liabilities were $5,167 and $4,865, respectively (2021 –$4,725 and $4,601). |
| 164 | 2022 Annual Report | Notes to Consolidated Financial Statements |
| (g) Fair value measurementThe following table presents the fair values of invested assets and segregated funds net assets measured at fair value categorized by thefair value hierarchy. |
| As at December 31, 2022 | Total fair value | Level 1 | Level 2 | Level 3 |
| Cash and short-term securities |
| FVTPL | $ | | | | 1,933 | $ | – | $ | 1,933 | $ | – |
| AFS | 10,926 | – | 10,926 | – |
| Other | | | | | 6,294 | 6,294 | – | – |
| Debt securities |
| FVTPL |
| Canadian government and agency | 14,798 | – | 14,798 | – |
| U.S. government and agency | | | | | 9,440 | – | 9,440 | – |
| Other government and agency | 22,986 | – | 22,986 | – |
| Corporate | 120,897 | – | 120,865 | 32 |
| Residential mortgage-backed securities | | | | | 7 | – | 7 | – |
| Commercial mortgage-backed securities | | | | | 570 | – | 570 | – |
| Other asset-backed securities | | | | | 1,575 | – | 1,549 | 26 |
| AFS |
| Canadian government and agency | | | | | 6,468 | – | 6,468 | – |
| U.S. government and agency | 14,384 | – | 14,384 | – |
| Other government and agency | | | | | 3,487 | – | 3,478 | 9 |
| Corporate | | | | | 7,745 | – | 7,745 | – |
| Residential mortgage-backed securities | | | | | 1 | – | 1 | – |
| Commercial mortgage-backed securities | | | | | 24 | – | 24 | – |
| Other asset-backed securities | | | | | 111 | – | 111 | – |
| Public equities |
| FVTPL | 21,989 | 21,918 | – | 71 |
| AFS | | | | | 1,530 | 1,530 | – | – |
| Real estate – investment property(1) | 11,394 | – | – | 11,394 |
| Other invested assets(2) | 30,256 | 26 | – | 30,230 |
| Segregated funds net assets(3) | 348,562 | 314,436 | 30,141 | 3,985 |
| Total | $ 635,377 | $ 344,204 | $ 245,426 | $ 45,747 |
| As at December 31, 2021 | Total fair value | Level 1 | Level 2 | Level 3 |
| Cash and short-term securities |
| FVTPL | $ | | | | 2,214 | $ | – | $ | 2,214 | $ | – |
| AFS | 14,339 | – | 14,339 | – |
| Other | | | | | 6,041 | 6,041 | – | – |
| Debt securities |
| FVTPL |
| Canadian government and agency | 18,706 | – | 18,706 | – |
| U.S. government and agency | 12,607 | – | 12,607 | – |
| Other government and agency | 21,888 | – | 21,888 | – |
| Corporate | 133,763 | – | 133,723 | 40 |
| Residential mortgage-backed securities | | | | | 8 | – | 8 | – |
| Commercial mortgage-backed securities | | | | | 1,103 | – | 1,103 | – |
| Other asset-backed securities | | | | | 1,647 | – | 1,619 | 28 |
| AFS |
| Canadian government and agency | | | | | 3,964 | – | 3,964 | – |
| U.S. government and agency | 18,792 | – | 18,792 | – |
| Other government and agency | | | | | 2,871 | – | 2,871 | – |
| Corporate | | | | | 7,332 | – | 7,331 | 1 |
| Residential mortgage-backed securities | | | | | 1 | – | 1 | – |
| Commercial mortgage-backed securities | | | | | 79 | – | 79 | – |
| Other asset-backed securities | | | | | 58 | – | 58 | – |
| Public equities |
| FVTPL | 25,716 | 25,716 | – | – |
| AFS | | | | | 2,351 | 2,349 | 2 | – |
| Real estate – investment property(1) | 11,421 | – | – | 11,421 |
| | | | | | |
| Other invested assets(2) | 24,300 | 257 | – | 24,043 |
| Segregated funds net assets(3) | 399,788 | 361,447 | 34,060 | 4,281 |
| Total | $ 708,989 | $ 395,810 | $ 273,365 | $ 39,814 |
| | | | 165 |
| (1) | For investment properties, the significant unobservable inputs are capitalization rates (ranging from 2.25% to 9.00% during the year and ranging from 2.25% to 9.00% during2021), terminal capitalization rates (ranging from 3.25% to 9.50% during the year and ranging from 3.25% to 9.25% during 2021) and discount rates (ranging from 3.30% to11.00% during the year and ranging from 3.80% to 10.50% during 2021). Holding other factors constant, a higher capitalization, terminal capitalization, and/or discount ratewill decrease the fair value of an investment property; while decreases in these rates would have the opposite effect. Changes in fair value based on variations in unobservableinputs generally cannot be extrapolated because the relationship between the directional changes of each input is not usually linear. |
| (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 infrastructureinvestments are primarily future distributable cash flows, terminal values and discount rates. Holding other factors constant, an increase to future distributable cash flows orterminal 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 duringthe year ranged from 7.15% to 15.6% (2021 – ranged from 7.25% to 20.0%). Disclosure of distributable cash flow and terminal value ranges are not meaningful given thedisparity 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 otherfactors 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 oppositeeffect. Discount rates during the year ranged from 4.25% to 7.0% (2021 – ranged from 4.5% to 7.0%). A range of prices for timber is not meaningful as the market pricedepends 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 propertiesvalued 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, 2022 | Carrying value | Total fair value | Level 1 | Level 2 | Level 3 |
| Mortgages(1) | $ | 54,638 | $ | 51,429 | $ | – | $ | – | $ 51,429 |
| Private placements(2) | 47,057 | 41,968 | – | 34,110 | 7,858 |
| Policy loans(3) | | | | | | 6,894 | 6,894 | – | 6,894 | – |
| Loans to Bank clients(4) | | | | | | 2,781 | 2,760 | – | 2,760 | – |
| Real estate – own use property(5) | | | | | | 1,878 | 3,033 | – | – | 3,033 |
| Public Bonds HTM | | | | | | 1,411 | 1,000 | – | 1,000 | – |
| Other invested assets(6) | 12,527 | 13,313 | 72 | – | 13,241 |
| Total invested assets disclosed at fair value | $ 127,186 | $ 120,397 | $ | 72 | $ 44,764 | $ 75,561 |
| As at December 31, 2021 | Carrying value | Total fair value | Level 1 | Level 2 | Level 3 |
| Mortgages(1) | $ | 52,014 | $ | 54,089 | $ | – | $ | – | $ 54,089 |
| Private placements(2) | 42,842 | 47,276 | – | 42,110 | 5,166 |
| Policy loans(3) | | | | | | 6,397 | 6,397 | – | 6,397 | – |
| Loans to Bank clients(4) | | | | | | 2,506 | 2,503 | – | 2,503 | – |
| Real estate – own use property(5) | | | | | | 1,812 | 3,024 | – | – | 3,024 |
| Public Bonds HTM | | | | | | 1,320 | 1,320 | – | 1,320 | – |
| Other invested assets(6) | 11,006 | 11,665 | 120 | – | 11,545 |
| Total invested assets disclosed at fair value | $ 117,897 | $ 126,274 | $ 120 | $ 52,330 | $ 73,824 |
| (1) | Fair value of commercial mortgages is determined through an internal valuation methodology using both observable and unobservable inputs. Unobservable inputs includecredit assumptions and liquidity spread adjustments. Fair value of fixed-rate residential mortgages is determined using the discounted cash flow method. Inputs used forvaluation are primarily comprised of prevailing interest rates and prepayment rates, if applicable. Fair value of variable-rate residential mortgages is assumed to be theircarrying value. |
| (2) | Fair value of private placements is determined through an internal valuation methodology using both observable and unobservable inputs. Unobservable inputs include creditassumptions and liquidity spread adjustments. Private placements are classified within Level 2 unless the liquidity adjustment constitutes a significant price impact, in whichcase 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 investment property in note 1. |
| (6) | Primarily include leveraged leases, oil and gas properties (disposed of during 2021) and equity method accounted other invested assets. Fair value of leveraged leases isdisclosed 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 appraisalsbased 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 andmarket comparable approaches. Inputs vary based on the specific investment. |
| Transfers between Level 1 and Level 2The Company records transfers of assets and liabilities between Level 1 and Level 2 at their fair values as at the end of each reportingperiod, consistent with the date of the determination of fair value. Assets are transferred out of Level 1 when they are no longer transactedwith sufficient frequency and volume in an active market. Conversely, assets are transferred from Level 2 to Level 1 when transactionvolume and frequency are indicative of an active market. The Company had $nil of assets transferred between Level 1 and Level 2 duringthe years ended December 31, 2022 (2021 – $5). |
| For segregated funds net assets, the Company had $nil transfers from Level 1 to Level 2 for the year ended December 31, 2022 (2021 –$5). The Company had $nil transfers from Level 2 to Level 1 for the year ended December 31, 2022 (2021 – $249). |
| 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 forthese assets or, in the absence of active markets, most of the inputs used to determine fair value are based on the Company’s ownassumptions about market participant assumptions. The Company prioritizes the use of market-based inputs over entity-based |
| 166 | 2022 Annual Report | Notes to Consolidated Financial Statements |
| assumptions in determining Level 3 fair values. The gains and losses in the table below includes the changes in fair value due to bothobservable and unobservable factors. |
| The following table presents a roll forward for invested assets, net derivatives and segregated funds net assets measured at fair valueusing significant unobservable inputs (Level 3) for the years ended December 31, 2022 and 2021. |
| | Total | | | | | | | | | Change in |
| | gains | Total | | | | | | | | unrealized |
| | (losses) | gains | | | | | | | | gains |
| Balance, | included | (losses) | | | | | | | Balance, | (losses) on |
| For the year endedDecember 31, 2022 | January 1, | in net | included | | | | Transfer | Transfer | Currency | December 31, | assets still |
| 2022 | income(1) | in AOCI(2) | Purchases | Sales | Settlements | in(3) | out(3) | movement | 2022 | held |
| Debt securitiesFVTPLCorporate |
| $ | 40 $ | (1) | $ – $ | | | | | | | | | 27 $ | – | $ | (1) $ | 6 $ | (40) $ | | | | | 1 | $ | 32 | $ | | | (1) |
| Other securitized assets | 28 | 2 | – | | | | | | | | | – | – | | (4) | – | – | | | | | – | 26 | | | | 2 |
| AFSOther government & |
| agency | | | | | | | | | | | | | | | – | – | – | | | | | | | | | – | – | | – | 10 | – | (1) | | 9 | | | – |
| Corporate | | | | | | | | | | | | | | | 1 | – | – | | | | | | | | | – | – | | – | – | (1) | | | | | – | – | | | – |
| Public equitiesFVTPL |
| | | | | | | | | | | | | | | – | (6) | – | | | | | | | | | 69 | (84) | | – | 87 | – | | | | | 5 | 71 | (15) |
| AFS | | | | | | | | | | | | | | | – | (1) | 1 | | | | | | | | | – | – | | – | – | – | | | | | – | – | | | – |
| Investment property | 11,421 | (443) | – | 312 | (237) | | – | 15 | – | 326 | 11,394 | (446) |
| Other invested assets | 24,043 | 1,922 | 7 | 4,934 | (666) | (1,474) | 248 | – | 1,216 | 30,230 | 2,046 |
| Total invested assets | 35,533 | 1,473 | 8 | 5,342 | (987) | (1,479) | 366 | (41) | 1,547 | 41,762 | 1,586 |
| Derivatives, net | 2,101 | (5,413) | (7) | (109) | – | | | | | | | | | | | 775 | – | (356) | (163) | (3,172) | (3,511) |
| Segregated funds net |
| assets | 4,281 | 475 | – | 246 | (1,113) | | (46) | – | (1) | 143 | 3,985 | 79 |
| Total | $ 41,915 $ (3,465) | | $ 1 $ 5,479 $ (2,100) $ | | | (750) $ 366 $ (398) $ 1,527 | | | | $ 42,575 | $ (1,846) |
| | Total | | | | | | | | | Change in |
| | gains | Total | | | | | | | | unrealized |
| | (losses) | gains | | | | | | | | gains |
| Balance, | included | (losses) | | | | | | | Balance, | (losses) on |
| For the year endedDecember 31, 2021 | January 1, | in net | included | | | | Transfer | Transfer | Currency | December 31, | assets still |
| 2021 | income(1) | in AOCI(2) | Purchases | Sales | Settlements | in(3) | out(3) | movement | 2021 | held |
| Debt securitiesFVTPLCorporate |
| $ | 510 $ | 11 | $ – $ | | | | | | | | | 11 $ | (93) $ | | – | $ | 11 $ (409) $ | | (1) | $ | 40 | $ | | | (8) |
| Other securitized assets | 45 | 3 | – | | | | | | | | | – | (9) | | (39) | 28 | – | | | | | – | 28 | | | | (4) |
| AFSCorporate |
| | | | | | | | | | | | | | | 3 | 1 | – | | | | | | | | | – | (3) | | – | – | – | | | | | – | 1 | | | – |
| Public equitiesFVTPL |
| | | | | | | | | | | | | | | – | – | – | | | | | | | | | 62 | (62) | | – | – | – | | | | | – | – | | | – |
| Investment property | 10,982 | 702 | – | 186 | (376) | | – | – | – | (73) | 11,421 | 626 |
| Other invested assets | 19,049 | 2,731 | 2 | 5,058 | (1,131) | (1,453) | 5 | – | (218) | 24,043 | 2,569 |
| Total invested assets | 30,589 | 3,448 | 2 | 5,317 | (1,674) | (1,492) | 44 | (409) | (292) | 35,533 | 3,183 |
| Derivatives, net | 3,443 | (897) | – | | | | | | | | | 14 | – | (182) | – | (309) | 32 | 2,101 | (547) |
| Segregated funds net |
| assets | 4,202 | 350 | – | | | | | | | | | 68 | (303) | | (28) | – | – | (8) | 4,281 | 116 |
| Total | $ 38,234 $ 2,901 | | $ 2 $ 5,399 $ (1,977) $ (1,702) $ | | | | 44 $ (718) $ | | (268) | $ 41,915 | $ 2,752 |
| (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 theamount is recorded in changes in segregated funds net assets, refer to notes 1(h) and 23. |
| (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, where the Company uses fair value atthe 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 marketdata (versus the previous period) resulted in reclassifying assets into Level 3. Transfers from Level 3 primarily result from observablemarket data becoming available for the entire term structure of the debt security. |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | 167 |
| Note 5 | Derivative and Hedging Instruments |
| Derivatives are financial contracts, the value of which is derived from underlying interest rates, foreign exchange rates, other financialinstruments, commodity prices or indices. The Company uses derivatives including swaps, forward and futures agreements, and options tomanage current and anticipated exposures to changes in interest rates, foreign exchange rates, commodity prices and equity marketprices, 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 flowsbased upon rates applied to a notional amount. For interest rate swaps, counterparties generally exchange fixed or floating interest ratepayments based on a notional value in a single currency. Cross currency swaps involve the exchange of principal amounts between partiesas well as the exchange of interest payments in one currency for the receipt of interest payments in another currency. Total return swapsare contracts that involve the exchange of payments based on changes in the values of a reference asset, including any returns such asinterest 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 underlyingcommodity 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) asecurity, 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 and Risk Factors” section of the Company’s 2022 MD&A for anexplanation of the Company’s dynamic hedging strategy for its variable annuity product guarantees. |
| (a) Fair value of derivativesThe pricing models used to value OTC derivatives are based on market standard valuation methodologies and the inputs to these modelsare consistent with what a market participant would use when pricing the instruments. Derivative valuations can be affected by changes ininterest rates, currency exchange rates, financial indices, credit spreads, default risk (including the counterparties to the contract), andmarket volatility. The significant inputs to the pricing models for most OTC derivatives are inputs that are observable or can becorroborated by observable market data and are classified as Level 2. Inputs that are observable generally include interest rates, foreigncurrency exchange rates and interest rate curves. However, certain OTC derivatives may rely on inputs that are significant to the fair valuethat are not observable in the market or cannot be derived principally from, or corroborated by, observable market data and thesederivatives are classified as Level 3. Inputs that are unobservable generally include broker quoted prices, volatilities and inputs that areoutside of the observable portion of the interest rate curve or other relevant market measures. These unobservable inputs may involvesignificant management judgment or estimation. Even though unobservable, these inputs are based on assumptions deemed appropriategiven the circumstances and consistent with what market participants would use when pricing such instruments. The credit risk of both thecounterparty and the Company are considered in determining the fair value for all OTC derivatives after considering the effects of nettingagreements and collateral arrangements. |
| 168 | 2022 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), creditequivalent amount and capital requirement by contract type. |
| Remaining term to maturity (notional amounts) | Fair value |
| | | | | | | | | Credit |
| | | Capital | Under 1 | | | 1 to 5 | Over | | | equivalent |
| | | requirement(2) | As at December 31, 2022 | year | | | years | 5 years | Total | Positive | Negative | | | | | | Net | amount(1) |
| Interest rate contracts |
| OTC swap contracts | $ | 8,817 | | | $ 19,253 | | | | | | $ | 98,380 | | | | | | $ 126,450 | $ | 5,992 | $ | (8,135) $ (2,143) $ | | | | | | | 419 | $ | 9 |
| Cleared swap contracts | 2,494 | | | 16,823 | 122,314 | 141,631 | 254 | (219) | | | | | | 35 | – | – |
| Forward contracts | 14,290 | | | 13,926 | 198 | 28,414 | 70 | (4,468) | | | | | | (4,398) | 8 | – |
| Futures | 11,772 | | | – | – | 11,772 | – | | | | | | | | | | – | – | – | – |
| Options purchased | 1,199 | | | 1,069 | 3,822 | 6,090 | 98 | | | | | – | 98 | 64 | 4 |
| Subtotal | 38,572 | | | 51,071 | 224,714 | 314,357 | 6,414 | (12,822) | | | | | | (6,408) | 491 | 13 |
| Foreign exchange |
| Swap contracts | 2,026 | | | 10,475 | 28,369 | 40,870 | 2,067 | (1,846) | | | | | | 221 | 1,166 | 23 |
| Forward contracts | 17,336 | | | – | – | 17,336 | 226 | (258) | | | | | | (32) | 89 | – |
| Futures | 2,319 | | | – | – | 2,319 | – | | | | | | | | | | – | – | – | – |
| Credit derivatives | 15 | | | 144 | – | 159 | 4 | | | | | | | | | | – | 4 | – | – |
| Equity contracts |
| Swap contracts | 547 | | | 396 | – | 943 | 26 | | | | | (7) | 19 | 24 | – |
| Futures | 3,813 | | | – | – | 3,813 | – | | | | | | | | | | – | – | – | – |
| Options purchased | 12,634 | | | 3,526 | – | 16,160 | 335 | (218) | | | | | | 117 | 232 | 2 |
| Subtotal including accrued |
| interest | 77,262 | | | 65,612 | 253,083 | 395,957 | 9,072 | (15,151) | | | | | | (6,079) | 2,002 | 38 |
| Less accrued interest | – | | | – | – | – | 484 | (862) | | | | | | (378) | – | – |
| Total | $ 77,262 | | | $ 65,612 | | | | | | $ 253,083 | $ 395,957 | $ | 8,588 | $ (14,289) $ (5,701) $ 2,002 | $ 38 |
| Remaining term to maturity (notional amounts) | Fair value |
| | | | | | | | | Credit |
| | | Capital | Under 1 | | | 1 to 5 | Over | | | equivalent |
| | | requirement(2) | As at December 31, 2021 | year | | | years | 5 years | Total | Positive | Negative | | | | | | Net | amount(1) |
| Interest rate contracts |
| OTC swap contracts | $ | 4,554 | | | $ 21,884 | | | | | | $ | 90,592 | | | | | | $ 117,030 | $ 12,112 | $ | (7,717) $ 4,395 | | | | | | $ 1,582 | $ 29 |
| Cleared swap contracts | 21,722 | | | 27,665 | 134,139 | 183,526 | 441 | (453) | | | | | | (12) | – | – |
| Forward contracts | 14,636 | | | 15,791 | 741 | 31,168 | 2,625 | (483) | | | | | | 2,142 | 299 | 5 |
| Futures | 11,944 | | | – | – | 11,944 | – | | | | | | | | | | – | – | – | – |
| Options purchased | 1,406 | | | 2,789 | 6,513 | 10,708 | 515 | | | | | – | 515 | 113 | 9 |
| Subtotal | 54,262 | | | 68,129 | 231,985 | 354,376 | 15,693 | (8,653) | | | | | | 7,040 | 1,994 | 43 |
| Foreign exchange |
| Swap contracts | 1,941 | | | 8,869 | 26,903 | 37,713 | 801 | (2,181) | | | | | | (1,380) | 1,302 | 25 |
| Forward contracts | 14,798 | | | – | – | 14,798 | 58 | | | | | (79) | (21) | 85 | – |
| Futures | 3,086 | | | – | – | 3,086 | – | | | | | | | | | | – | – | – | – |
| Credit derivatives | 11 | | | 33 | – | 44 | 1 | | | | | | | | | | – | 1 | – | – |
| Equity contracts |
| Swap contracts | 669 | | | 323 | – | 992 | 57 | | | | | (10) | 47 | 29 | – |
| Futures | 11,359 | | | – | – | 11,359 | – | | | | | | | | | | – | – | – | – |
| Options purchased | 10,974 | | | 6,716 | 40 | 17,730 | 1,616 | | | | | (17) | 1,599 | 766 | 8 |
| Subtotal including accrued |
| interest | 97,100 | | | 84,070 | 258,928 | 440,098 | 18,226 | (10,940) | | | | | | 7,286 | 4,176 | 76 |
| Less accrued interest | – | | | – | – | – | 723 | (902) | | | | | | (179) | – | – |
| Total | $ 97,100 | | | $ 84,070 | | | | | | $ 258,928 | $ 440,098 | $ 17,503 | $ (10,038) | | | | | | $ 7,465 | $ 4,176 | $ 76 |
| (1) | Credit equivalent amount is the sum of replacement cost and the potential future credit exposure less any collateral held. Replacement cost represents the current cost ofreplacing all contracts with a positive fair value. The amounts take into consideration legal contracts that permit offsetting of positions. The potential future credit exposure iscalculated based on a formula prescribed by OSFI. |
| (2) | Capital requirement represents the credit equivalent amount, weighted according to the creditworthiness of the counterparty, as prescribed by OSFI. |
| The total notional amount of $396 billion (2021 – $440 billion) includes $77 billion (2021 – $121 billion) related to derivatives utilized inthe Company’s variable annuity guarantee dynamic hedging and macro risk hedging programs. During 2022, the Company discontinuedthe dynamic hedging program for the John Hancock Life Insurance Company (U.S.A.) (“JHUSA”) legacy variable annuities, reinsured withVenerable Holdings, Inc. as disclosed in note 7(k). Due to the Company’s variable annuity hedging practices, many trades are in offsettingpositions, resulting in materially lower net fair value exposure to the Company than what the gross notional amount would suggest. |
| 170 | 2022 Annual Report | Notes to Consolidated Financial Statements |
| Fair value and the fair value hierarchy of derivative instruments |
| As at December 31, 2022 | Fair value | Level 1 | Level 2 | Level 3 |
| Derivative assets |
| Interest rate contracts | $ | 5,919 | $ | – | $ | 5,766 | $ | 153 |
| Foreign exchange contracts | 2,299 | – | 2,298 | 1 |
| Equity contracts | 366 | – | 361 | 5 |
| Credit default swaps | | | | | 4 | – | 4 | – |
| Total derivative assets | $ | 8,588 | $ | – | $ | 8,429 | $ | 159 |
| Derivative liabilities |
| Interest rate contracts | $ 12,025 | $ | – | $ | 8,689 | $ 3,336 |
| Foreign exchange contracts | 2,039 | – | 2,037 | 2 |
| Equity contracts | 225 | – | 216 | 9 |
| Total derivative liabilities | $ 14,289 | $ | – | $ 10,942 | $ 3,347 |
| As at December 31, 2021 | Fair value | Level 1 | Level 2 | Level 3 |
| Derivative assets |
| Interest rate contracts | $ 14,971 | $ | – | $ 12,510 | $ 2,461 |
| Foreign exchange contracts | 854 | – | 854 | – |
| Equity contracts | 1,677 | – | 1,616 | 61 |
| Credit default swaps | | | | | 1 | – | 1 | – |
| Total derivative assets | $ 17,503 | $ | – | $ 14,981 | $ 2,522 |
| Derivative liabilities |
| Interest rate contracts | $ | 7,829 | $ | – | $ | 7,419 | $ | 410 |
| Foreign exchange contracts | 2,182 | – | 2,181 | 1 |
| Equity contracts | 27 | – | 17 | 10 |
| Total derivative liabilities | $ 10,038 | $ | – | $ | 9,617 | $ | 421 |
| Level 3 roll forward information for net derivative contracts measured using significant unobservable inputs is disclosed in note 4(g). |
| (b) Hedging relationshipsThe Company uses derivatives for economic hedging purposes. In certain circumstances, these hedges also meet the requirements ofhedge accounting. Risk management strategies eligible for hedge accounting are designated as fair value hedges, cash flow hedges or netinvestment hedges, as described below. |
| Fair value hedgesThe Company uses interest rate swaps to manage its exposure to changes in the fair value of fixed rate financial instruments due tochanges in interest rates. The Company also uses cross currency swaps to manage its exposure to foreign exchange rate fluctuations,interest rate fluctuations, or both. |
| The Company recognizes gains and losses on derivatives and the related hedged items in fair value hedges in investment income. Theseinvestment gains (losses) are shown in the following table. |
| | | Ineffectiveness |
| | | | | | Hedged items in qualifyingfair value hedgingrelationships | Gains (losses) | Gains (losses) | | recognized in |
| recognized on | recognized for | | investment |
| For the year ended December 31, 2022 | | | | | derivatives | hedged items | | income |
| Foreign currency swaps | | | | | | Fixed rate assets | $ 7 | $ (5) | $ 2 |
| Total | | $ 7 | $ (5) | $ 2 |
| | | Ineffectiveness |
| | | | | | Hedged items in qualifyingfair value hedgingrelationships | Gains (losses) | Gains (losses) | | recognized in |
| recognized on | recognized for | | investment |
| For the year ended December 31, 2021 | | | | | derivatives | hedged items | | income |
| Foreign currency swaps | | | | | | Fixed rate assets | $ 4 | $ (2) | $ 2 |
| Total | | $ 4 | $ (2) | $ 2 |
| | | | | | | |
| | | | 171 |
| Cash flow hedgesThe Company uses interest rate swaps to hedge the variability in cash flows from variable rate financial instruments and forecastedtransactions. The Company also uses cross currency swaps and foreign currency forward contracts to hedge the variability from foreigncurrency financial instruments and foreign currency expenses. Total return swaps are used to hedge the variability in cash flowsassociated with certain stock-based compensation awards. Inflation swaps are used to reduce inflation risk generated from inflation-indexed liabilities. |
| The effects of derivatives in cash flow hedging relationships on the Consolidated Statements of Income and the Consolidated Statementsof Comprehensive Income are shown in the following table. |
| | | Gains (losses) |
| | Gains (losses) | reclassified | Ineffectiveness |
| Hedged items in qualifyingcash flow hedgingrelationships | deferred in | from AOCI into | recognized in |
| | AOCI on | investment | investment |
| For the year ended December 31, 2022 | | derivatives | income | | income |
| Foreign currency swaps | Fixed rate assets | $ | | | | (1) | $ | (1) | $ | – |
| Floating rate liabilities | | | | | 175 | (49) | – |
| Fixed rate liabilities | | | | | 34 | 35 | – |
| Equity contracts | Stock-based compensation | | 2 | 6 | – |
| Total | | $ 210 | $ (9) | | $ | – |
| | | Gains (losses) |
| | Gains (losses) | reclassified | Ineffectiveness |
| Hedged items in qualifyingcash flow hedgingrelationships | deferred in | from AOCI into | recognized in |
| | AOCI on | investment | investment |
| For the year ended December 31, 2021 | | derivatives | income | | income |
| Foreign currency swaps | Fixed rate assets | $ | | | | (1) | $ | (1) | $ | – |
| Floating rate liabilities | | | | | 89 | 3 | – |
| Fixed rate liabilities | | | | | (19) | (21) | – |
| Equity contracts | Stock-based compensation | | 5 | 5 | – |
| Total | | $ | | | | 74 | $ (14) | | $ | – |
| The Company anticipates that net losses of approximately $9 will be reclassified from AOCI to net income within the next 12 months. Themaximum time frame for which variable cash flows are hedged is 14 years. |
| Hedges of net investments in foreign operationsThe Company primarily uses forward currency contracts, cross currency swaps and non-functional currency denominated debt to manageits foreign currency exposures to net investments in foreign operations. |
| The effects of net investment hedging relationships on the Consolidated Statements of Income and the Consolidated Statements of OtherComprehensive Income are shown in the following table. |
| | | Gains (losses) | Ineffectiveness |
| | | reclassified from | recognized in |
| | Gains (losses) | AOCI into | investment |
| For the year ended December 31, 2022 | | deferred in AOCI | investment income | | income |
| Non-functional currency denominated debt | | $ (458) | | | | | $ | – | $ | – |
| Forward contracts | | 14 | | – | – |
| Total | | $ (444) | | | | | $ | – | $ | – |
| | | Gains (losses) | Ineffectiveness |
| | | reclassified from | recognized in |
| | Gains (losses) | AOCI into | investment |
| For the year ended December 31, 2021 | | deferred in AOCI | investment income | | income |
| Non-functional currency denominated debt | | $ | 61 | | | | | $ | – | $ | – |
| Forward contracts | | 59 | | – | – |
| Total | | $ 120 | | | | | $ | – | $ | – |
| 172 | 2022 Annual Report | Notes to Consolidated Financial Statements |
| (c) Derivatives not designated in qualifying hedge accounting relationshipsDerivatives used in portfolios supporting insurance contract liabilities are generally not designated in qualifying hedge accountingrelationships because the change in the value of the insurance contract liabilities economically hedged by these derivatives is recordedthrough net income. Since changes in fair value of these derivatives and related hedged risks are recognized in investment income as theyoccur, they generally offset the change in hedged risk to the extent the hedges are economically effective. Interest rate and cross currencyswaps are used in the portfolios supporting insurance contract liabilities to manage duration and currency risks. |
| Investment income on derivatives not designated in qualifying hedge accounting relationships |
| For the years ended December 31, | 2022 | 2021 |
| Interest rate swaps | | | $ | (3,428) | $ (1,986) |
| Interest rate futures | (431) | (687) |
| Interest rate options | (258) | (133) |
| Foreign currency swaps | 1,171 | (166) |
| Currency rate futures | (103) | 66 |
| Forward contracts | (7,561) | (1,751) |
| Equity futures | 794 | (2,140) |
| Equity contracts | (818) | 871 |
| Credit default swaps | – | (2) |
| Total | | | $ (10,634) | $ (5,928) |
| (d) Embedded derivativesCertain insurance contracts contain features that are classified as embedded derivatives and are measured separately at FVTPL, includingreinsurance contracts related to guaranteed minimum income benefits and contracts containing certain credit and interest rate features. |
| Certain reinsurance contracts related to guaranteed minimum income benefits contain embedded derivatives requiring separatemeasurement at FVTPL as the financial component contained in the reinsurance contracts does not contain significant insurance risk. Asat December 31, 2022, reinsurance ceded guaranteed minimum income benefits had a fair value of $585 (2021 – $734) and reinsuranceassumed guaranteed minimum income benefits had a fair value of $65 (2021 – $86). Claims recovered under reinsurance cededcontracts offset claims expenses and claims paid on the reinsurance assumed are reported as contract benefits. |
| The Company’s credit and interest rate embedded derivatives promise to pay the returns on a portfolio of assets to the contract holder.These embedded derivatives contain credit and interest rate risks that are financial risks embedded in the underlying insurance contract.As at December 31, 2022, these embedded derivatives had a fair value of $395 (2021 – $11). |
| Other financial instruments classified as embedded derivatives but exempt from separate measurement at fair value include variableuniversal life and variable life products’ minimum guaranteed credited rates, no lapse guarantees, guaranteed annuitization options, CPIindexing of benefits, and segregated fund minimum guarantees other than reinsurance ceded/assumed guaranteed minimum incomebenefits. These embedded derivatives are measured and reported within insurance contract liabilities and are exempt from separate fairvalue measurement as they contain insurance risk and/or are closely related to the insurance host contract. |
| | | | |
| | 173 |
| Note 6 | Goodwill and Intangible Assets |
| (a) Change in the carrying value of goodwill and intangible assetsThe following table presents the change in carrying value of goodwill and intangible assets. |
| | | | | Effect of changes |
| | Balance, | Net additions/ | Amortization | | in foreign | Balance, |
| As at December 31, 2022 | | January 1 | (disposals)(1)(2) | expense | exchange rates | | December 31 |
| Goodwill | | $ 5,651 | $ 255 | $ n/a | | $ 108 | $ | 6,014 |
| Indefinite life intangible assets |
| Brand | | 761 | | – | | | | n/a | 52 | 813 |
| Fund management contracts and other(3) | | 788 | | | | | | | 228 | n/a | 32 | 1,048 |
| | 1,549 | | | | | | | 228 | n/a | 84 | 1,861 |
| Finite life intangible assets(4) |
| Distribution networks | | 888 | | 6 | | | | 47 | 34 | 881 |
| Customer relationships | | 687 | | – | | | | 56 | 12 | 643 |
| Software | | 1,091 | | | | | | | 192 | 235 | 20 | 1,068 |
| Other | | 49 | | 7 | 6 | | | | | 2 | 52 |
| | 2,715 | | | | | | | 205 | 344 | 68 | 2,644 |
| Total intangible assets | | 4,264 | | | | | | | 433 | 344 | 152 | 4,505 |
| Total goodwill and intangible assets | | $ 9,915 | $ 688 | $ 344 | | $ 260 | $ 10,519 |
| | | | | Effect of changes |
| | Balance, | Net additions/ | Amortization | | in foreign | Balance, |
| As at December 31, 2021 | | January 1 | (disposals) (5) | expense | exchange rates | | December 31 |
| Goodwill | | $ 5,714 | $ | (5) | $ n/a | | $ (58) | $ | 5,651 |
| Indefinite life intangible assets |
| Brand | | 764 | | – | | | | n/a | (3) | 761 |
| Fund management contracts and other(3) | | 796 | | (3) | | | | n/a | (5) | 788 |
| | 1,560 | | (3) | | | | n/a | (8) | 1,549 |
| Finite life intangible assets(4) |
| Distribution networks | | 806 | | | | | | | 131 | 44 | (5) | 888 |
| Customer relationships | | 738 | | (2) | | | | 48 | (1) | 687 |
| Software | | 1,059 | | | | | | | 198 | 148 | (18) | 1,091 |
| Other | | 52 | | 2 | 6 | | | | | 1 | 49 |
| | 2,655 | | | | | | | 329 | 246 | (23) | 2,715 |
| Total intangible assets | | 4,215 | | | | | | | 326 | 246 | (31) | 4,264 |
| Total goodwill and intangible assets | | $ 9,929 | $ 321 | $ 246 | | $ (89) | $ | 9,915 |
| (1) | In November 2022, the Company acquired control of Manulife TEDA Fund Management Company, LTD. through the purchase of the remaining 51% of shares that it did notalready own from its joint venture partner. The transaction included cash consideration of $334 and derecognition of the Company’s previous joint venture interest with a fairvalue of $321. Goodwill, indefinite life fund management contracts and distribution networks, and finite life management contracts of $255, $185, $52 and $3 wererecognized. |
| (2) | In January 2022, the Company paid $256 to VietinBank for an extension of the life of the distribution agreement acquired from Aviva Plc in December 2021. |
| (3) | Fund management contracts are mostly allocated to Canada WAM and U.S. WAM CGUs with carrying values of $273 (2021 – $273) and $397 (2021 – $371), respectively. |
| (4) | Gross carrying amount of finite life intangible assets was $1,517 for distribution networks, $1,146 for customer relationships, $2,736 for software and $136 for other(2021 – $1,456, $1,132, $2,484 and $124), respectively. |
| (5) | In December 2021, the Company purchased the Vietnamese operations of Aviva Plc including rights to an exclusive distribution agreement with VietinBank. |
| (b) Goodwill impairment testingThe Company completed its annual goodwill impairment testing in the fourth quarter of 2022 by determining the recoverable amounts ofits businesses using valuation techniques discussed below (refer to notes 1(f) and 6(c)). The testing indicated that there was no impairmentof goodwill in 2022 (2021 – $nil). |
| 174 | 2022 Annual Report | Notes to Consolidated Financial Statements |
| The following tables present the carrying value of goodwill by CGU or group of CGUs. |
| | | Effect of |
| | | changes in |
| | | foreign |
| As at December 31, 2022CGU or group of CGUs | Balance, | Net additions/ | exchange | Balance, |
| January 1 | (disposals) | rates | December 31 |
| Asia |
| Asia Insurance (excluding Japan) | $ | 152 | $ | | | – | $ 10 | $ | 162 |
| Japan Insurance | 386 | | | | – | (26) | 360 |
| Canada Insurance | 1,955 | | | | – | 5 | 1,960 |
| U.S. Insurance | 336 | | | | – | 24 | 360 |
| Global Wealth and Asset Management |
| Asia WAM | 183 | | | | 255 | 12 | 450 |
| Canada WAM | 1,436 | | | | – | – | 1,436 |
| U.S. WAM | 1,203 | | | | – | 83 | 1,286 |
| Total | $ 5,651 | $ 255 | $ 108 | $ 6,014 |
| | | Effect of |
| | | changes in |
| | | foreign |
| As at December 31, 2021CGU or group of CGUs | Balance, | Net additions/ | exchange | Balance, |
| January 1 | (disposals) | rates | December 31 |
| Asia |
| Asia Insurance (excluding Japan) | $ | 159 | $ | | | (5) | $ | (2) | $ | 152 |
| Japan Insurance | 433 | | | | – | (47) | 386 |
| Canada Insurance | 1,955 | | | | – | – | 1,955 |
| U.S. Insurance | 338 | | | | – | (2) | 336 |
| Global Wealth and Asset Management |
| Asia WAM | 185 | | | | – | (2) | 183 |
| Canada WAM | 1,436 | | | | – | – | 1,436 |
| U.S. WAM | 1,208 | | | | – | (5) | 1,203 |
| Total | $ 5,714 | $ | | | (5) | $ (58) | $ 5,651 |
| The valuation techniques, significant assumptions and sensitivities, where applicable, applied in the goodwill impairment testing aredescribed below. |
| (c) Valuation techniquesWhen determining if a CGU is impaired, the Company compares its recoverable amount to the allocated capital for that unit, which isaligned with the Company’s internal reporting practices. The recoverable amounts were based on fair value less costs to sell (“FVLCS”) forAsia Insurance (excluding Japan) and Asia WAM. For other CGUs, value-in-use (“VIU”) was used. |
| Under the FVLCS approach, the Company determines the fair value of the CGU or group of CGUs using an earnings-based approach whichincorporates forecasted earnings, excluding interest and equity market impacts and normalized new business expenses multiplied by anearnings-multiple derived from the observable price-to-earnings multiples of comparable financial institutions. The price-to-earningsmultiple used by the Company for testing was 11.6 (2021 – 11.6). These FVLCS valuations are categorized as Level 3 of the fair valuehierarchy (2021 – Level 3). |
| Under the VIU approach, used for CGUs with insurance business, an embedded appraisal value is determined from a projection of futuredistributable earnings derived from both the in-force business and new business expected to be sold in the future, and therefore, reflectsthe economic value for each CGU’s or group of CGUs’ profit potential under a set of assumptions. This approach requires assumptionsincluding sales and revenue growth rates, capital requirements, interest rates, equity returns, mortality, morbidity, policyholder behaviour,tax rates and discount rates. For non-insurance CGUs, the VIU is based on discounted cash flow analysis which incorporates relevantaspects of the embedded appraisal value approach. |
| (d) Significant assumptionsTo calculate embedded appraisal value, the Company discounted projected earnings from in-force contracts and valued 20 years of newbusiness growing at expected plan levels, consistent with the periods used for forecasting long-term businesses such as insurance. Inarriving at its projections, the Company considered past experience, economic trends such as interest rates, equity returns and productmix as well as industry and market trends. Where growth rate assumptions for new business cash flows were used in the embeddedappraisal value calculations, they ranged from zero per cent to nine per cent (2021 – zero per cent to six per cent). |
| | | | | | |
| Interest rate assumptions are based on prevailing market rates at the valuation date. |
| | | | 175 |
| For 2022, tax rates applied to the projections include the impact of internal reinsurance treaties and amounted to 28.0 per cent,27.5 per cent and 21.0 per cent for the Japan, Canada and U.S. jurisdictions, respectively. For 2021, tax rates applied to the projectionsinclude the impact of internal reinsurance treaties and amounted to 28.0 per cent, 26.5 per cent and 21.0 per cent for the Japan, Canada,and U.S. jurisdictions, respectively. Tax assumptions are sensitive to changes in tax laws as well as assumptions about the jurisdictions inwhich profits are earned. It is possible that actual tax rates could differ from those assumed. |
| Discount rates assumed in determining the value-in-use for applicable CGUs or group of CGUs ranged from 10.0 per cent to 12.0 per centon an after-tax basis or 12.5 per cent to 15.0 per cent on a pre-tax basis (2021 – 8.0 per cent to 10.1 per cent on an after-tax basis or10.0 per cent to 12.7 per cent on a pre-tax basis). |
| Key assumptions may change as economic and market conditions change, which may lead to impairment charges in the future. Adversechanges in discount rates (including from changes in interest rates) and growth rate assumptions for new business cash flow projectionsused in the determination of embedded appraisal values or reductions in market-based earnings multiples calculations may result inimpairment charges in the future which could be material. |
| Note 7 | Insurance Contract Liabilities and Reinsurance Assets |
| (a) Insurance contract liabilities and reinsurance assetsInsurance contract liabilities are reported gross of reinsurance ceded and the ceded liabilities are reported separately as reinsuranceassets. Insurance contract liabilities include actuarial liabilities, benefits payable, provision for unreported claims and policyholderamounts on deposit. The components of gross and net insurance contract liabilities are shown below. |
| As at December 31, | | 2022 | 2021 |
| Insurance contract liabilities | | | | $ 352,153 | $ 374,890 |
| Benefits payable and provision for unreported claims | | 5,610 | 5,251 |
| Policyholder amounts on deposit | | 13,642 | 12,134 |
| Gross insurance contract liabilities | | 371,405 | 392,275 |
| Reinsurance assets(1) | | (47,674) | (44,531) |
| Net insurance contract liabilities | | | | $ 323,731 | $ 347,744 |
| (1) | Reinsurance assets of $38 (2021 – $48) are related to investment contract liabilities, refer to note 8(b). |
| Net insurance contract liabilities represent the amount which, together with estimated future premiums and net investment income, will besufficient to pay estimated future benefits, policyholder dividends and refunds, taxes (other than income taxes) and expenses on policiesin-force net of reinsurance premiums and recoveries. |
| Net insurance contract liabilities are determined using CALM, as required by the Canadian Institute of Actuaries. |
| The determination of net insurance contract liabilities is based on an explicit projection of cash flows using current assumptions for eachmaterial cash flow item. Investment returns are projected using the current asset portfolios and projected reinvestment strategies. |
| Each assumption is based on the best estimate adjusted by a margin for adverse deviation. For fixed income returns, this margin isestablished by scenario testing a range of prescribed and company-developed scenarios consistent with Canadian Actuarial Standards ofPractice. For all other assumptions, this margin is established by directly adjusting the best estimate assumption. |
| Cash flows used in the net insurance contract liabilities valuation adjust the gross policy cash flows to reflect projected cash flows fromceded reinsurance. The cash flow impact of ceded reinsurance varies depending upon the amount of reinsurance, the structure ofreinsurance treaties, the expected economic benefit from treaty cash flows and the impact of margins for adverse deviation. Grossinsurance contract liabilities are determined by discounting gross policy cash flows using the same discount rate as the net CALM modeldiscount rate. |
| The reinsurance asset is determined by taking the difference between the gross insurance contract liabilities and the net insurancecontract liabilities. The reinsurance asset represents the benefit derived from reinsurance arrangements in force at the date of theConsolidated Statements of Financial Position. |
| The period used for the projection of cash flows is the policy lifetime for most individual insurance contracts. For other types of contracts, ashorter projection period may be used, with the contract generally ending at the earlier of the first renewal date on or after theConsolidated Statements of Financial Position date where the Company can exercise discretion in renewing its contractual obligations orterms of those obligations and the renewal or adjustment date that maximizes the insurance contract liabilities. For segregated fundproducts with guarantees, the projection period is generally set as the period that leads to the largest insurance contract liability. Wherethe projection period is less than the policy lifetime, insurance contract liabilities may be reduced by an allowance for acquisition expensesexpected to be recovered from policy cash flows beyond the projection period used for the liabilities. Such allowances are tested forrecoverability using assumptions that are consistent with other components of the actuarial valuation. |
| 176 | 2022 Annual Report | Notes to Consolidated Financial Statements |
| (b) CompositionThe composition of insurance contract liabilities and reinsurance assets by the line of business and reporting segment is as follows. |
| Gross insurance contract liabilities |
| | | Other | | | Total, |
| Individual insurance |
| | | insurance | Total, net ofreinsurance | Total | gross of |
| | Annuities | contract | | reinsurance | reinsurance | Non- |
| | and pensions | liabilities(1) | ceded | ceded | ceded | As at December 31, 2022 | Participating | | | | | | | participating |
| Asia | $ 66,294 | | | | | | | $ | 34,684 | $ | 6,221 | $ | 4,142 | $ 111,341 | $ | 2,727 | | | | $ 114,068 |
| Canada | 12,637 | | | | | | 38,325 | 13,593 | 14,095 | 78,650 | 1,676 | 80,326 |
| U.S. | 7,867 | | | | | | 67,789 | 11,273 | 46,849 | 133,778 | 43,137 | 176,915 |
| Corporate and Other | – | | | | | | (640) | 24 | 578 | | | | | | | (38) | 134 | 96 |
| Total, net of reinsurance ceded | 86,798 | | | | | | 140,158 | 31,111 | 65,664 | 323,731 | 47,674 | 371,405 |
| Total reinsurance ceded | 8,552 | | | | | | 22,434 | 15,793 | 895 | 47,674 |
| Total, gross of reinsurance ceded | $ 95,350 | | | | | | | $ 162,592 | $ 46,904 | $ 66,559 | $ 371,405 |
| | | Other | | | Total, |
| Individual insurance |
| | | insurance | Total, net ofreinsurance | Total | gross of |
| | Annuities | contract | | reinsurance | reinsurance | Non- |
| | and pensions | liabilities(1) | ceded | ceded | ceded | As at December 31, 2021 | Participating | | | | | | | participating |
| Asia | $ 64,586 | | | | | | | $ | 36,387 | $ | 6,869 | $ | 3,590 | $ 111,432 | $ | 2,749 | | | | $ 114,181 |
| Canada | 13,518 | | | | | | 44,320 | 16,554 | 14,981 | 89,373 | 430 | 89,803 |
| U.S. | 8,591 | | | | | | 71,077 | 14,007 | 53,555 | 147,230 | 41,150 | 188,380 |
| Corporate and Other | – | | | | | | (676) | 22 | 363 | (291) | 202 | (89) |
| Total, net of reinsurance ceded | 86,695 | | | | | | 151,108 | 37,452 | 72,489 | 347,744 | 44,531 | 392,275 |
| Total reinsurance ceded | 8,144 | | | | | | 20,767 | 14,681 | 939 | 44,531 |
| Total, gross of reinsurance ceded | $ 94,839 | | | | | | | $ 171,875 | $ 52,133 | $ 73,428 | $ 392,275 |
| (1) | Other insurance contract liabilities include group insurance and individual and group health including long-term care insurance. |
| Separate sub-accounts were established for participating policies in-force at the demutualization of MLI and John Hancock Mutual LifeInsurance Company. These sub-accounts permit this participating business to be operated as separate “closed blocks” of participatingpolicies. As at December 31, 2022, $26,289 (2021 – $29,000) of both reinsurance assets and insurance contract liabilities were relatedto these closed blocks of participating policies. |
| (c) Assets backing insurance contract liabilities, other liabilities and capitalAssets are segmented and matched to liabilities with similar underlying characteristics by product line and major currency. The Companyhas established target investment strategies and asset mixes for each asset segment supporting insurance contract liabilities whichconsider the risk attributes of the liabilities supported by the assets and expectations of market performance. Liabilities with rate and termguarantees are predominantly backed by fixed-rate instruments on a cash flow matching basis for a targeted duration horizon. Longerduration cash flows on these liabilities as well as on adjustable products such as participating life insurance are backed by a broader rangeof asset classes, including equity and alternative long-duration investments. The Company’s capital is invested in a range of debt andequity investments, both public and private. |
| Changes in the fair value of assets backing net insurance contract liabilities, that the Company considers to be other than temporary,would have a limited impact on the Company’s net income wherever there is an effective matching of assets and liabilities, as thesechanges would be substantially offset by corresponding changes in the value of net insurance contract liabilities. The fair value of assetsbacking net insurance contract liabilities as at December 31, 2022, excluding reinsurance assets, was estimated at $317,854(2021 – $354,587). |
| As at December 31, 2022, the fair value of assets backing capital and other liabilities was estimated at $524,297 (2021 – $571,431). |
| | | | | | | | | | | |
| | | | | | 177 |
| The following table presents the carrying value of assets backing net insurance contract liabilities, other liabilities and capital. |
| | | Other |
| Individual insurance |
| | | insurance |
| | Annuities | contract | Other | | | Non- |
| | and pensions | liabilities(1) | liabilities(2) | Capital(3) | Total | As at December 31, 2022 | Participating | | | | | | | participating |
| AssetsDebt securities |
| $ 42,279 | | | | | | | $ | 72,706 | $ 15,686 | $ 31,998 | | | | | | $ | 9,739 | $ 31,496 | | | | | $ 203,904 |
| Public equities | 12,253 | | | | | | 6,792 | 336 | 562 | 675 | 2,901 | 23,519 |
| Mortgages | 4,378 | | | | | | 14,101 | 4,350 | 8,766 | 22,997 | 46 | 54,638 |
| Private placements | 6,810 | | | | | | 19,498 | 8,038 | 10,497 | 2,003 | 211 | 47,057 |
| Real estate | 3,346 | | | | | | 7,030 | 913 | 1,875 | (66) | 174 | 13,272 |
| Other | 17,732 | | | | | | 20,031 | 1,788 | 11,966 | 427,369 | 27,665 | 506,551 |
| Total | $ 86,798 | | | | | | | $ 140,158 | $ 31,111 | $ 65,664 | | | | | | $ 462,717 | $ 62,493 | | | | | $ 848,941 |
| | | Other |
| Individual insurance |
| | | insurance |
| | Annuities | contract | Other | | | Non- |
| | and pensions | liabilities(1) | liabilities(2) | Capital(3) | Total | As at December 31, 2021 | Participating | | | | | | | participating |
| AssetsDebt securities |
| $ 43,278 | | | | | | | $ | 82,050 | $ 19,575 | $ 36,207 | | | | | | $ | 10,723 | $ 32,306 | | | | | $ 224,139 |
| Public equities | 14,667 | | | | | | 8,112 | 453 | 374 | 626 | 3,835 | 28,067 |
| Mortgages | 3,799 | | | | | | 13,295 | 4,572 | 8,526 | 21,802 | 20 | 52,014 |
| Private placements | 6,005 | | | | | | 17,741 | 7,370 | 9,775 | 1,723 | 228 | 42,842 |
| Real estate | 3,467 | | | | | | 6,814 | 987 | 1,782 | 6 | 177 | 13,233 |
| Other | 15,479 | | | | | | 23,096 | 4,495 | 15,825 | 469,014 | 29,439 | 557,348 |
| Total | $ 86,695 | | | | | | | $ 151,108 | $ 37,452 | $ 72,489 | | | | | | $ 503,894 | $ 66,005 | | | | | $ 917,643 |
| (1) | Other insurance contract liabilities include group insurance and individual and group health including long-term care insurance. |
| (2) | Other liabilities are non-insurance contract liabilities which include segregated funds, bank deposits, long-term debt, deferred tax liabilities, derivatives, investment contracts,embedded derivatives and other miscellaneous liabilities. |
| (3) | Capital is defined in note 13. |
| (d) Significant insurance contract liability valuation assumptionsThe determination of insurance contract liabilities involves the use of estimates and assumptions. Insurance contract liabilities have twomajor components: a best estimate amount and a provision for adverse deviation. |
| Best estimate assumptionsBest estimate assumptions are made with respect to mortality and morbidity, investment returns, rates of policy termination, operatingexpenses and certain taxes. Actual experience is monitored to ensure that assumptions remain appropriate and assumptions are changedas warranted. Assumptions are discussed in more detail in the following table. |
| Nature of factor and assumption methodology | | Risk management |
| Mortalityandmorbidity | | | | | | | | | | | Mortality relates to the occurrence of death. Mortality is a keyassumption for life insurance and certain forms of annuities.Mortality assumptions are based on the Company’s internalexperience as well as past and emerging industry experience.Assumptions are differentiated by sex, underwriting class, policytype and geographic market. Assumptions are made for futuremortality improvements. | The Company maintains underwriting standards to determinethe insurability of applicants. Claim trends are monitored on anongoing basis. Exposure to large claims is managed byestablishing policy retention limits, which vary by market andgeographic location. Policies in excess of the limits arereinsured with other companies. |
| | Mortality is monitored monthly and the overall 2022 experiencewas unfavourable (2021 – unfavourable) when compared to theCompany’s assumptions. Morbidity is also monitored monthlyand the overall 2022 experience was favourable (2021 –favourable) when compared to the Company’s assumptions. |
| | | | | | | | | | | Morbidity relates to the occurrence of accidents and sicknessfor insured risks. Morbidity is a key assumption for long-termcare insurance, disability insurance, critical illness and otherforms of individual and group health benefits. Morbidityassumptions are based on the Company’s internal experience aswell as past and emerging industry experience and areestablished for each type of morbidity risk and geographicmarket. Assumptions are made for future morbidityimprovements. |
| 178 | 2022 Annual Report | Notes to Consolidated Financial Statements |
| Nature of factor and assumption methodology | Risk management |
| Investmentreturns | | The Company segments assets to support liabilities by businesssegment and geographic market and establishes investmentstrategies for each liability segment. Projected cash flows fromthese assets are combined with projected cash flows from futureasset purchases/sales to determine expected rates of return onthese assets for future years. Investment strategies are basedon the target investment policies for each segment and thereinvestment returns are derived from current and projectedmarket rates for fixed income investments and a projectedoutlook for other alternative long-duration assets. | The Company’s policy of closely matching asset cash flows withthose of the corresponding liabilities is designed to mitigate theCompany’s exposure to future changes in interest rates. Theinterest rate risk positions in business segments are monitoredon an ongoing basis. Under CALM, the reinvestment rate isdeveloped using interest rate scenario testing and reflects theinterest rate risk positions. |
| In 2022, the movement in interest rates positively (2021 –negatively) impacted the Company’s net income. This positiveimpact was primarily due to increase in risk-free interest rates inthe U.S., Canada, and Asia. |
| | Investment return assumptions include expected future creditlosses on fixed income investments. Credit losses are projectedbased on past experience of the Company and industry as wellas specific reviews of the current investment portfolio. |
| The exposure to credit losses is managed against policies thatlimit concentrations by issuer, corporate connections, ratings,sectors and geographic regions. On participating policies andsome non-participating policies, credit loss experience ispassed back to policyholders through the investment returncrediting formula. For other policies, premiums and benefitsreflect the Company’s assumed level of future credit losses atcontract inception or most recent contract adjustment date. TheCompany holds explicit provisions in actuarial liabilities forcredit risk including provisions for adverse deviation. |
| | Investment return assumptions for each asset class andgeographic market also incorporate expected investmentmanagement expenses that are derived from internal coststudies. The costs are attributed to each asset class to developunitized assumptions per dollar of asset for each asset class andgeographic market. |
| In 2022, credit loss experience on debt securities andmortgages was favourable (2021 – favourable) when comparedto the Company’s assumptions. |
| Equities, real estate and other alternative long-duration assetsare used to support liabilities where investment returnexperience is passed back to policyholders through dividends orcredited investment return adjustments. Equities, real estate,and other alternative long-duration assets are also used tosupport long-dated obligations in the Company’s annuity andpension businesses and for long-dated insurance obligations oncontracts where the investment return risk is borne by theCompany. |
| In 2022, investment experience related to alternative long-duration assets backing policyholder liabilities was favourable(2021 – favourable) primarily driven by gains in private equities,timber and agriculture properties, partially offset by losses inreal estate properties. In 2022, alternative long-duration assetorigination exceeded (2021 – did not exceed) valuationrequirements. |
| In 2022, for the business that is dynamically hedged,segregated fund guarantee experience on residual,non-dynamically hedged market risks were unfavourable (2021– unfavourable). For the business that is not dynamicallyhedged, experience on segregated fund guarantees due tochanges in the market value of assets under management wasalso unfavourable (2021 – unfavourable). This excludes theexperience on the macro equity hedges. |
| In 2022, investment expense experience was favourable (2021– unfavourable) when compared to the Company’s assumptions. |
| | | | |
| | | 179 |
| Nature of factor and assumption methodology | Risk management |
| Policyterminationandpremiumpersistency | | Policies are terminated through lapses and surrenders, wherelapses represent the termination of policies due to non-paymentof premiums and surrenders represent the voluntary terminationof policies by policyholders. Premium persistency representsthe level of ongoing deposits on contracts where there ispolicyholder discretion as to the amount and timing of deposits.Policy termination and premium persistency assumptions areprimarily based on the Company’s recent experience adjustedfor expected future conditions. Assumptions reflect differencesby type of contract within each geographic market. | The Company seeks to design products that minimize financialexposure to lapse, surrender and premium persistency risk. TheCompany monitors lapse, surrender and persistencyexperience. |
| In aggregate, 2022 policyholder termination and premiumpersistency experience was unfavourable (2021 – unfavourable)when compared to the Company’s assumptions used in thecomputation of actuarial liabilities. |
| Expensesand taxes | | Operating expense assumptions reflect the projected costs ofmaintaining and servicing in-force policies, including associatedoverhead expenses. The expenses are derived from internal coststudies projected into the future with an allowance for inflation.For some developing businesses, there is an expectation thatunit costs will decline as these businesses grow. | The Company prices its products to cover the expected costs ofservicing and maintaining them. In addition, the Companymonitors expenses monthly, including comparisons of actualexpenses to expense levels allowed for in pricing and valuation. |
| Maintenance expenses for 2022 were unfavourable (2021 –unfavourable) when compared to the Company’s assumptionsused in the computation of actuarial liabilities. |
| | Taxes reflect assumptions for future premium taxes and othernon-income related taxes. For income taxes, policy liabilities areadjusted only for temporary tax timing and permanent tax ratedifferences on the cash flows available to satisfy policyobligations. |
| The Company prices its products to cover the expected cost oftaxes. |
| Policyholderdividends,experienceratingrefunds, andotheradjustablepolicyelements | | The best estimate projections for policyholder dividends andexperience rating refunds, and other adjustable elements ofpolicy benefits are determined to be consistent withmanagement’s expectation of how these elements will bemanaged should experience emerge consistently with the bestestimate assumptions used for mortality and morbidity,investment returns, rates of policy termination, operatingexpenses and taxes. | The Company monitors policy experience and adjusts policybenefits and other adjustable elements to reflect thisexperience. |
| Policyholder dividends are reviewed annually for all businessesunder a framework of Board-approved policyholder dividendpolicies. |
| Foreigncurrency | | Foreign currency risk results from a mismatch of the currency ofliabilities and the currency of the assets designated to supportthese obligations. Where a currency mismatch exists, theassumed rate of return on the assets supporting the liabilities isreduced to reflect the potential for adverse movements inforeign exchange rates. | The Company generally matches the currency of its assets withthe currency of the liabilities they support, with the objective ofmitigating the risk of loss arising from movements in currencyexchange rates. |
| The Company reviews actuarial methods and assumptions on an annual basis. If changes are made to assumptions (refer to note 7(h)), thefull impact is recognized in income immediately. |
| (e) Sensitivity of insurance contract liabilities to changes in non-economic assumptionsThe sensitivity of net income attributed to shareholders to changes in non-economic assumptions underlying insurance contract liabilitiesis shown below, assuming a simultaneous change in the assumption across all business units. The sensitivity of net income attributed toshareholders to a deterioration or improvement in non-economic assumptions for Long-Term Care (“LTC”) as at December 31, 2022 is alsoshown below. |
| In practice, experience for each assumption will frequently vary by geographic market and business and assumption updates are made ona business/geographic specific basis. Actual results can differ materially from these estimates for a variety of reasons including theinteraction among these factors when more than one changes; changes in actuarial and investment return and future investment activityassumptions; changes in business mix, effective tax rates and other market factors; and the general limitations of internal models. |
| 180 | 2022 Annual Report | Notes to Consolidated Financial Statements |
| Potential impact on net income attributed to shareholders arising from changes to non-economic assumptions(1) |
| Decrease in after-tax net |
| income attributed |
| to shareholders |
| As at December 31, | 2022 | 2021 |
| Policy related assumptions2% adverse change in future mortality rates(2),(4) |
| Products where an increase in rates increases insurance contract liabilities | $ | (500) | $ | (500) |
| Products where a decrease in rates increases insurance contract liabilities | (500) | (500) |
| 5% adverse change in future morbidity rates (incidence and termination)(3),(4),(5) | (4,500) | (5,500) |
| 10% adverse change in future policy termination rates(4) | (2,200) | (2,400) |
| 5% increase in future expense levels | (600) | (600) |
| (1) | The participating policy funds are largely self-supporting and generate no material impact on net income attributed to shareholders as a result of changes in non-economicassumptions. Experience gains or losses would generally result in changes to future dividends, with no direct impact to shareholders. |
| (2) | An increase in mortality rates will generally increase policy liabilities for life insurance contracts whereas a decrease in mortality rates will generally increase policy liabilities forpolicies with longevity risk such as payout annuities. |
| (3) | No amounts related to morbidity risk are included for policies where the policy liability provides only for claims costs expected over a short period, generally less than one year,such as Group Life and Health. |
| (4) | The impacts of the adverse sensitivities on LTC for morbidity, mortality and lapse do not assume any partial offsets from the Company’s ability to contractually raise premiumrates in such events, subject to state regulatory approval. In practice, the Company would plan to file for rate increases equal to the amount of deterioration resulting from thesensitivities. |
| (5) | 5% deterioration in incidence rates and 5% deterioration in claim termination rates. |
| Potential impact on net income attributed to shareholders arising from changes to non-economic assumptions for Long-Term Careincluded in the above table(1),(2) |
| Decrease in after-tax net |
| income attributed |
| to shareholders |
| As at December 31, | 2022 | 2021 |
| Policy related assumptions2% adverse change in future mortality rates |
| $ | (300) | | $ | (300) |
| 5% adverse change in future morbidity incidence rates | (1,700) | (2,000) |
| 5% adverse change in future morbidity claims termination rates | (2,400) | (3,100) |
| 10% adverse change in future policy termination rates | (300) | (400) |
| 5% increase in future expense levels | (100) | (100) |
| (1) | The impacts of the adverse sensitivities on LTC for morbidity, mortality and lapse do not assume any partial offsets from the Company’s ability to contractually raise premiumrates in such events, subject to state regulatory approval. In practice, the Company would plan to file for rate increases equal to the amount of deterioration resulting from thesensitivities. |
| (2) | The impact of favourable changes to all the sensitivities is relatively symmetrical. |
| (f) Provision for adverse deviation assumptionsThe assumptions made in establishing insurance contract liabilities reflect expected best estimates of future experience. To recognize theuncertainty in these best estimate assumptions, to allow for possible misestimation of and deterioration in experience and to provide agreater degree of assurance that the insurance contract liabilities are adequate to pay future benefits, the Appointed Actuary is required toinclude a margin in each assumption. |
| Margins are released into future earnings as the policy is released from risk. Margins for interest rate risk are included by testing a numberof scenarios of future interest rates. The margin can be established by testing a limited number of scenarios, some of which are prescribedby the Canadian Actuarial Standards of Practice, and determining the liability based on the worst outcome. Alternatively, the margin canbe set by testing many scenarios, which are developed according to actuarial guidance. Under this approach the liability would be theaverage of the outcomes above a percentile in the range prescribed by the Canadian Actuarial Standards of Practice. |
| Specific guidance is also provided for other risks such as market, credit, mortality and morbidity risks. For other risks which are notspecifically addressed by the Canadian Institute of Actuaries, a range is provided of five per cent to 20 per cent of the expected experienceassumption. The Company uses assumptions within the permissible ranges, with the determination of the level set considering the riskprofile of the business. On occasion, in specific circumstances for additional prudence, a margin may exceed the high end of the range,which is permissible under the Canadian Actuarial Standards of Practice. This additional margin would be released if the specificcircumstances which led to it being established were to change. |
| Each margin is reviewed annually for continued appropriateness. |
| | | | |
| | 181 |
| (g) Change in insurance contract liabilitiesThe change in insurance contract liabilities was a result of the following business activities and changes in actuarial estimates. |
| | Other | Net | | Gross |
| | insurance | insurance | | insurance |
| Net actuarial | contract | contract | Reinsurance | contract |
| For the year ended December 31, 2022 | liabilities | liabilities(1) | liabilities | assets | liabilities |
| Balance, January 1 | $ 332,272 | $ 15,472 | | | | $ 347,744 | $ 44,531 | | | $ 392,275 |
| New policies(2) | 5,365 | – | 5,365 | | | | | 116 | 5,481 |
| Normal in-force movement(2) | (39,174) | 1,216 | (37,958) | (1,042) | (39,000) |
| Changes in methods and assumptions(2) | | | | | | | | | 112 | (192) | (80) | | | | | 349 | 269 |
| Reinsurance transactions(2),(3) | (2,419) | – | (2,419) | | | | | 950 | (1,469) |
| Impact of changes in foreign exchange rates | 10,439 | 640 | 11,079 | 2,770 | 13,849 |
| Balance, December 31 | $ 306,595 | $ 17,136 | | | | $ 323,731 | $ 47,674 | | | $ 371,405 |
| | Other | Net | | Gross |
| | insurance | insurance | | insurance |
| Net actuarial | contract | contract | Reinsurance | contract |
| For the year ended December 31, 2021 | liabilities | liabilities(1) | liabilities | assets | liabilities |
| Balance, January 1 | $ 325,408 | $ 14,377 | | | | $ 339,785 | $ 45,769 | | | $ 385,554 |
| New policies(4) | 5,947 | – | 5,947 | | | | | 276 | 6,223 |
| Normal in-force movement(4) | 4,689 | 1,283 | 5,972 | (1,812) | 4,160 |
| Changes in methods and assumptions(4) | | | | | | | | | 287 | – | 287 | | | | | 455 | 742 |
| Reinsurance transactions | | | | | | | | | – | – | – | | | | – | – |
| Impact of changes in foreign exchange rates | (4,059) | (188) | (4,247) | (157) | (4,404) |
| Balance, December 31 | $ 332,272 | $ 15,472 | | | | $ 347,744 | $ 44,531 | | | $ 392,275 |
| (1) | Other insurance contract liabilities are comprised of benefits payable and provisions for unreported claims and policyholder amounts on deposit. |
| (2) | In 2022, the $34,971 decrease reported as the change in insurance contract liabilities on the 2022 Consolidated Statements of Income primarily consists of changes due tonormal in-force movement, new policies, changes in methods and assumptions, and reinsurance transactions. These four items in the gross insurance contract liabilities werenetted off by a decrease of $34,719, of which $35,830 is included in the Consolidated Statements of Income as a decrease in insurance contract liabilities and $1,111increase is included in gross claims and benefits. The Consolidated Statements of Income change in insurance contract liabilities also includes the change in embeddedderivatives associated with insurance contracts, however these embedded derivatives are included in other liabilities on the Consolidated Statements of Financial Position. |
| (3) | In 2022, we completed two transactions to reinsure blocks of legacy U.S. variable annuity (“VA”) policies. Under the terms of the transactions, the Company will retainresponsibility for the maintenance of the policies with no intended impact to VA policyholders. The transactions were structured as coinsurance for the general fund liabilitiesand modified coinsurance for the segregated fund liabilities. |
| (4) | In 2021, the $10,719 increase reported as the change in insurance contract liabilities on the Consolidated Statements of Income primarily consists of changes due to normalin-force movement, new policies and changes in methods and assumptions. These three items in the gross insurance contract liabilities were netted off by an increase of$11,125, of which $9,868 is included in the Consolidated Statements of Income increase in insurance contract liabilities and $1,257 is included in gross claims and benefits.The Consolidated Statements of Income change in insurance contract liabilities also includes the change in embedded derivatives associated with insurance contracts. |
| (h) Actuarial methods and assumptionsA comprehensive review of actuarial methods and assumptions is performed annually. The review is designed to reduce the Company’sexposure to uncertainty by ensuring assumptions for both asset and liability related risks remain appropriate. This is accomplished bymonitoring experience and selecting assumptions which represent a current best estimate view of expected future experience, andmargins for adverse deviations that are appropriate for the risks assumed. While the assumptions selected represent the Company’scurrent best estimates and assessment of risk, the ongoing monitoring of experience and changes in the economic environment are likelyto result in future changes to the actuarial assumptions, which could materially impact the measurement of insurance contract liabilities. |
| 2022 Review of Actuarial Methods and AssumptionsThe completion of the 2022 annual review of actuarial methods and assumptions resulted in a decrease in insurance contract liabilities,net of reinsurance, of $80, and a net gain to net income attributed to shareholders of $36 post-tax. |
| | Change in insurance contract liabilities, |
| | net of reinsurance |
| | Attributed to | | | | | Change in net |
| | participating | Attributed to | | | | income attributed |
| | policyholders’ | shareholders’ | | | | to shareholders |
| For the year ended December 31, 2022 | | Total | | | | account(1) | account | (post-tax) |
| Long-term care triennial review | | | | | | | | | | $ | 19 | | | | $ | – | $ | 19 | $ (15) |
| Mortality and morbidity updates | | 157 | (5) | 162 | (126) |
| Lapses and policyholder behaviour updates | | 317 | 74 | 243 | (192) |
| Investment related updates | | (210) | (1) | (209) | 157 |
| Other updates | | (363) | | | | (145) | (218) | 212 |
| Net impact | | | | | | | | | | $ | (80) | | | | $ | (77) | $ | (3) | $ 36 |
| (1) | The change in insurance contract liabilities, net of reinsurance, attributable to the participating policyholders’ account was primarily driven by an increase in expected long-terminterest rates within the valuation models to reflect the higher interest rate environment, partially offset by the lapse assumption update in Canada. |
| 182 | 2022 Annual Report | Notes to Consolidated Financial Statements |
| Long-term care triennial reviewU.S. Insurance completed a comprehensive long-term care (“LTC”) experience study. The review included all aspects of claim assumptions,as well as the progress on future premium rate increases. The impact of the LTC review resulted in a net $15 post-tax charge to net incomeattributed to shareholders. |
| The experience study showed that claim costs established in the last triennial review remain appropriate in aggregate for the older blocksof business1 supported by robust claims data on this mature block. Insurance contract liabilities were strengthened for claim costs on thenewer block of business2. This was driven by lower active life mortality3 supported by Company experience and a recent industry study, aswell as higher utilization of benefits, which included the impact of reflecting higher inflation in the cost-of-care up to the current year. TheCompany also reviewed and updated incidence and claim termination assumptions which, on a net basis, provided a partial offset to theincrease in insurance contract liabilities on active life mortality and utilization. In addition, some policyholders are electing to reduce theirbenefits in lieu of paying increased premiums which resulted in a reduction in insurance contract liabilities. The overall claims experiencereview led to a post-tax charge to net income attributed to shareholders of approximately $2.3 billion (US$1.7 billion). |
| Experience continues to support the assumptions of both future morbidity and mortality improvement, resulting in no changes to theseassumptions. |
| As of September 30, 2022, the Company has received actual premium increase approvals of $2.5 billion pre-tax (US$1.9 billion pre-tax)on a present value basis since the last triennial review in 2019. This aligns with the full amount assumed in the Company’s insurancecontract liabilities at that time and demonstrates the Company’s continued strong track record of progress in securing premium rateincreases4. In 2022, the review of future premium increases assumed in insurance contract liabilities resulted in a post-tax gain to netincome attributed to shareholders of approximately $2.1 billion (US$1.6 billion). This reflects expected future premium increases that aredue to the Company’s 2022 review of morbidity, mortality, and lapse assumptions, as well as outstanding amounts from prior state filings.Premium increases averaging approximately 30% will be sought on about one-half of the business, excluding the carryover of 2019amounts requested. The Company’s assumptions reflect the estimated timing and amount of state approved premium increases. |
| Other refinements to LTC valuation resulted in a post-tax gain of approximately $0.2 billion (US$0.2 billion) to net income attributed toshareholders. |
| Mortality and morbidity updatesMortality and morbidity updates resulted in a $126 post-tax charge to net income attributed to shareholders, driven by a detailed review ofthe mortality and morbidity assumptions for the Company’s Canada insurance business, and by updates to morbidity assumptions inVietnam to align with experience. |
| Lapses and policyholder behaviour updatesUpdates to lapses and policyholder behaviour assumptions resulted in a $192 post-tax charge to net income attributed to shareholders. |
| The Company completed a detailed review of lapse assumptions for Singapore, and increased lapse rates to align with experience onindex-linked products, which reduced projected future fee income to be received on these products. |
| The Company also increased lapse rates on Canada’s term insurance products for policies approaching their renewal date, reflectingemerging experience in the Company’s study. |
| Investment-related updatesUpdates to investment return assumptions resulted in a $157 post-tax gain to net income attributed to shareholders, primarily driven byannual updates to the Company’s valuation models to reflect market movements during the year. No changes were made to the Company’slong-term assumed returns. |
| Other updatesOther updates resulted in a $212 post-tax gain to net income attributed to shareholders, which included refinements to the projection ofthe Company’s tax and liability cash flows, as well as various other modelling updates. |
| 1 | First generation policies issued prior to 2002. |
| | |
| 2 | Second generation policies with an average issue date of 2007 and Group policies with an average issue date of 2003. |
| 3 | The mortality rate of LTC policyholders who are currently not on claim. |
| 4 | Actual experience obtaining premium increases could be materially different than what the Company has assumed, resulting in further increases or decreases in insurancecontract liabilities, which could be material. |
| 183 |
| 2021 Review of Actuarial Methods and AssumptionsThe completion of the 2021 annual review of actuarial methods and assumptions resulted in an increase in insurance contract liabilities of$287, net of reinsurance, and a decrease in net income attributed to shareholders of $41 post-tax. |
| Change in insurance contract liabilities, |
| | net of reinsurance |
| | Attributed to | | Change in net |
| | participating | Attributed to | income attributed |
| | policyholders’ | shareholders’ | to shareholders |
| For the year ended December 31, 2021 | Total | account(1) | account | (post-tax) |
| U.S. variable annuity product review | $ | 51 | $ | – | $ | | 51 | $ (40) |
| Mortality and morbidity updates | 350 | | – | | 350 | (257) |
| Lapses and policyholder behaviour updates | 686 | | | | | | 18 | 668 | (534) |
| Expense updates | (653) | | | | | | (25) | (628) | | | 503 |
| Investment related updates | (257) | | | | | | (2) | (255) | | | 168 |
| Other updates | 110 | | | | | | 231 | (121) | | | 119 |
| Net impact | $ 287 | $ | | | | | 222 | $ | | 65 | $ (41) |
| (1) | The change in insurance contract liabilities, net of reinsurance, attributable to the participating policyholders’ account was primarily driven by a reduction in the expected long-term interest rates within the valuation models to reflect the low interest rate environment. |
| U.S. variable annuity product reviewThe review of the Company’s variable annuity products in the U.S. resulted in a $40 post-tax charge to net income attributed toshareholders. |
| The charge was primarily driven by updates to lapse assumptions to reflect emerging experience, partially offset by refinements to theCompany’s segregated fund guaranteed minimum withdrawal benefit valuation models. |
| Mortality and morbidity updatesMortality and morbidity updates resulted in a $257 post-tax charge to net income attributed to shareholders. |
| The charge was driven by updates to older age mortality on certain products in the Company’s U.S. life insurance business, mortalityassumption updates in Indonesia to reflect recent experience, as well as from refining assumptions on several reinsurance arrangementsin Canada. |
| Lapses and policyholder behaviour updatesUpdates to lapses and policyholder behaviour assumptions resulted in a $534 post-tax charge to net income attributed to shareholders. |
| The Company completed a detailed review of lapse assumptions for non-participating policies within the Company’s U.S. life insurancebusiness including those for universal life, variable universal life, and term products. The Company observed a trend of low lapse rates onthe protection-focused universal life insurance products as consumers continue to value the product guarantees in the prolonged lowinterest rate environment. The Company lowered the overall lapse assumptions for these products to reflect actual experience, whichresulted in a post-tax charge to net income attributed to shareholders. |
| Other updates to lapse and policyholder behaviour assumptions were made across several products in Canada and Japan to reflect recentexperience, resulting in a modest post-tax charge to net income attributed to shareholders. |
| Expense updatesUpdates to expense assumptions resulted in a $503 post-tax gain to net income attributed to shareholders. |
| The Company completed a detailed review of the investment expense assumptions across the Company. This resulted in a $263 post-taxgain to net income attributed to shareholders, primarily driven by scale benefits. |
| The Company also completed a global expense study, which resulted in a $256 post-tax gain to net income attributed to shareholders. Thefavourable result primarily reflects a reallocation of expenses across certain business lines to align with actual experience, as well as fromexpense savings related to various expense efficiency initiatives. |
| Investment-related updatesUpdates to investment return assumptions resulted in a $168 post-tax gain to net income attributed to shareholders. |
| The primary driver of the gain was an update to the Company’s corporate bond default rates to reflect recent experience; the Companyreduced default assumptions for certain credit ratings in Canada, the U.S., and Japan. This was partially offset by a reduction to theCompany’s Canadian real estate investment return assumptions. |
| 184 | 2022 Annual Report | Notes to Consolidated Financial Statements |
| Other updatesOther updates resulted in a $119 post-tax gain to net income attributed to shareholders. |
| This was primarily driven by Japan, whereby investment fees for certain mandates in the general account provided by affiliate investmentmanagers were reviewed and updated to align with broader market levels. |
| (i) Insurance contracts contractual obligationsInsurance contracts give rise to obligations fixed by agreement. As at December 31, 2022, the Company’s contractual obligations andcommitments relating to insurance contracts are as follows. |
| Less than | 1 to 3 | 3 to 5 |
| Payments due by period | 1 year | years | years | Over 5 years | Total |
| Insurance contract liabilities(1) | $ 11,498 | $ 12,365 | $ 18,496 | $ 1,012,611 | | $ 1,054,970 |
| (1) | Insurance contract liability cash flows include estimates related to the timing and payment of death and disability claims, policy surrenders, policy maturities, annuitypayments, minimum guarantees on segregated fund products, policyholder dividends, commissions and premium taxes offset by contractual future premiums on in-forcecontracts. These estimated cash flows are based on the best estimate assumptions used in the determination of insurance contract liabilities. These amounts are undiscountedand reflect recoveries from reinsurance agreements. Due to the use of assumptions, actual cash flows may differ from these estimates. Cash flows include embeddedderivatives measured separately at fair value. |
| (j) Gross claims and benefitsThe following table presents a breakdown of gross claims and benefits. |
| For the years ended December 31, | | | | | | 2022 | 2021 |
| Death, disability and other claims | | | | $ 19,404 | | $ 18,583 |
| Maturity and surrender benefits | | | | | | | 10,662 | 8,728 |
| Annuity payments | | | | | | | 3,242 | 3,276 |
| Policyholder dividends and experience rating refunds | | | | | | | 1,279 | 1,255 |
| Net transfers from segregated funds | | | | | | | (1,267) | (732) |
| Total | | | | $ 33,320 | | $ 31,110 |
| (k) Reinsurance transactionOn November 15, 2021 and October 3, 2022, the Company, through its subsidiaries John Hancock Life Insurance Company (U.S.A.)(“JHUSA”) and John Hancock Life Insurance Company of New York (“JHNY”) entered into reinsurance agreements with Venerable Holdings,Inc. to reinsure blocks of legacy U.S. variable annuity (“VA”) policies. Under the terms of the transactions, the Company will retainresponsibility for the maintenance of the policies with no intended impact to VA policyholders. The transactions were structured ascoinsurance for the general fund liabilities and modified coinsurance for the segregated fund liabilities. |
| The transactions closed on February 1, 2022 and October 3, 2022, respectively, resulting in a cumulative after-tax gain of $806,comprising a cumulative after-tax gain of $846 recognized in 2022, and a one-time after-tax loss of $40 recognized in the fourth quarter2021. |
| Note 8 | | | | | | | | Investment Contract Liabilities |
| Investment contract liabilities are contractual obligations that do not contain significant insurance risk. These contracts are measuredeither at fair value or at amortized cost. |
| (a) Investment contract liabilities measured at fair valueInvestment contract liabilities measured at fair value include certain investment savings and pension products sold primarily in Hong Kongand mainland China. The following table presents the movement in investment contract liabilities measured at fair value. |
| For the years ended December 31, | | | | | | 2022 | 2021 |
| Balance, January 1 | | | | | | $ 802 | $ 932 |
| New policies | | | | | | 93 | 54 |
| Changes in market conditions | | | | | | (39) | (38) |
| Redemptions, surrenders and maturities | | | | | | (106) | (138) |
| Impact of changes in foreign exchange rates | | | | | | 46 | (8) |
| Balance, December 31 | | | | | | $ 796 | $ 802 |
| | | | | | | | | |
| | | | | 185 |
| (b) Investment contract liabilities measured at amortized costInvestment contract liabilities measured at amortized cost include several fixed annuity products sold in the U.S. and Canada that provideguaranteed income payments for a contractually determined period and are not contingent on survivorship. |
| The following table presents carrying and fair values of investment contract liabilities measured at amortized cost. |
| 2022 | 2021 |
| | | Amortized | | Amortized |
| | | cost, gross of | | cost, gross of |
| | | reinsurance | | reinsurance |
| As at December 31, | ceded(1) | | | Fair value | ceded(1) | | | | Fair value |
| U.S. fixed annuity products | | | $ 1,575 | $ 1,547 | | | | $ 1,380 | $ 1,602 |
| Canadian fixed annuity products | 877 | | | 956 | 935 | | | | 1,016 |
| Investment contract liabilities | | | $ 2,452 | $ 2,503 | | | | $ 2,315 | $ 2,618 |
| (1) | As at December 31, 2022, investment contract liabilities with the carrying value and fair value of $38 and $38, respectively (2021 – $48 and $52, respectively), werereinsured by the Company. The net carrying value and fair value of investment contract liabilities were $2,414 and $2,465 (2021 – $2,267 and $2,566), respectively. |
| The changes in investment contract liabilities measured at amortized cost was a result of the following business activities. |
| For the years ended December 31, | | 2022 | | | | 2021 |
| Balance, January 1 | | | | | $ 2,315 | $ 2,356 |
| Policy deposits | | 200 | | | | 92 |
| Interest | | 67 | | | | 71 |
| Withdrawals | | (236) | | | | (191) |
| Fees | | (1) | | | | | (1) |
| Other | | – | | | | | (5) |
| Impact of changes in foreign exchange rates | | 107 | | | | | (7) |
| Balance, December 31 | | | | | $ 2,452 | $ 2,315 |
| Carrying value of fixed annuity products is amortized at a rate that exactly discounts the projected actual cash flows to the net carryingamount of the liability at the date of issue. |
| Fair value of fixed annuity products is determined by projecting cash flows according to the contract terms and discounting the cash flowsat current market rates adjusted for the Company’s own credit standing. As at December 31, 2022 and 2021, fair value of all investmentcontract liabilities was determined using Level 2 valuation techniques. |
| (c) Investment contracts contractual obligationsAs at December 31, 2022, the Company’s contractual obligations and commitments relating to the investment contracts are as follows. |
| | | | | | | | Less than | 1 to 3 | | | 3 to 5 | Over 5 |
| Payments due by period | | | | | | | | 1 year | years | | | | | | | | years | years | | | | Total |
| Investment contract liabilities(1) | | | | | | | | $ 300 | $ 511 | | | $ 514 | $ 3,365 | $ 4,690 |
| (1) | Due to the nature of the products, the timing of net cash flows may be before contract maturity. Cash flows are undiscounted. |
| 186 | 2022 Annual Report | Notes to Consolidated Financial Statements |
| Note 9 | Risk Management |
| The Company’s policies and procedures for managing risks of financial instruments are disclosed in denoted components of the “RiskManagement and Risk Factors” section of the MD&A for the year ended December 31, 2022. These MD&A disclosures are in accordancewith IFRS 7 “Financial Instruments: Disclosures” and are an integral part of these Consolidated Financial Statements. |
| (a) Credit riskCredit risk is the risk of loss due to inability or unwillingness of a borrower, or counterparty, to fulfill its payment obligations. Worseningregional and global economic conditions, segment or industry sector challenges, or company specific factors could result in defaults ordowngrades and could lead to increased provisions or impairments related to the Company’s general fund invested assets, derivativefinancial instruments and reinsurance assets and an increase in provisions for future credit impairments that are included in actuarialliabilities. |
| The Company’s exposure to credit risk is managed through risk management policies and procedures which include a defined creditevaluation and adjudication process, delegated credit approval authorities and established exposure limits by borrower, corporateconnection, credit rating, industry and geographic region. The Company measures derivative counterparty exposure as net potential creditexposure, which takes into consideration mark-to-market values of all transactions with each counterparty, net of any collateral held, andan allowance to reflect future potential exposure. Reinsurance counterparty exposure is measured reflecting the level of ceded liabilities. |
| The Company also ensures where warranted, that mortgages, private placements and loans to Bank clients are secured by collateral, thenature of which depends on the credit risk of the counterparty. |
| An allowance for losses on loans is established when a loan becomes impaired. Allowances for loan losses are calculated to reduce thecarrying value of the loans to estimated net realizable value. The establishment of such allowances takes into consideration normalhistorical credit loss levels and future expectations, with an allowance for adverse deviations. In addition, policy liabilities include generalprovisions for credit losses from future asset impairments. Impairments are identified through regular monitoring of all credit relatedexposures, considering such information as general market conditions, industry and borrower specific credit events and any other relevanttrends or conditions. Allowances for losses on reinsurance contracts are established when a reinsurance counterparty becomes unable orunwilling to fulfill its contractual obligations. The allowance for loss is based on current recoverable amounts and ceded policy liabilities. |
| Credit risk associated with derivative counterparties is discussed in note 9(d) and credit risk associated with reinsurance counterparties isdiscussed in note 9(i). |
| (i) Credit exposureThe following table presents the gross carrying amount of financial instruments subject to credit exposure, without considering anycollateral held or other credit enhancements. |
| As at December 31, | | 2022 | 2021 |
| Debt securities |
| FVTPL | | | | $ 170,273 | $ 189,722 |
| AFS | | 32,220 | 33,097 |
| Other | | 1,411 | 1,320 |
| Mortgages | | 54,638 | 52,014 |
| Private placements | | 47,057 | 42,842 |
| Policy loans | | 6,894 | 6,397 |
| Loans to Bank clients | | 2,781 | 2,506 |
| Derivative assets | | 8,588 | 17,503 |
| Accrued investment income | | 2,813 | 2,641 |
| Reinsurance assets | | 47,712 | 44,579 |
| Other financial assets | | 6,077 | 6,242 |
| Total | | | | $ 380,464 | $ 398,863 |
| As at December 31, 2022, 96% (2021 – 97%) of debt securities were investment grade-rated with ratings ranging between AAA to BBB. |
| (ii) Credit qualityCredit quality of commercial mortgages and private placementsCredit quality of commercial mortgages and private placements is assessed at least annually by using an internal rating based on regularmonitoring of credit-related exposures, considering both qualitative and quantitative factors. |
| A provision is recorded when the internal risk ratings indicate that a loss represents the most likely outcome. These assets are designatedas non-accrual and an allowance is established based on an analysis of the security and repayment sources. | | | | | | |
| | | 187 |
| The following table presents the credit quality of commercial mortgages and private placements. |
| As at December 31, 2022 | AAA | AA | A | BBB | BB | B and lower | Total |
| Commercial mortgages |
| Retail | $ | 113 | | | | | | $ | 1,526 | $ | 4,872 | $ | 2,055 | | | | $ | 194 | | | | $ | 2 | $ | 8,762 |
| Office | 102 | 1,460 | 5,950 | 1,471 | 57 | | | | 33 | 9,073 |
| Multi-family residential | 500 | 2,213 | 3,751 | 892 | 11 | | | | | – | 7,367 |
| Industrial | 72 | 929 | 3,312 | 407 | – | | | | | – | 4,720 |
| Other | 180 | 990 | 798 | 764 | – | | | | | – | 2,732 |
| Total commercial mortgages | 967 | 7,118 | | | | | | | | | 18,683 | 5,589 | 262 | | | | 35 | 32,654 |
| Agricultural mortgages | – | – | 119 | 240 | – | | | | | – | 359 |
| Private placements | 904 | 6,991 | | | | | | | | | 16,534 | 17,176 | 1,105 | | | | 4,347 | 47,057 |
| Total | $ 1,871 | | | | | | $ 14,109 | $ 35,336 | $ 23,005 | | | | | $ 1,367 | $ 4,382 | $ 80,070 |
| As at December 31, 2021 | AAA | AA | A | BBB | BB | B and lower | Total |
| Commercial mortgages |
| Retail | $ | 113 | | | | | | $ | 1,340 | $ | 5,179 | $ | 1,936 | | | | $ | 228 | | | | $ | 2 | $ | 8,798 |
| Office | 56 | 1,256 | 6,004 | 1,291 | 87 | | | | 40 | 8,734 |
| Multi-family residential | 557 | 1,869 | 3,771 | 767 | 32 | | | | | – | 6,996 |
| Industrial | 47 | 376 | 2,808 | 328 | – | | | | | – | 3,559 |
| Other | 212 | 1,010 | 787 | 956 | 47 | | | | | – | 3,012 |
| Total commercial mortgages | 985 | 5,851 | | | | | | | | | 18,549 | 5,278 | 394 | | | | 42 | 31,099 |
| Agricultural mortgages | – | – | 119 | 242 | – | | | | | – | 361 |
| Private placements | 976 | 5,720 | | | | | | | | | 16,147 | 16,220 | 1,161 | | | | 2,618 | 42,842 |
| Total | $ 1,961 | | | | | | $ 11,571 | $ 34,815 | $ 21,740 | | | | | $ 1,555 | $ 2,660 | $ 74,302 |
| Credit quality of residential mortgages and loans to Bank clientsCredit quality of residential mortgages and loans to Bank clients is assessed at least annually with the loan being performing ornon-performing as the key credit quality indicator. |
| Full or partial write-offs of loans are recorded when management believes that there is no realistic prospect of full recovery. Write-offs, netof recoveries, are deducted from the allowance for credit losses. All impairments are captured in the allowance for credit losses. |
| The following table presents credit quality of residential mortgages and loans to Bank clients. |
| | 2022 | | | | | | | 2021 |
| As at December 31, | Insured | Uninsured | Total | | Insured | | | | Uninsured | Total |
| Residential mortgages |
| Performing | $ 7,015 | $ 14,569 | $ 21,584 | | | | | $ 7,264 | $ 13,272 | $ 20,536 |
| Non-performing(1) | | 8 | | | | | | | | | 33 | 41 | 6 | | | | 12 | 18 |
| Loans to Bank clients |
| Performingn/a | 2,778 | 2,778 | | n/a | | | | 2,506 | 2,506 |
| Non-performing(1) | | | | | | | n/a | | | | 3 | 3 | n/a | | | | | – | – |
| Total | $ 7,023 | $ 17,383 | $ 24,406 | | | | | $ 7,270 | $ 15,790 | $ 23,060 |
| (1) | Non-performing refers to payments that are 90 days or more past due. |
| The carrying value of government-insured mortgages was 13% of the total mortgage portfolio as at December 31, 2022 (2021 – 14%). Mostof these insured mortgages are residential loans as classified in the table above. |
| (iii) Past due or credit impaired financial assetsThe Company provides for credit risk by establishing allowances against the carrying value of impaired loans and recognizing impairmentlosses on AFS debt securities. In addition, the Company reports as impairment losses certain declines in the fair value of debt securitiesdesignated as FVTPL which it deems represent impairments due to non-recoverability of due amounts. |
| 188 | 2022 Annual Report | Notes to Consolidated Financial Statements |
| The following table presents the carrying value of financial assets with some or all of their contractual payments past due but which are notimpaired and impaired financial assets. |
| Past due but not impaired |
| Less than | 90 days | | Total |
| As at December 31, 2022 | 90 days | and greater | | Total | impaired |
| Debt securities(1),(2) |
| FVTPL | | | | | $ 2,059 | $ | 71 | $ 2,130 | $ | 9 |
| AFS | 922 | – | 922 | – |
| Private placements(1) | 317 | 152 | 469 | 229 |
| Mortgages and loans to Bank clients | 103 | – | 103 | 74 |
| Other financial assets | 36 | 34 | 70 | 1 |
| Total | | | | | $ 3,437 | $ 257 | $ 3,694 | $ 313 |
| Past due but not impaired |
| Less than | 90 days | | Total |
| As at December 31, 2021 | 90 days | and greater | | Total | impaired |
| Debt securities(1),(2) |
| FVTPL | | | | | $ | 20 | $ | – | $ | 20 | $ | 2 |
| AFS | – | – | – | – |
| Private placements(1) | 63 | – | 63 | 175 |
| Mortgages and loans to Bank clients | 61 | – | 61 | 51 |
| Other financial assets | 261 | 47 | 308 | – |
| Total | | | | | $ | 405 | $ | 47 | $ | 452 | $ 228 |
| (1) | Payments of $12 on $3,297 (December 31, 2021 – $nil and $20, respectively) of financial assets past due less than 90 days are delayed. |
| (2) | Payments of $4 on $224 (December 31, 2021 – $nil and $nil, respectively) of financial assets past due greater than 90 days are delayed. |
| The following table presents gross carrying value and allowances for loan losses for impaired loans. |
| Gross | | | | | Allowances | Net carrying |
| As at December 31, 2022 | carrying value | for loan losses | | value |
| Private placements | $ 254 | | $ 25 | $ 229 |
| Mortgages and loans to Bank clients | | 96 | 22 | 74 |
| Total | $ 350 | | $ 47 | $ 303 |
| Gross | | | | | Allowances | Net carrying |
| As at December 31, 2021 | carrying value | for loan losses | | value |
| Private placements | $ 197 | | $ 22 | $ 175 |
| Mortgages and loans to Bank clients | | 73 | 22 | 51 |
| Total | $ 270 | | $ 44 | $ 226 |
| The following table presents movement of allowance for loan losses during the year. |
| | | | | | | 2022 | 2021 |
| | | | | | | Mortgages | Mortgages |
| | | | | | | | Private | and loans toBank clients | Private | and loans toBank clients |
| For the years ended December 31, | | | | | | | | placements | Total | placements | | | Total |
| Balance, January 1 | | | | | | | | $ 22 | $ 22 | $ 44 | $ 79 | $ 28 | $ 107 |
| Provisions | | | | | | | | 22 | 4 | 26 | 14 | 12 | 26 |
| Recoveries | | | | | | | | (18) | (2) | (20) | (58) | (16) | (74) |
| Write-offs(1) | | | | | | | | (1) | (2) | (3) | (13) | (2) | (15) |
| Balance, December 31 | | | | | | | | $ 25 | $ 22 | $ 47 | $ 22 | $ 22 | $ | 44 |
| (1) | Includes disposals and impact of changes in foreign exchange rates. |
| (b) Securities lending, repurchase and reverse repurchase transactionsThe Company engages in securities lending to generate fee income. Collateral exceeding the market value of the loaned securities isretained by the Company until the underlying security has been returned to the Company. The market value of the loaned securities ismonitored daily and additional collateral is obtained or refunded as the market value of the underlying loaned securities fluctuates. As atDecember 31, 2022, the Company had loaned securities (which are included in invested assets) with a market value of $723 (2021 –$564). The Company holds collateral with a current market value that exceeds the value of securities lent in all cases. |
| | | | | | | | | | |
| | | | 189 |
| The Company engages in reverse repurchase transactions to generate fee income to take possession of securities to cover short positionsin similar instruments and to meet short-term funding requirements. As at December 31, 2022, the Company had engaged in reverserepurchase transactions of $895 (2021 – $1,490) which are recorded as short-term receivables. In addition, the Company had engaged inrepurchase transactions of $895 as at December 31, 2022 (2021 – $536) which are recorded as payables. |
| (c) Credit default swapsThe Company replicates exposure to specific issuers by selling credit protection via credit default swaps (“CDS”) to complement its cashdebt securities investing. The Company does not write CDS protection more than its government bond holdings. A CDS is a derivativeinstrument representing an agreement between two parties to exchange the credit risk of a single specified entity or an index based on thecredit risk of a group of entities (all commonly referred to as the “reference entity” or a portfolio of “reference entities”), in return for aperiodic premium. CDS contracts typically have a five-year term. |
| The following table presents details of the credit default swap protection sold by type of contract and external agency rating for theunderlying reference security. |
| | | Weighted |
| Notional | | | average maturity |
| As at December 31, 2022 | amount(1) | Fair value | (in years)(2) |
| Single name CDS(3) – Corporate debt |
| A | $ 133 | $ 4 | | | 4 |
| BBB | 26 | | | – | 1 |
| Total single name CDS | $ 159 | $ 4 | | | 4 |
| Total CDS protection sold | $ 159 | $ 4 | | | 4 |
| | | Weighted |
| Notional | | | average maturity |
| As at December 31, 2021 | amount(1) | Fair value | (in years)(2) |
| Single name CDS(3) – Corporate debt |
| A | $ | 16 | $ – | | | 1 |
| BBB | 28 | | | 12 |
| Total single name CDS | $ | 44 | $ 1 | | | 2 |
| Total CDS protection sold | $ | 44 | $ 1 | | | 2 |
| (1) | Notional amounts represent the maximum future payments the Company would have to pay its CDS counterparties assuming a default of the underlying credit and zero recoveryon the underlying issuer obligations. |
| (2) | The weighted average maturity of the CDS is weighted based on notional amounts. |
| (3) | Ratings are based on S&P where available followed by Moody’s, DBRS, and Fitch. If no rating is available from a rating agency, an internally developed rating is used. |
| The Company held no purchased credit protection as at December 31, 2022 and 2021. |
| (d) DerivativesThe Company’s point-in-time exposure to losses related to credit risk of a derivative counterparty is limited to the amount of any net gainsthat may have accrued with the particular counterparty. Gross derivative counterparty exposure is measured as the total fair value(including accrued interest) of all outstanding contracts in a gain position excluding any offsetting contracts in a loss position and theimpact of collateral on hand. The Company limits the risk of credit losses from derivative counterparties by using investment gradecounterparties, entering into master netting arrangements which permit the offsetting of contracts in a loss position in the case of acounterparty default and entering into Credit Support Annex agreements whereby collateral must be provided when the exposure exceedsa certain threshold. All contracts are held with or guaranteed by investment grade counterparties, the majority of whom are rated A- orhigher. As at December 31, 2022, the percentage of the Company’s derivative exposure with counterparties rated AA- or higher was 36 percent (2021 – 17 per cent). The Company’s exposure to credit risk was mitigated by $2,194 fair value of collateral held as security as atDecember 31, 2022 (2021 – $10,121). |
| As at December 31, 2022, the largest single counterparty exposure, without taking into consideration the impact of master nettingagreements or the benefit of collateral held, was $1,582 (2021 – $2,132). The net exposure to this counterparty, after taking intoconsideration master netting agreements and the fair value of collateral held, was $nil (2021 – $nil). As at December 31, 2022, the totalmaximum credit exposure related to derivatives across all counterparties, without taking into consideration the impact of master nettingagreements and the benefit of collateral held, was $9,072 (2021 – $18,226). |
| (e) Offsetting financial assets and financial liabilitiesCertain derivatives, securities lent and repurchase agreements have conditional offset rights. The Company does not offset these financialinstruments in the Consolidated Statements of Financial Position, as the rights of offset are conditional. |
| 190 | 2022 Annual Report | Notes to Consolidated Financial Statements |
| In the case of derivatives, collateral is collected from and pledged to counterparties and clearing houses to manage credit risk exposure inaccordance with Credit Support Annexes to swap agreements and clearing agreements. Under master netting agreements, the Companyhas a right of offset in the event of default, insolvency, bankruptcy or other early termination. |
| In the case of reverse repurchase and repurchase transactions, additional collateral may be collected from or pledged to counterparties tomanage credit exposure according to bilateral reverse repurchase or repurchase agreements. In the event of default by a reverse purchasetransaction counterparty, the Company is entitled to liquidate the collateral held to offset against the same counterparty’s obligation. |
| The following table presents the effect of conditional master netting and similar arrangements. Similar arrangements may include globalmaster repurchase agreements, global master securities lending agreements, and any related rights to financial collateral pledged orreceived. |
| Related amounts not set off in the |
| Consolidated Statements of |
| | Financial Position |
| Amounts subject to | | | Financialand cash | Net | Net |
| an enforceable | | | | amount | amounts |
| master netting | | | collateral | includingfinancing | excluding |
| | | Gross amounts of | arrangement or | | | pledged | | financing |
| As at December 31, 2022 | | | financial instruments(1) | similar agreements | | | (received)(2) | entity(3) | entity |
| Financial assetsDerivative assets |
| | | $ | | | | 9,072 | $ (7,170) | | | $ | (1,687) | $ 215 | $ 215 |
| Securities lending | | | | | | | 723 | – | (723) | – | – |
| Reverse repurchase agreements | | | | | | | 895 | (779) | | (116) | – | – |
| Total financial assets | | | $ 10,690 | $ (7,949) | | | $ | (2,526) | $ 215 | $ 215 |
| Financial liabilitiesDerivative liabilities |
| | | $ (15,151) | $ 7,170 | | | $ | 7,834 | $ (147) | $ (103) |
| Repurchase agreements | | | | | | | (895) | 779 | | 116 | – | – |
| Total financial liabilities | | | $ (16,046) | $ 7,949 | | | $ | 7,950 | $ (147) | $ (103) |
| Related amounts not set off in the |
| Consolidated Statements of |
| | Financial Position |
| Amounts subject to | | | Financialand cash | Net | Net |
| an enforceable | | | | amount | amounts |
| master netting | | | collateral | includingfinancing | excluding |
| | | Gross amounts of | arrangement or | | | pledged | | financing |
| As at December 31, 2021 | | | financial instruments(1) | similar agreements | | | (received)(2) | entity(3) | entity |
| Financial assetsDerivative assets |
| | | $ 18,226 | $ (8,410) | | | $ | (9,522) | $ 294 | $ 294 |
| Securities lending | | | | | | | 564 | – | (564) | – | – |
| Reverse repurchase agreements | | | | | | | 1,490 | (183) | | (1,307) | – | – |
| Total financial assets | | | $ 20,280 | $ (8,593) | | | $ (11,393) | $ 294 | $ 294 |
| Financial liabilitiesDerivative liabilities |
| | | $ (10,940) | $ 8,410 | | | $ | 2,250 | $ (280) | $ (79) |
| Repurchase agreements | | | | | | | (536) | 183 | | 353 | – | – |
| Total financial liabilities | | | $ (11,476) | $ 8,593 | | | $ | 2,603 | $ (280) | $ (79) |
| (1) | Financial assets and liabilities include accrued interest of $488 and $862, respectively (2021 – $725 and $902, respectively). |
| (2) | Financial and cash collateral exclude over-collateralization. As at December 31, 2022, the Company was over-collateralized on OTC derivative assets, OTC derivative liabilities,securities lending and reverse repurchase agreements and repurchase agreements in the amounts of $507, $1,528, $63 and $nil, respectively (2021 – $599, $875, $36 and$2, respectively). As at December 31, 2022, collateral pledged (received) does not include collateral-in-transit on OTC instruments or initial margin on exchange tradedcontracts or cleared contracts. |
| (3) | Includes derivative contracts entered between the Company and its financing entity which it does not consolidate. The Company does not exchange collateral on derivativecontracts entered with this entity. Refer to note 18. |
| The Company also has certain credit linked note assets and variable surplus note liabilities which have unconditional offsetting rights.Under the netting agreements, the Company has rights of offset including in the event of the Company’s default, insolvency, or bankruptcy.These financial instruments are offset in the Consolidated Statements of Financial Position. |
| | | | | | | | | |
| | | | | | 191 |
| A credit linked note is a fixed income instrument the term of which, in this case, is linked to a variable surplus note. A surplus note is asubordinated debt obligation that often qualifies as surplus (the U.S. statutory equivalent of equity) by some U.S. state insuranceregulators. Interest payments on surplus notes are made after all other contractual payments are made. The following table presents theeffect of unconditional netting. |
| | Amounts subject to |
| Gross amounts of | an enforceable | Net amounts of |
| As at December 31, 2022 | financial instruments | netting arrangement | financial instruments |
| Credit linked note(1) | $ 1,242 | $ | | (1,242) | $ – |
| Variable surplus note | | | | | | (1,242) | 1,242 | – |
| | Amounts subject to |
| Gross amounts of | an enforceable | Net amounts of |
| As at December 31, 2021 | financial instruments | netting arrangement | financial instruments |
| Credit linked note(1) | $ 1,054 | | | $ (1,054) | $ – |
| Variable surplus note | | | | | | (1,054) | 1,054 | – |
| (1) | As at December 31, 2022 and 2021, the Company had no fixed surplus notes outstanding, refer to note 19(g). |
| (f) Risk concentrationsThe Company defines enterprise-wide investment portfolio level targets and limits to ensure that portfolios are diversified across assetclasses and individual investment risks. The Company monitors actual investment positions and risk exposures for concentration risk andreports its findings to the Executive Risk Committee and the Risk Committee of the Board of Directors. |
| As at December 31, | | | 2022 | | 2021 |
| Debt securities and private placements rated as investment grade BBB or higher(1) | | | 96% | | 97% |
| Government debt securities as a per cent of total debt securities | | | 36% | | 36% |
| Government private placements as a per cent of total private placements | | | 10% | | 11% |
| Highest exposure to a single non-government debt security and private placement issuer | | | | $ | | | 1,006 | $ | | 1,167 |
| Largest single issuer as a per cent of the total equity portfolio | | | 2% | | 2% |
| Income producing commercial office properties (2022 – 41% of real estate, 2021 – 47%) | | | | $ | | | 5,486 | $ | | 6,244 |
| Largest concentration of mortgages and real estate(2) – Ontario Canada (2022 – 27%, 2021 – 28%) | | | | $ 18,343 | $ 18,253 |
| (1) | Investment grade debt securities and private placements include 39% rated A, 17% rated AA and 14% rated AAA (2021 – 39%, 17% and 15%) investments based on externalratings where available. |
| (2) | Mortgages and real estate investments are diversified geographically and by property type. |
| The following table presents debt securities and private placements portfolio by sector and industry. |
| | | | | | 2022 | 2021 |
| As at December 31, | Carrying value | % of total | | Carrying value | % of total |
| Government and agency | $ | | | | | 77,236 | 31 | | $ | 84,244 | | 32 |
| Utilities | | | | | | 46,315 | 18 | 48,372 | | 18 |
| Financial | | | | | | 38,808 | 15 | 38,905 | | 15 |
| Consumer | | | | | | 31,556 | 13 | 32,671 | | 12 |
| Energy | | | | | | 16,314 | 7 | 19,637 | | 7 |
| Industrial | | | | | | 23,823 | 9 | 24,727 | | 9 |
| Other | | | | | | 16,909 | 7 | 18,425 | | 7 |
| Total | $ 250,961 | 100 | | $ 266,981 | 100 |
| (g) Insurance riskInsurance risk is the risk of loss due to actual experience for mortality and morbidity claims, policyholder behaviour and expenses emergingdifferently than assumed when a product was designed and priced. A variety of assumptions are made related to these experience factors,for reinsurance costs, and for sales levels when products are designed and priced, as well as in the determination of policy liabilities.Assumptions for future claims are generally based on both Company and industry experience, and assumptions for future policyholderbehaviour and expenses are generally based on Company experience. Such assumptions require significant professional judgment, andactual experience may be materially different than the assumptions made by the Company. Claims may be impacted unexpectedly bychanges in the prevalence of diseases or illnesses, medical and technology advances, widespread lifestyle changes, natural disasters, large-scale man-made disasters and acts of terrorism. Policyholder behaviour including premium payment patterns, policy renewals, lapse ratesand withdrawal and surrender activity are influenced by many factors including market and general economic conditions, and the availabilityand relative attractiveness of other products in the marketplace. Some reinsurance rates are not guaranteed and may be changedunexpectedly. Adjustments the Company seeks to make to Non-Guaranteed elements to reflect changing experience factors may bechallenged by regulatory or legal action and the Company may be unable to implement them or may face delays in implementation. |
| 192 | 2022 Annual Report | Notes to Consolidated Financial Statements |
| The Company manages insurance risk through global policies, standards and best practices with respect to product design, pricing,underwriting and claim adjudication, and a global underwriting manual. Each business unit establishes underwriting policies andprocedures, including criteria for approval of risks and claims adjudication policies and procedures. The current global life retention limit isUS$30 for individual policies (US$35 for survivorship life policies) and is shared across businesses. Lower limits are applied in somemarkets and jurisdictions. The Company aims to further reduce exposure to claims concentrations by applying geographical aggregateretention limits for certain covers. Enterprise-wide, the Company aims to reduce the likelihood of high aggregate claims by operatingglobally, insuring a wide range of unrelated risk events, and reinsuring some risk. |
| (h) Concentration riskThe geographic concentration of the Company’s insurance and investment contract liabilities, including embedded derivatives, is shownbelow. The disclosure is based on the countries in which the business is written. |
| Gross | Reinsurance |
| As at December 31, 2022 | liabilities | assets | Net liabilities |
| U.S. and Canada | | | | $ 251,305 | $ (45,898) | $ 205,407 |
| Asia and Other | 123,808 | (1,814) | 121,994 |
| Total | | | | $ 375,113 | $ (47,712) | $ 327,401 |
| Gross | Reinsurance |
| As at December 31, 2021 | liabilities | assets | Net liabilities |
| U.S. and Canada | | | | $ 271,090 | $ (42,806) | $ 228,284 |
| Asia and Other | 124,398 | (1,773) | 122,625 |
| Total | | | | $ 395,488 | $ (44,579) | $ 350,909 |
| (i) Reinsurance riskIn the normal course of business, the Company limits the amount of loss on any one policy by reinsuring certain levels of risk with otherinsurers. In addition, the Company accepts reinsurance from other reinsurers. Reinsurance ceded does not discharge the Company’sliability as the primary insurer. Failure of reinsurers to honour their obligations could result in losses to the Company; consequently,allowances are established for amounts deemed uncollectible. To minimize losses from reinsurer insolvency, the Company monitors theconcentration of credit risk both geographically and with any one reinsurer. In addition, the Company selects reinsurers with high creditratings. |
| As at December 31, 2022, the Company had $47,712 (2021 – $44,579) of reinsurance assets. Of this, 91 per cent (2021 – 94 per cent)were ceded to reinsurers with Standard and Poor’s ratings of A- or above. The Company’s exposure to credit risk was mitigated by $25,247fair value of collateral held as security as at December 31, 2022 (2021 – $25,466). Net exposure after considering offsetting agreementsand the benefit of the fair value of collateral held was $22,465 as at December 31, 2022 (2021 – $19,113). |
| Note 10 | | | | | Long-Term Debt |
| (a) Carrying value of long-term debt instruments |
| As at December 31, | | | | | | Issue date | Maturity date | Par value | 2022 | 2021 |
| 3.050% Senior notes(1),(2) | | | | | | August 27, 2020 | August 27, 2060 | US$ 1,155 | $ 1,559 | $ 1,455 |
| 5.375% Senior notes(1),(3) | | | | | | March 4, 2016 | March 4, 2046 | US$ | 750 | 1,004 | 939 |
| 3.703% Senior notes(1),(4) | | | | | | March 16, 2022 | March 16, 2032 | US$ | 750 | 1,011 | | | | | | – |
| 2.396% Senior notes(1),(5) | | | | | | June 1, 2020 | June 1, 2027 | US$ | 200 | 270 | 253 |
| 2.484% Senior notes(1),(5) | | | | | | May 19, 2020 | May 19, 2027 | US$ | 500 | 674 | 630 |
| 3.527% Senior notes(1),(3) | | | | | | December 2, 2016 | December 2, 2026 | US$ | 270 | 365 | 342 |
| 4.150% Senior notes(1),(3) | | | | | | March 4, 2016 | March 4, 2026 | US$ 1,000 | 1,351 | 1,263 |
| Total | | $ 6,234 | $ 4,882 |
| (1) | These U.S. dollar senior notes have been designated as hedges of the Company’s net investment in its U.S. operations which reduces the earnings volatility that would otherwisearise from the re-measurement of these senior notes into Canadian dollars. |
| (2) | MFC may redeem the notes in whole, but not in part, on August 27, 2025, and thereafter on every August 27 at a redemption price equal to par, together with accrued andunpaid interest. Issue costs are amortized to the earliest par redemption date. |
| (3) | MFC may redeem the senior notes in whole or in part, at any time, at a redemption price equal to the greater of par and a price based on the yield of a correspondingU.S. Treasury bond, from redemption date to the respective maturity date, plus a specified number of basis points. The specified number of basis points is as follows: 5.375% -40 bps, 3.527% - 20 bps, and 4.150% - 35 bps. Issue costs are amortized over the term of the debt. |
| (4) | Issued by MFC during the first quarter, interest is payable semi-annually. The Company may redeem the senior notes in whole or in part, at any time, at a redemption price equalto the greater of par and a price based on the yield of a corresponding U.S. Treasury bond, from redemption date to December 16, 2031, plus 25 bps, together with accruedand unpaid interest. Issue costs are amortized over the term of the debt. |
| | | | | | | | | |
| (5) | MFC may redeem the senior notes in whole or in part, at any time, at a redemption price equal to the greater of par and a price based on the yield of a corresponding U.S.Treasury bond, from redemption date to two months before the respective maturity date, plus a specified number of basis points. The specified number of basis points is asfollows: 2.396% - 30 bps, and 2.484% - 30 bps. Issuance costs are amortized over the term of the debt. |
| | | | | | | | 193 |
| The cash amount of interest paid on long-term debt during the year ended December 31, 2022 was $204 (2021 – $210). |
| (b) Fair value measurementFair value of long-term debt instruments is determined using the following hierarchy: |
| Level 1 – Fair value is determined using quoted market prices where available. |
| Level 2 – When quoted market prices are not available, fair value is determined with reference to quoted prices of similar debt instrumentsor estimated using discounted cash flows based on observable market rates. |
| The Company measures long-term debt at amortized cost in the Consolidated Statements of Financial Position. As at December 31, 2022,the fair value of long-term debt was $5,587 (2021 – $5,439). Fair value of long-term debt was determined using Level 2 valuationtechniques (2021 – Level 2). |
| (c) Aggregate maturities of long-term debt |
| Less than | 1 to 3 | 3 to 5 | Over 5 |
| As at December 31 | 1 year | years | years | years | Total |
| 2022 | $ | | | | | – | $ | – | $ 2,661 | $ 3,573 | $ 6,234 |
| 2021 | | | | | | – | – | 1,605 | 3,277 | 4,882 |
| Note 11 | | | | | | | Capital Instruments |
| (a) Carrying value of capital instruments |
| | | | | | | | | Earliest parredemption date |
| As at December 31, | | | | | | | | Issuance date | Maturity date | | Par value | 2022 | 2021 |
| JHFC Subordinated notes(1),(2) | | | | | | | | December 14, 2006 | n/a | December 15, 2036 | | $ | 650 $ | 647 | $ | 647 |
| 2.818% MFC Subordinated debentures(1),(3) | | | | | | | | May 12, 2020 | May 13, 2030 | May 13, 2035 | | $ | 1,000 | 996 | 995 |
| 4.061% MFC Subordinated notes(1),(4),(5) | | | | | | | | February 24, 2017 | February 24, 2027 | February 24, 2032 | | US$ | 750 | 1,013 | 947 |
| 2.237% MFC Subordinated debentures(1),(6) | | | | | | | | May 12, 2020 | May 12, 2025 | May 12, 2030 | | $ | 1,000 | 998 | 997 |
| 3.00% MFC Subordinated notes(1),(7) | | | | | | | | November 21, 2017 | November 21, 2024 | November 21, 2029 | | S$ | 500 | 504 | 469 |
| 3.049% MFC Subordinated debentures(1),(8) | | | | | | | | August 18, 2017 | August 20, 2024 | August 20, 2029 | | $ | 750 | 749 | 748 |
| 3.317% MFC Subordinated debentures(1),(8) | | | | | | | | May 9, 2018 | May 9, 2023 | May 9, 2028 | | $ | 600 | 600 | 599 |
| 3.181% MLI Subordinated debentures(9) | | | | | | | | November 20, 2015 | November 22, 2022 | November 22, 2027 | | $ | 1,000 | – | 999 |
| 7.375% JHUSA Surplus notes(10) | | | | | | | | February 25, 1994 | n/a | February 15, 2024 | | US$ | 450 | 615 | 579 |
| Total | | | | $ 6,122 | $ 6,980 |
| (1) | The Company is monitoring regulatory and market developments globally with respect to the interest rate benchmark reform. As reference interest rates for these capitalinstruments could potentially be discontinued in the future, the Company will take appropriate actions in due course to accomplish the necessary transitions or replacements.As at December 31, 2022, capital instruments of $647 (2021 – $647) have interest rate referencing CDOR. In addition, capital instruments of $3,343, $1,013, and $504(2021 – $4,338, $947, and $469, respectively) have interest rate reset in the future referencing CDOR, the USD Mid-Swap rate, and the SGD swap rate, respectively. |
| (2) | Issued by Manulife Holdings (Delaware) LLC (“MHDLL”), now John Hancock Financial Corporation (“JHFC”), a wholly owned subsidiary of MFC, to Manulife Finance (Delaware)LLC (“MFLLC”), a subsidiary of Manulife Finance (Delaware) L.P. (“MFLP”). MFLP and its subsidiaries are wholly owned unconsolidated related parties of the Company. Thenotes bear interest at a floating rate equal to the 90-day Bankers’ Acceptance rate plus 0.72%. With regulatory approval, JHFC may redeem the note, in whole or in part, at anytime, at par, together with accrued and unpaid interest. Refer to note 18. |
| (3) | Issued by MFC, interest is payable semi-annually. After May 13, 2030, the interest rate will reset to equal 3-month CDOR plus 1.82%. With regulatory approval, MFC mayredeem the debentures, in whole, or in part, on or after May 13, 2025, at a redemption price together with accrued and unpaid interest. If the redemption date is on or afterMay 13, 2025, but prior to May 13, 2030, the redemption price shall be the greater of: (i) the Canada yield price as defined in the prospectus; and (ii) par. If the redemptiondate is on or after May 13, 2030, the redemption price shall be equal to par. |
| (4) | On the earliest par redemption date, the interest rate will reset to equal the 5-Year US Dollar Mid-Swap Rate plus 1.647%. With regulatory approval, MFC may redeem thedebentures, in whole, but not in part, on the earliest par redemption date, at a redemption price equal to par, together with accrued and unpaid interest. |
| (5) | Designated as a hedge of the Company’s net investment in its U.S. operations which reduces the earnings volatility that would otherwise arise from the re-measurement of thesubordinated notes into Canadian dollars. |
| (6) | Issued by MFC, interest is payable semi-annually. After May 12, 2025, the interest rate will reset to equal 3-month CDOR plus 1.49%. With regulatory approval, MFC mayredeem the debentures, in whole, or in part, on or after May 12, 2025, at a redemption price equal to par, together with accrued and unpaid interest. |
| (7) | On the earliest par redemption date, the interest rate will reset to equal the 5-Year Singapore Dollar Swap Rate plus 0.832%. With regulatory approval, MFC may redeem thedebentures, in whole, but not in part, on the earliest par redemption date and thereafter on each interest payment date, at a redemption price equal to par, together withaccrued and unpaid interest. |
| (8) | Interest is fixed for the period up to the earliest par redemption date, thereafter, the interest rate will reset to a floating rate equal to the 3-month CDOR plus a specifiednumber of basis points. The specified number of basis points is as follows: 3.049% - 105 bps, 3.317% - 78 bps. With regulatory approval, MFC may redeem the debentures, inwhole or in part, on or after the earliest par redemption date, at a redemption price equal to par, together with accrued and unpaid interest. |
| (9) | MLI redeemed in full the 3.181% MLI subordinated debentures at par, on November 22, 2022, the earliest par redemption date. |
| (10) | Issued by John Hancock Mutual Life Insurance Company, now John Hancock Life Insurance Company (U.S.A.). Any payment of interest or principal on the surplus notesrequires prior approval from the Department of Insurance and Financial Services of the State of Michigan. The carrying value of the surplus notes reflects an unamortized fairvalue increment of US$5 (2021 – US$9), which arose as a result of the acquisition of John Hancock Financial Services, Inc. The amortization of the fair value adjustment isrecorded in interest expense. |
| 194 | 2022 Annual Report | Notes to Consolidated Financial Statements |
| (b) Fair value measurementFair value of capital instruments is determined using the following hierarchy: |
| Level 1 – Fair value is determined using quoted market prices where available. |
| Level 2 – When quoted market prices are not available, fair value is determined with reference to quoted prices of similar debt instrumentsor estimated using discounted cash flows based on observable market rates. |
| The Company measures capital instruments at amortized cost in the Consolidated Statements of Financial Position. As at December 31,2022, the fair value of capital instruments was $5,737 (2021 – $7,213). Fair value of capital instruments was determined using Level 2valuation techniques (2021 – Level 2). |
| Note 12 | Equity Capital and Earnings Per Share |
| The authorized capital of MFC consists of: |
| • an unlimited number of common shares without nominal or par value; and• an unlimited number of Class A, Class B and Class 1 preferred shares without nominal or par value, issuable in series. |
| (a) Preferred shares and other equity instrumentsThe following table presents information about the outstanding preferred shares and other equity instruments as at December 31, 2022and 2021. |
| | | | | | Number of |
| | | | | | | | Net amount(4) |
| | | Annual dividend/ | Earliest redemption | | shares | Faceamount |
| As at December 31, 2022 | | Issue date | distribution rate(1) | | date(2),(3) | (in millions) | | 2022 | 2021 |
| Preferred shares |
| Class A preferred shares |
| Series 2 | | | | | | | | | | February 18, 2005 | 4.65% | n/a | | | | | | | 14 | $ | 350 | $ | 344 | $ | 344 |
| Series 3 | | | | | | | | | | January 3, 2006 | 4.50% | n/a | | | | | | | 12 | 300 | 294 | 294 |
| Class 1 preferred shares |
| Series 3(5),(6) | | | | | | | | | | March 11, 2011 | 2.348% | June 19, 2026 | | | | | | | | 7 | 163 | 160 | 160 |
| Series 4(7) | | June 20, 2016 | | | | | | | | | floating | June 19, 2026 | | | | | | | | 1 | 37 | 36 | 36 |
| Series 7(8) | | | | | | | | | | February 22, 2012 | 4.312% | March 19, 2022 | | | | | | | | 10 | 250 | – | 244 |
| Series 9(5),(6),(9) | | May 24, 2012 | | | | | | | | | 5.978% | September 19, 2027 | | | | | | | | 10 | 250 | 244 | 244 |
| Series 11(5),(6) | | | | | | | | | | December 4, 2012 | 4.731% | March 19, 2023 | | | | | | | | 8 | 200 | 196 | 196 |
| Series 13(5),(6) | | June 21, 2013 | | | | | | | | | 4.414% | September 19, 2023 | | | | | | | | 8 | 200 | 196 | 196 |
| Series 15(5),(6) | | | | | | | | | | February 25, 2014 | 3.786% | June 19, 2024 | | | | | | | | 8 | 200 | 195 | 195 |
| Series 17(5),(6) | | | | | | | | | | August 15, 2014 | 3.80% | December 19, 2024 | | | | | | | | 14 | 350 | 343 | 343 |
| Series 19(5),(6) | | | | | | | | | | December 3, 2014 | 3.675% | March 19, 2025 | | | | | | | | 10 | 250 | 246 | 246 |
| Series 23(8) | | | | | | | | | | November 22, 2016 | 4.85% | March 19, 2022 | | | | | | | | 19 | 475 | – | 467 |
| Series 25(5),(6) | | | | | | | | | | February 20, 2018 | 4.70% | June 19, 2023 | | | | | | | | 10 | 250 | 245 | 245 |
| Other equity instruments |
| Limited recourse capital notes(10) |
| Series 1(11) | | | | | | | | | | February 19, 2021 | 3.375% | May 19, 2026 | | n/a | 2,000 | 1,982 | 1,982 |
| Series 2(11) | | | | | | | | | | November 12, 2021 | 4.100% | February 19, 2027 | | n/a | 1,200 | 1,189 | 1,189 |
| Series 3(11) | | June 16, 2022 | | | | | | | | | 7.117% | June 19, 2027 | | n/a | 1,000 | 990 | – |
| Total | | | | | | 131 | $ 7,475 | $ 6,660 | $ 6,381 |
| (1) | Holders of Class A and Class 1 preferred shares are entitled to receive non-cumulative preferential cash dividends on a quarterly basis, as and when declared by the Board ofDirectors. Non-deferrable distributions are payable to all LRCN holders semi-annually at the Company’s discretion. |
| (2) | Redemption of all preferred shares is subject to regulatory approval. MFC may redeem each series, in whole or in part, at par, on the earliest redemption date or every fiveyears thereafter, except for Class A Series 2, Class A Series 3 and Class 1 Series 4 preferred shares. Class A Series 2 and Series 3 preferred shares are past their respectiveearliest redemption date and MFC may redeem these preferred shares, in whole or in part, at par at any time, subject to regulatory approval, as noted. MFC may redeem theClass 1 Series 4 preferred shares, in whole or in part, at any time, at $25.00 per share if redeemed on June 19, 2026 (the earliest redemption date) and on June 19 every fiveyears thereafter, or at $25.50 per share if redeemed on any other date after June 19, 2021, subject to regulatory approval, as noted. |
| (3) | Redemption of all LRCN series notes is subject to regulatory approval. MFC may at its option redeem each series in whole or in part, at a redemption price equal to par,together with accrued and unpaid interest. The redemption period for Series 1 is every five years during the period from May 19 to and including June 19, commencing in2026. The redemption period for Series 2 is every five years during the period from February 19 to and including March 19, commencing in 2027. After the first redemptiondate, the redemption period for Series 3 is every five years during the period from May 19 to and including June 19, commencing in 2032. |
| (4) | Net of after-tax issuance costs. |
| (5) | On the earliest redemption date and every five years thereafter, the annual dividend rate will be reset to the five-year Government of Canada bond yield plus a yield specified foreach series. The specified yield for Class 1 preferred shares is: Series 3 – 1.41%, Series 9 – 2.86%, Series 11 – 2.61%, Series 13 – 2.22%, Series 15 – 2.16%, Series 17 –2.36%, Series 19 – 2.30% and Series 25 – 2.55%. |
| | | | | | | | | | | | | |
| (6) | On the earliest redemption date and every five years thereafter, Class 1 preferred shares are convertible at the option of the holder into a new series that is one number higherthan their existing series, and the holders are entitled to non-cumulative preferential cash dividends, payable quarterly if and when declared by the Board of Directors, at a rateequal to the three-month Government of Canada Treasury bill yield plus the rate specified in footnote 5 above. |
| | | | | | | | | 195 |
| (7) | The floating dividend rate for the Class 1 Series 4 preferred shares equals the three-month Government of Canada Treasury bill yield plus 1.41%. |
| (8) | MFC redeemed in full the Class 1 Series 7 and Class 1 Series 23 preferred shares at par, on March 19, 2022, which is the earliest redemption date. |
| (9) | MFC did not exercise its right to redeem all or any of the outstanding Class 1 Series 9 preferred shares on September 19, 2022, which is the earliest redemption date. Thedividend rate was reset as specified in footnote 5 above to an annual fixed rate of 5.978%, for a five-year period commencing on September 20, 2022. |
| (10) | Non-payment of distributions or principal on any LRCN series notes when due will result in a recourse event. The recourse of each noteholder will be limited to theirproportionate amount of the Limited Resource Trust’s assets which comprise of Class 1 Series 27 preferred shares for LRCN Series 1 notes, Class 1 Series 28 preferredshares for LRCN Series 2 notes, and Class 1 Series 29 preferred shares for LRCN Series 3 notes. All claims of the holders of LRCN series notes against MFC will beextinguished upon receipt of the corresponding trust assets. The Class 1 Series 27, Class 1 Series 28, and Class 1 Series 29 preferred shares are eliminated on consolidationwhile being held in the Limited Recourse Trust. |
| (11) | The LRCN Series 1 distribute at a fixed rate of 3.375% payable semi-annually, until June 18, 2026; on June 19, 2026 and every five years thereafter until June 19, 2076, therate will be reset at a rate equal to the five-year Government of Canada yield as defined in the prospectus, plus 2.839%. The LRCN Series 2 distribute at a fixed rate of 4.10%payable semi-annually, until March 18, 2027; on March 19, 2027 and every five years thereafter until March 19, 2077, the rate will be reset at a rate equal to the five-yearGovernment of Canada yield as defined in the prospectus, plus 2.704%. The LRCN Series 3 distribute at a fixed rate of 7.117% payable semi-annually, until June 18, 2027; onJune 19, 2027 and every five years thereafter until June 19, 2077, the rate will be reset at a rate equal to the five-year Government of Canada yield as defined in theprospectus, plus 3.95%. |
| (b) Common sharesThe following table presents changes in common shares issued and outstanding. |
| 2022 | 2021 |
| | | Number of | | Number of |
| shares | shares |
| For the years ended December 31, | | | (in millions) | Amount | (in millions) | Amount |
| Balance, January 1 | 1,943 | $ 23,093 | 1,940 | $ 23,042 |
| Repurchased for cancellation | (79) | | | (938) | – | | | | – |
| Issued on exercise of stock options and deferred share units | 1 | | | 23 | 3 | | | | 51 |
| Total | 1,865 | $ 22,178 | 1,943 | $ 23,093 |
| Normal Course Issuer Bid |
| On February 1, 2022, the Company announced that the Toronto Stock Exchange (“TSX”) approved a normal course issuer bid (“NCIB”)permitting the purchase for cancellation of up to 97 million common shares. Under this NCIB which commenced on February 3, 2022, andexpired on February 2, 2023, MFC purchased for cancellation 85.8 million of its common shares at an average price of $23.99 per sharefor a total cost of $2,060, which represent 4.4% of its issued and outstanding common shares. |
| During the year ended December 31, 2022, the Company purchased and subsequently cancelled 78.9 million shares for $1,884. Of this,$938 was recorded in common shares and $946 was recorded in retained earnings in the Consolidated Statements of Changes in Equity. |
| On February 15, 2023, the Company announced, subject to the approval of the TSX, its intention to launch an NCIB permitting thepurchase for cancellation of up to 55.7 million common shares, representing approximately 3% of its issued and outstanding commonshares. Purchases under the NCIB may commence after the TSX has accepted the notice of intention and continue for up to one year, orsuch earlier date as the Company completes its purchases. |
| (c) Earnings per shareThe following table presents basic and diluted earnings per common share of the Company. |
| For the years ended December 31, | | 2022 | | | | 2021 |
| Basic earnings per common share | | $ 3.68 | | | | $ 3.55 |
| Diluted earnings per common share | | 3.68 | | | | 3.54 |
| The following is a reconciliation of the number of shares in the calculation of basic and diluted earnings per share. |
| For the years ended December 31, | | 2022 | | | | 2021 |
| Weighted average number of common shares (in millions) | | 1,910 | | | | 1,942 |
| Dilutive stock-based awards(1) (in millions) | | 3 | | | | 4 |
| Weighted average number of diluted common shares (in millions) | | 1,913 | | | | 1,946 |
| (1) | The dilutive effect of stock-based awards was calculated using the treasury stock method. This method calculates the number of incremental shares by assuming theoutstanding stock-based awards are (i) exercised and (ii) then reduced by the number of shares assumed to be repurchased from the issuance proceeds, using the averagemarket price of MFC common shares for the year. Excluded from the calculation was a weighted average of 9 million (2021 – nil million) anti-dilutive stock-based awards. |
| 196 | 2022 Annual Report | Notes to Consolidated Financial Statements |
| (d) Quarterly dividend declaration subsequent to year endOn February 15, 2023, the Company’s Board of Directors approved a quarterly dividend of $0.365 per share on the common shares ofMFC, payable on or after March 20, 2023 to shareholders of record at the close of business on February 28, 2023. |
| The Board also declared dividends on the following non-cumulative preferred shares, payable on or after March 19, 2023 to shareholdersof record at the close of business on February 28, 2023. |
| Class A Shares Series 2 – $0.29063 per share | Class 1 Shares Series 13 – $0.275875 per share |
| Class A Shares Series 3 – $0.28125 per share | Class 1 Shares Series 15 – $0.236625 per share |
| Class 1 Shares Series 3 – $0.14675 per share | Class 1 Shares Series 17 – $0.2375 per share |
| Class 1 Shares Series 4 – $0.34089 per share | Class 1 Shares Series 19 – $0.229688 per share |
| Class 1 Shares Series 9 – $0.373625 per share | Class 1 Shares Series 25 – $0.29375 per share |
| Class 1 Shares Series 11 – $0.295688 per share |
| Note 13 | | Capital Management |
| (a) Capital managementThe Company monitors and manages its consolidated capital in compliance with the Life Insurance Capital Adequacy Test (“LICAT”)guideline, the capital framework issued by the Office of the Superintendent of Financial Institutions (“OSFI”). Under the capital framework,the Company’s consolidated capital resources, including available capital, surplus allowance, and eligible deposits, are measured againstthe base solvency buffer, which is the risk-based capital requirement determined in accordance with the guideline. |
| The Company’s operating activities are primarily conducted within MLI and its subsidiaries. MLI is also regulated by OSFI and is thereforesubject to consolidated risk-based capital requirements using the OSFI LICAT framework. |
| The Company seeks to manage its capital with the objectives of: |
| • Operating with sufficient capital to be able to honour all commitments to its policyholders and creditors with a high degree of |
| confidence; |
| • Retaining the ongoing confidence of regulators, policyholders, rating agencies, investors and other creditors in order to ensure access |
| to capital markets; and |
| • Optimizing return on capital to meet shareholders’ expectations subject to constraints and considerations of adequate levels of capital |
| established to meet the first two objectives. |
| Capital is managed and monitored in accordance with the Capital Management Policy. The policy is reviewed and approved by the Board ofDirectors annually and is integrated with the Company’s risk and financial management frameworks. It establishes guidelines regarding thequantity and quality of capital, internal capital mobility, and proactive management of ongoing and future capital requirements. |
| The capital management framework considers the requirements of the Company as a whole as well as the needs of each of the Company’ssubsidiaries. Internal capital targets are set above the regulatory requirements, and consider a number of factors, including expectationsof regulators and rating agencies, results of sensitivity and stress testing and the Company’s own risk assessments. The Companymonitors against these internal targets and initiates actions appropriate to achieving its business objectives. |
| Consolidated capital, based on accounting standards, is presented in the table below for MFC. For regulatory reporting purposes, underthe LICAT framework, the numbers are further adjusted for various additions or deductions to capital as mandated by the guidelines usedby OSFI. |
| Consolidated capital |
| As at December 31, | | | 2022 | 2021 |
| Total equity | | | $ 56,379 | $ 58,869 |
| Exclude AOCI gain/(loss) on cash flow hedges | | | 8 | (156) |
| Total equity excluding AOCI on cash flow hedges | | | 56,371 | 59,025 |
| Qualifying capital instruments | | | 6,122 | 6,980 |
| Consolidated capital | | | $ 62,493 | $ 66,005 |
| (b) Restrictions on dividends and capital distributionsDividends and capital distributions are restricted under the Insurance Companies Act (“ICA”). These restrictions apply to both MFC and itsprimary operating subsidiary MLI. The ICA prohibits the declaration or payment of any dividend on shares of an insurance company if thereare reasonable grounds for believing a company does not have adequate capital and adequate and appropriate forms of liquidity or thedeclaration or the payment of the dividend would cause the company to be in contravention of any regulation made under the ICArespecting the maintenance of adequate capital and adequate and appropriate forms of liquidity, or of any direction made to the company |
| | | | | |
| | | | 197 |
| by OSFI. The ICA also requires an insurance company to notify OSFI of the declaration of a dividend at least 15 days prior to the date fixedfor its payment. Similarly, the ICA prohibits the purchase for cancellation of any shares issued by an insurance company or the redemptionof any redeemable shares or other similar capital transactions, if there are reasonable grounds for believing that the company does nothave adequate capital and adequate and appropriate forms of liquidity or the payment would cause the company to be in contravention ofany regulation made under the ICA respecting the maintenance of adequate capital and adequate and appropriate forms of liquidity, or anydirection made to the company by OSFI. These latter transactions would require the prior approval of OSFI. |
| The ICA requires Canadian insurance companies to maintain adequate levels of capital at all times. |
| Since MFC is a holding company that conducts all of its operations through regulated insurance subsidiaries (or companies owned directlyor indirectly by these subsidiaries), its ability to pay future dividends will depend on the receipt of sufficient funds from its regulatedinsurance subsidiaries. These subsidiaries are also subject to certain regulatory restrictions under laws in Canada, the United States andcertain other countries that may limit their ability to pay dividends or make other upstream distributions. |
| Note 14 | Revenue from Service Contracts |
| The Company provides investment management services, transaction processing and administrative services and distribution and relatedservices to proprietary and third-party investment funds, retirement plans, group benefit plans, institutional investors and otherarrangements. The Company also provides real estate management services to tenants of the Company’s investment properties. |
| The Company’s service contracts generally impose single performance obligations, each consisting of a series of similar related servicesfor each customer. |
| The Company’s performance obligations within service arrangements are generally satisfied over time as the customer simultaneouslyreceives and consumes the benefits of the services rendered, measured using an output method. Fees typically include variableconsideration and the related revenue is recognized to the extent that it is highly probable that a significant reversal in the amount ofcumulative revenue recognized will not occur when the uncertainty is subsequently resolved. |
| Asset based fees vary with asset values of accounts under management, subject to market conditions and investor behaviors beyond theCompany’s control. Transaction processing and administrative fees vary with activity volume, also beyond the Company’s control. Somefees, including distribution fees, are based on account balances and transaction volumes. Fees related to account balances andtransaction volumes are measured daily. Real estate management service fees include fixed portions plus recovery of variable costs ofservices rendered to tenants. Fees related to services provided are generally recognized as services are rendered, which is when itbecomes highly probable that no significant reversal of cumulative revenue recognized will occur. The Company has determined that itsservice contracts have no significant financing components because fees are collected monthly. The Company has no significant contractassets or contract liabilities. |
| The following tables present revenue from service contracts by service lines and reporting segments as disclosed in note 20. |
| | | | | Global | Corporate |
| For the year ended December 31, 2022 | | Asia | Canada | U.S. | WAM | and Other | Total |
| Investment management and other related fees | | $ | 234 | $ | 242 | $ | 445 | $ 3,079 | $ (250) | $ | 3,750 |
| Transaction processing, administration, and service fees | | 292 | 866 | 13 | 2,416 | | | (8) | 3,579 |
| Distribution fees and other | | 143 | 43 | 76 | 868 | (44) | 1,086 |
| Total included in other revenue | | 669 | 1,151 | 534 | 6,363 | (302) | 8,415 |
| Revenue from non-service lines | | 789 | 275 | (76) | (13) | (226) | 749 |
| Total other revenue | | $ 1,458 | $ 1,426 | $ | 458 | $ 6,350 | $ (528) | $ | 9,164 |
| Real estate management services included in net investment income | | $ | 35 | $ | 136 | $ | 126 | $ | – | $ | | 8 | $ | 305 |
| | | | | Global | Corporate |
| For the year ended December 31, 2021 | | Asia | Canada | U.S. | WAM | and Other | Total |
| Investment management and other related fees | | $ | 217 | $ | 230 | $ | 499 | $ 3,198 | $ (247) | $ | 3,897 |
| Transaction processing, administration, and service fees | | 287 | 918 | 12 | 2,517 | (11) | 3,723 |
| Distribution fees and other | | 251 | 20 | 65 | 799 | (54) | 1,081 |
| Total included in other revenue | | 755 | 1,168 | 576 | 6,514 | (312) | 8,701 |
| Revenue from non-service lines | | 941 | 168 | 1,248 | (1) | 75 | 2,431 |
| Total other revenue | | $ 1,696 | $ 1,336 | $ 1,824 | $ 6,513 | $ (237) | $ 11,132 |
| Real estate management services included in net investment income | | $ | 37 | $ | 126 | $ | 128 | $ | – | $ | | 7 | $ | 298 |
| 198 | 2022 Annual Report | Notes to Consolidated Financial Statements |
| Note 15 | Stock-Based Compensation |
| (a) Stock optionsThe Company grants stock options under its Executive Stock Option Plan (“ESOP”) to selected individuals. The options provide the holderthe right to purchase MFC common shares at an exercise price equal to the higher of the prior day, prior five-day or prior ten-day averageclosing market price of the shares on the Toronto Stock Exchange on the date the options are granted. The options vest over a period notexceeding four years and expire not more than 10 years from the grant date. Effective with the 2015 grant, options may only be exercisedafter the fifth-year anniversary. A total of 73,600,000 common shares have been reserved for issuance under the ESOP. |
| Options outstanding |
| | 2022 | 2021 |
| | | | Number of | Weighted | Number of | Weighted |
| | | | options | average | options | average |
| For the years ended December 31, | | | | (in millions) | exercise price | | | | (in millions) | exercise price |
| Outstanding, January 1 | | 21 | | | $ 22.09 | 24 | | | | $ 21.74 |
| Granted | | – | | | | | | – | – | | | | | | – |
| Exercised | | (1) | | | 16.15 | (3) | | | | 18.34 |
| Expired | | – | | | 24.63 | – | | | | 24.73 |
| Forfeited | | – | | | 23.96 | – | | | | 23.96 |
| Outstanding, December 31 | | 20 | | | $ 22.42 | 21 | | | | $ 22.09 |
| Exercisable, December 31 | | 10 | | | $ 20.91 | 8 | | | | $ 18.94 |
| | | | | | | | | | Options outstanding | Options exercisable |
| | | | | | | | | | | | Weighted average | Weighted average |
| | | | | | | | | | | Number of | Weighted | remaining | Number of | | | | Weighted | remaining |
| | | | | | | | | | | options | average | | contractual life | options | average | contractual life |
| For the year ended December 31, 2022 | | | | | | | | | | | (in millions) | exercise price | (in years) | (in millions) | | | | | | exercise price | (in years) |
| $12.64—$20.99 | | | | | | | | | | 4 | $ 17.42 | 2.91 | 4 | $ 17.42 | 2.91 |
| $21.00—$24.83 | | | | | | | | | | | | | 16 | $ 23.58 | 4.94 | 6 | $ 23.08 | 2.95 |
| Total | | | | | | | | | | | | | 20 | $ 22.42 | 4.56 | 10 | $ 20.91 | 2.93 |
| No stock options were granted in 2022 or 2021. |
| Compensation expense related to stock options was $5 for the year ended December 31, 2022 (2021 – $9). |
| (b) Deferred share unitsIn 2000, the Company granted deferred share units (“DSUs”) on a one-time basis to certain employees under the ESOP. These DSUs vestover a three-year period and each DSU entitles the holder to receive one common share on retirement or termination of employment. Whendividends are paid on common shares, holders of DSUs are deemed to receive dividends at the same rate, payable in the form of additionalDSUs. The number of these DSUs outstanding was 166,000 as at December 31, 2022 (2021 – 188,000). |
| In addition, for certain employees and pursuant to the Company’s deferred compensation program, the Company grants DSUs under theRestricted Share Units (“RSUs”) Plan which entitle the holder to receive payment in cash equal to the value of the same number of commonshares plus credited dividends on retirement or termination of employment. In 2022, the Company granted 30,000 DSUs to certainemployees which vest after 36 months (2021 – 34,000). In 2022, 106,000 DSUs (2021 – 26,000) were granted to certain employees whoelected to defer receipt of all or part of their annual bonus. These DSUs vested immediately. |
| Under the Stock Plan for Non-Employee Directors, each eligible director may elect to receive his or her annual director’s retainer and feesin DSUs (which vest immediately) or common shares in lieu of cash. In 2022, 116,000 DSUs (2021 – 101,000) were issued under thisarrangement. Upon termination of the Board service, an eligible director who has elected to receive DSUs will be entitled to receive cashequal to the value of the DSUs accumulated in his or her account, or at his or her direction, an equivalent number of common shares. TheCompany is allowed to issue up to one million common shares under this plan after which awards may be settled using shares purchased inthe open market. |
| | | | | | | | | | | | | | |
| | | | | | | | | 199 |
| The fair value of 252,000 DSUs issued during the year was $24.15 per unit as at December 31, 2022 (2021 – 161,000 at $24.11 per unit). |
| For the years ended December 31,Number of DSUs (in thousands) |
| 2022 | 2021 |
| Outstanding, January 1 | 2,079 | 2,169 |
| Issued | 252 | 161 |
| Reinvested | 126 | 100 |
| Redeemed | (75) | (345) |
| Forfeitures and cancellations | (9) | (6) |
| Outstanding, December 31 | 2,373 | 2,079 |
| Of the DSUs outstanding as at December 31, 2022, 166,000 (2021 – 188,000) entitle the holder to receive common shares, 977,000(2021 – 840,000) entitle the holder to receive payment in cash and 1,230,000 (2021 – 1,051,000) entitle the holder to receive payment incash or common shares, at the option of the holder. |
| Compensation expense related to DSUs was $7 for the year ended December 31, 2022 (2021 – $6). |
| The carrying and fair value of the DSUs liability as at December 31, 2022 was $53 (2021 – $46) and was included in other liabilities. |
| (c) Restricted share units and performance share unitsFor the year ended December 31, 2022, 8.6 million RSUs (2021 – 6.8 million) and 1.7 million PSUs (2021 – 1.5 million) were granted tocertain eligible employees under MFC’s Restricted Share Unit Plan. The fair value of the RSUs and PSUs granted during the year was$24.15 per unit as at December 31, 2022 (2021 – $24.11 per unit). Each RSU and PSU entitles the holder to receive payment equal to themarket value of one common share, plus credited dividends, at the time of vesting, subject to any performance conditions. |
| RSUs and PSUs granted in March 2022 will vest after 36 months from their grant date and the related compensation expense isrecognized over this period, unless the employee is eligible to retire at the time of grant or will be eligible to retire during the vestingperiod, in which case the cost is recognized at the grant date or over the period between the grant date and the date on which theemployee is eligible to retire, respectively. Compensation expense related to RSUs and PSUs was $158 and $23, respectively, for the yearended December 31, 2022 (2021 – $135 and $31, respectively). |
| The carrying and fair value of the RSUs and PSUs liability as at December 31, 2022 was $388 (2021 – $362) and was included in otherliabilities. |
| (d) Global share ownership planThe Company’s Global Share Ownership Plan allows qualifying employees to apply up to five per cent of their annual base earnings towardthe purchase of common shares. The Company matches a percentage of the employee’s eligible contributions up to a maximum amount.The Company’s contributions vest immediately. All contributions are used to purchase common shares in the open market on behalf ofparticipating employees. |
| Note 16 | | | Employee Future Benefits |
| The Company maintains defined contribution and defined benefit pension plans and other post-employment plans for employees andagents including registered (tax-qualified) pension plans that are typically funded, as well as supplemental non-registered (non-qualified)pension plans for executives, retiree welfare plans and disability welfare plans that are typically not funded. |
| (a) Plan characteristicsThe Company’s final average pay defined benefit pension plans and retiree welfare plans are closed to new members. All employees mayparticipate in capital accumulation plans including defined benefit cash balance plans, 401(k) plans and/or defined contribution plans,depending on the country of employment. |
| All pension arrangements are governed by local pension committees or management, but significant plan changes require approval fromthe Company’s Board of Directors. |
| The Company’s funding policy for defined benefit pension plans is to make the minimum annual contributions required by regulations in thecountries in which the plans are offered. Assumptions and methods prescribed for regulatory funding purposes typically differ from thoseused for accounting purposes. |
| The Company’s remaining defined benefit pension and/or retiree welfare plans are in the U.S., Canada, Japan and Taiwan (China). Thereare also disability welfare plans in the U.S. and Canada. |
| The largest defined benefit pension and retiree welfare plans are the primary plans for employees in the U.S. and Canada. These are thematerial plans that are discussed in the balance of this note. The Company measures its defined benefit obligations and fair value of planassets for accounting purposes as at December 31 each year. |
| 200 | 2022 Annual Report | Notes to Consolidated Financial Statements |
| U.S. defined benefit pension and retiree welfare plansThe Company operates a qualified cash balance plan that is open to new members, a closed non-qualified cash balance plan, and a closedretiree welfare plan. |
| Actuarial valuations to determine the Company’s minimum funding contributions for the qualified cash balance plan are required annually.Deficits revealed in the funding valuations must generally be funded over a period of up to seven years. It is expected that there will be norequired funding for this plan in 2023. There are no plan assets set aside for the non-qualified cash balance plan. |
| The retiree welfare plan subsidizes the cost of life insurance and medical benefits. The majority of those who retired after 1991 receive afixed-dollar subsidy from the Company based on service. The plan was closed to all employees hired after 2004. While assets have beenset aside in a qualified trust to pay future retiree welfare benefits, this funding is optional. Retiree welfare benefits offered under the plancoordinate with the U.S. Medicare program to make optimal use of available federal financial support. |
| The qualified pension and retiree welfare plans are governed by the U.S. Benefits Committee, while the non-qualified pension plan isgoverned by the U.S. Non-Qualified Plans Subcommittee. |
| Canadian defined benefit pension and retiree welfare plansThe Company’s defined benefit plans in Canada include two registered final average pay pension plans, a non-registered supplemental finalaverage pay pension plan and a retiree welfare plan, all of which have been closed to new members. |
| Actuarial valuations to determine the Company’s minimum funding contributions for the registered pension plans are required at leastonce every three years. Deficits revealed in the funding valuation must generally be funded over a period of ten years. For 2023, therequired funding for these plans is expected to be $3. The non-registered supplemental pension plan is not funded. |
| The retiree welfare plan subsidizes the cost of life insurance, medical and dental benefits. These subsidies are a fixed-dollar amount forthose who retired after April 30, 2013 and have been eliminated for those who retire after 2019. There are no assets set aside for this plan. |
| The registered pension plans are governed by Pension Committees, while the supplemental non-registered plan is governed by the Boardof Directors. The retiree welfare plan is governed by management. |
| (b) RisksIn final average pay pension plans and retiree welfare plans, the Company generally bears the material risks which include interest rate,investment, longevity and health care cost inflation risks. In defined contribution plans, these risks are typically borne by the employee. Incash balance plans, the interest rate, investment and longevity risks are partially transferred to the employee. |
| Material sources of risk to the Company for all plans include: |
| • A decline in discount rates that increases the defined benefit obligations by more than the change in value of plan assets;• Lower than expected rates of mortality; and• For retiree welfare plans, higher than expected health care costs. |
| The Company has managed these risks through plan design and eligibility changes that have limited the size and growth of the definedbenefit obligations. Investment risks for funded plans are managed by investing significantly in asset classes which are highly correlatedwith the plans’ liabilities. |
| In the U.S., delegated committee representatives and management review the financial status of the qualified defined benefit pension planat least monthly, and steps are taken in accordance with an established dynamic investment policy to increase the plan’s allocation toasset classes which are highly correlated with the plan’s liabilities and reduce investment risk as the funded status improves. As atDecember 31, 2022, the target asset allocation for the plan was 30% return-seeking assets and 70% liability-hedging assets (2021 - 30%and 70%). |
| In Canada, internal committees and management review the financial status of the registered defined benefit pension plans on at least aquarterly basis. As at December 31, 2022, the target asset allocation for the plans was 20% return-seeking assets and 80% liability-hedging assets (2021 - 20% and 80%). |
| Certain long-term impacts of the COVID-19 pandemic (on future mortality and inflation, for example) are still unknown. The Company willcontinue to closely monitor experience related to COVID-19, as well as emerging research, and will adjust its long-term assumptionsaccordingly in the future. |
| | |
| 201 |
| (c) Pension and retiree welfare plans |
| The following tables present the reconciliation of defined benefit obligation and fair value of plan assets for the pension plans and retireewelfare plans. |
| Pension plans | Retiree welfare plans |
| For the years ended December 31, | 2022 | | 2021 | 2022 | | 2021 |
| Changes in defined benefit obligation:Opening balance |
| $ 4,560 | | $ 4,901 | $ 584 | | $ 638 |
| Current service cost | 43 | | 44 | – | | – |
| Past service cost - amendment | (6) | | – | – | | – |
| Interest cost | 127 | | 115 | 16 | | 15 |
| Plan participants’ contributions | – | | – | 3 | | 3 |
| Actuarial losses (gains) due to: |
| Experience | 5 | | 3 | (13) | | – |
| Demographic assumption changes | – | | 7 | – | | 1 |
| Economic assumption changes | (835) | | (194) | (112) | | (29) |
| Benefits paid | (299) | | (303) | (40) | | (42) |
| Impact of changes in foreign exchange rates | 199 | | (13) | 28 | | (2) |
| Defined benefit obligation, December 31 | $ 3,794 | | $ 4,560 | $ 466 | | $ 584 |
| Pension plans | Retiree welfare plans |
| For the years ended December 31, | 2022 | | 2021 | 2022 | | 2021 |
| Change in plan assets:Fair value of plan assets, opening balance |
| $ 4,510 | | $ 4,595 | $ 587 | | $ 606 |
| Interest income | 127 | | 109 | 16 | | 14 |
| Return on plan assets (excluding interest income) | (869) | | 70 | (91) | | (1) |
| Employer contributions | 59 | | 61 | 11 | | 11 |
| Plan participants’ contributions | – | | – | 3 | | 3 |
| Benefits paid | (299) | | (303) | (40) | | (42) |
| Administration costs | (11) | | (9) | (2) | | (2) |
| Impact of changes in foreign exchange rates | 205 | | (13) | 39 | | (2) |
| Fair value of plan assets, December 31 | $ 3,722 | | $ 4,510 | $ 523 | | $ 587 |
| (d) Amounts recognized in the Consolidated Statements of Financial PositionThe following table presents the deficit (surplus) and net defined benefit liability (asset) for the pension plans and retiree welfare plans. |
| Pension plans | Retiree welfare plans |
| As at December 31, | 2022 | | 2021 | 2022 | | 2021 |
| Development of net defined benefit liabilityDefined benefit obligation |
| $ 3,794 | | $ 4,560 | $ 466 | | $ 584 |
| Fair value of plan assets | 3,722 | | 4,510 | 523 | | 587 |
| Deficit (surplus) | 72 | | 50 | (57) | | (3) |
| Effect of asset limit(1) | 48 | | 37 | – | | – |
| Deficit (surplus) and net defined benefit liability (asset) | 120 | | 87 | (57) | | (3) |
| Deficit is comprised of:Funded or partially funded plans |
| (441) | | (600) | (168) | | (154) |
| Unfunded plans | 561 | | 687 | 111 | | 151 |
| Deficit (surplus) and net defined benefit liability (asset) | $ | 120 | | $ | 87 | $ (57) | | $ | (3) |
| (1) | The asset limit relates to a registered pension plan in Canada. The surplus in that plan is above the present value of economic benefits that can be derived by the Companythrough reductions in future contributions. For the other funded pension plans, the present value of the economic benefits available in the form of reductions in futurecontributions to the plans remains greater than the current surplus. |
| (e) Disaggregation of defined benefit obligationThe following table presents components of the defined benefit obligation between active members and inactive and retired members. |
| | | | | U.S. plans | Canadian plans |
| | | | | | Pension plans | Retiree welfare plans | Pension plans | Retiree welfare plans |
| As at December 31, | | | | | | 2022 | 2021 | | 2022 | 2021 | 2022 | | 2021 | 2022 | | 2021 |
| Active members | | | | | | $ | 509 | $ | 537 | | $ | 11 | $ | 17 | $ | 125 | | $ | 184 | $ | – | | $ | – |
| Inactive and retired members | | | | | | 2,006 | 2,371 | | 344 | 416 | 1,154 | | 1,468 | 111 | | 151 |
| Total | | | | | | $ 2,515 | $ 2,908 | | $ 355 | $ 433 | $ 1,279 | | $ 1,652 | $ 111 | | $ 151 |
| 202 | 2022 Annual Report | Notes to Consolidated Financial Statements |
| (f) Fair value measurementsThe following tables present major categories of plan assets and the allocation to each category. |
| U.S. plans(1) | Canadian plans(2) |
| | | Pension plans | Retiree welfare plans | Pension plans | Retiree welfare plans |
| As at December 31, 2022 | | | Fair value | % of total | | | Fair value | | | % of total | Fair value | % of total | | | | Fair value | | % of total |
| Cash and cash equivalents | | | $ | 35 | 1% | | | $ | 22 | | | 4% | $ | 9 | 1% | | | | $ – | | | – |
| Public equity securities(3) | | | 377 | 15% | | | 41 | | | 8% | 233 | 20% | | | | | | – | – |
| Public debt securities | | | 1,509 | 58% | | | 445 | | | 85% | 898 | 79% | | | | | | – | – |
| Other investments(4) | | | 660 | 26% | | | 15 | | | 3% | 1 | 0% | | | | | | – | – |
| Total | | | $ 2,581 | 100% | | | $ 523 | | | 100% | $ 1,141 | 100% | | | | $ – | | | – |
| U.S. plans(1) | Canadian plans(2) |
| | | Pension plans | Retiree welfare plans | Pension plans | Retiree welfare plans |
| As at December 31, 2021 | | | Fair value | % of total | | | Fair value | | | % of total | Fair value | % of total | | | | Fair value | | % of total |
| Cash and cash equivalents | | | $ | 90 | 3% | | | $ | 21 | | | 4% | $ | 14 | 1% | | | | $ – | | | – |
| Public equity securities(3) | | | 600 | 20% | | | 57 | | | 10% | 322 | 22% | | | | | | – | – |
| Public debt securities | | | 1,863 | 61% | | | 501 | | | 85% | 1,144 | 77% | | | | | | – | – |
| Other investments(4) | | | 475 | 16% | | | 8 | | | 1% | 2 | 0% | | | | | | – | – |
| Total | | | $ 3,028 | 100% | | | $ 587 | | | 100% | $ 1,482 | 100% | | | | $ – | | | – |
| (1) | The U.S. pension and retiree welfare plan assets have daily quoted prices in active markets, except for the private debt, infrastructure, private equity, real estate, timber andagriculture assets. In the aggregate, the latter assets represent approximately 15% of all U.S. pension and retiree welfare plan assets as at December 31, 2022 (2021 – 7%). |
| (2) | All the Canadian pension plan assets have daily quoted prices in active markets, except for the group annuity contract assets that represent approximately 0.1% of all Canadianpension plan assets as at December 31, 2022 (2021 – 0.1%). |
| (3) | Equity securities include direct investments in MFC common shares of $1.2 (2021 – $1.2) in the U.S. retiree welfare plan and $nil (2021 – $nil) in Canada. |
| (4) | Other U.S. plan assets include investment in real estate, private debt, infrastructure, private equity, timberland and agriculture, and managed futures. Other Canadian pensionplan assets include investment in the group annuity contract. |
| (g) Net benefit cost recognized in the Consolidated Statements of IncomeThe following table presents components of the net benefit cost for the pension plans and retiree welfare plans. |
| | | | | Pension plans | Retiree welfare plans |
| For the years ended December 31, | | | | | 2022 | 2021 | | | | 2022 | | 2021 |
| Defined benefit current service cost(1) | | | | | $ | 43 | $ | 44 | | | | $ – | | $ – |
| Defined benefit administrative expenses | | | | | 11 | 9 | | | | | | 2 | 2 |
| Past service cost-plan amendments and curtailments | | | | | (6) | – | | | | | | – | – |
| Service cost | | | | | 48 | 53 | | | | | | 2 | 2 |
| Interest on net defined benefit (asset) liability | | | | | 2 | 6 | | | | | | – | 1 |
| Defined benefit cost | | | | | 50 | 59 | | | | | | 2 | 3 |
| Defined contribution cost | | | | | 85 | 90 | | | | | | – | – |
| Net benefit cost | | | | | $ 135 | $ 149 | | | | $ 2 | | $ 3 |
| (1) | There are no significant current service costs for the retiree welfare plans as they are closed and mostly frozen. The remeasurement gain or loss on these plans is due to thevolatility of discount rates and investment returns. |
| (h) Re-measurement effects recognized in Other Comprehensive IncomeThe following table presents components of the re-measurement effects recognized in Other Comprehensive Income for the pension plansand retiree welfare plans. |
| | | | | Pension plans | Retiree welfare plans |
| For the years ended December 31, | | | | | 2022 | 2021 | | | | 2022 | | 2021 |
| Actuarial gains (losses) on defined benefit obligations due to: |
| Experience | | | | | $ | (5) | $ | (3) | | | | $ 13 | | $ | – |
| Demographic assumption changes | | | | | – | (7) | | | | | | – | (1) |
| Economic assumption changes | | | | | 835 | 194 | | | | 112 | | 29 |
| Return on plan assets (excluding interest income) | | | | | (869) | 70 | | | | (91) | | (1) |
| Change in effect of asset limit (excluding interest) | | | | | (10) | (37) | | | | | | – | – |
| Total re-measurement effects | | | | | $ (49) | $ 217 | | | | $ 34 | | $ 27 |
| | | | | | | | | | |
| | | | | | | | 203 |
| (i) AssumptionsThe following table presents key assumptions used by the Company to determine the defined benefit obligation and net benefit cost for thedefined benefit pension plans and retiree welfare plans. |
| U.S. Plans | Canadian Plans |
| | | Pension plans | Retiree welfare plans | | | Pension plans | Retiree welfare plans |
| For the years ended December 31, | | | 2022 | 2021 | | | | | 2022 | 2021 | 2022 | 2021 | | | 2022 | | | 2021 |
| To determine the defined benefit obligation at end of year(1): |
| Discount rate | | | 5.0% | 2.7% | | | | | 5.0% | 2.7% | 5.3% | 3.1% | | | 5.3% | | | 3.2% |
| Initial health care cost trend rate(2) | | | n/a | n/a | | | | | 7.8% | 7.0% | n/a | n/a | | | 5.3% | | | 5.4% |
| To determine the defined benefit cost for the year(1): |
| Discount rate | | | 2.7% | 2.4% | | | | | 2.7% | 2.4% | 3.1% | 2.5% | | | 3.2% | | | 2.6% |
| Initial health care cost trend rate(2) | | | n/a | n/a | | | | | 7.0% | 7.3% | n/a | n/a | | | 5.4% | | | 5.5% |
| (1) | Inflation and salary increase assumptions are not shown as they do not materially affect obligations and cost. |
| (2) | The health care cost trend rate used to measure the U.S. based retiree welfare obligation was 7.8% grading to 4.8% for 2035 and years thereafter (2021 – 7.0% grading to4.5% for 2032) and to measure the net benefit cost was 7.0% grading to 4.5% for 2032 and years thereafter (2021 – 7.3% grading to 4.5% for 2032). In Canada, the rate usedto measure the retiree welfare obligation was 5.3% grading to 4.8% for 2026 and years thereafter (2021 – 5.4% grading to 4.8% for 2026) and to measure the net benefit costwas 5.4% grading to 4.8% for 2026 and years thereafter (2021 – 5.5% grading to 4.8% for 2026). |
| Assumptions regarding future mortality are based on published statistics and mortality tables. The following table presents current lifeexpectancies underlying the values of the obligations in the defined benefit pension and retiree welfare plans. |
| As at December 31, 2022 | | | | | U.S. | | | Canada |
| Life expectancy (in years) for those currently age 65 |
| Males | | | | | 22.1 | | | 23.9 |
| Females | | | | | 23.6 | | | 25.7 |
| Life expectancy (in years) at age 65 for those currently age 45 |
| Males | | | | | 23.5 | | | 24.8 |
| Females | | | | | 25.0 | | | 26.6 |
| (j) Sensitivity of assumptions on obligationsAssumptions used can have a significant effect on the obligations reported for defined benefit pension and retiree welfare plans. Thefollowing table sets out the potential impact on the obligations arising from changes in the key assumptions. The sensitivities assume allother assumptions are held constant. In actuality, inter-relationships with other assumptions may exist. |
| As at December 31, 2022 | | | | Pension plans | Retiree welfare plans |
| Discount rate: |
| Impact of a 1% increase | | $ (279) | | | | | | $ (39) |
| Impact of a 1% decrease | | 322 | | | | | | 45 |
| Health care cost trend rate: |
| Impact of a 1% increase | | n/a | | | | | | 10 |
| Impact of a 1% decrease | | n/a | | | | | | (9) |
| Mortality rates(1) |
| Impact of a 10% decrease | | 93 | | | | | | 8 |
| (1) | If the actuarial estimates of mortality are adjusted in the future to reflect unexpected decreases in mortality, the effect of a 10% decrease in mortality rates at each future agewould be an increase in life expectancy at age 65 of 0.8 years for U.S. males and females, 0.8 years for Canadian females and 0.7 years for Canadian males, respectively. |
| (k) Maturity profileThe following table presents weighted average duration (in years) of the defined benefit obligations. |
| | | | Pension plans | Retiree welfare plans |
| As at December 31, | | | | 2022 | 2021 | | | 2022 | | | 2021 |
| U.S. plans | | | | 8.2 | 9.7 | | | 8.2 | | | 9.5 |
| Canadian plans | | | | 10.6 | 12.4 | | | 11.1 | | | 13.3 |
| 204 | 2022 Annual Report | Notes to Consolidated Financial Statements |
| (l) Cash flows – contributionsThe following table presents total cash payments for all employee future benefits, comprised of cash contributed by the Company tofunded defined benefit pension and retiree welfare plans, cash payments directly to beneficiaries in respect of unfunded pension andretiree welfare plans, and cash contributed to defined contribution pension plans. |
| Pension plans | Retiree welfare plans |
| For the years ended December 31, | 2022 | | 2021 | 2022 | | 2021 |
| Defined benefit plans | $ | 59 | | $ | 61 | $ 11 | | $ 11 |
| Defined contribution plans | 85 | | 90 | | – | – |
| Total | $ 144 | | $ 151 | $ 11 | | $ 11 |
| The Company’s best estimate of expected cash payments for employee future benefits for the year ending December 31, 2023 is $65 fordefined benefit pension plans, $89 for defined contribution pension plans and $13 for retiree welfare plans. |
| Note 17 | | | | | | Income Taxes |
| (a) Income tax expenseThe following table presents income tax expense (recovery) recognized in the Consolidated Statements of Income. |
| For the years ended December 31, | | 2022 | | 2021 |
| Current taxCurrent year |
| | $ 1,097 | | $ 1,390 |
| Adjustments related to prior years | | (263) | | (50) |
| Total current tax | | 834 | | 1,340 |
| Deferred taxChange related to temporary differences |
| | 706 | | (139) |
| Adjustments related to prior years | | 226 | | 12 |
| Effects of change in tax rates in Canada | | (201) | | – |
| Total deferred tax | | 731 | | (127) |
| Income tax expense | | $ 1,565 | | $ 1,213 |
| The following table discloses income tax expense (recovery) recognized directly in equity. |
| For the years ended December 31, | | 2022 | | 2021 |
| Recognized in other comprehensive incomeCurrent income tax expense (recovery) |
| | $ | (323) | | $ | (3) |
| Deferred income tax expense (recovery) | | (863) | | (61) |
| Total recognized in other comprehensive income | | $ (1,186) | | $ | (64) |
| Recognized in equity, other than other comprehensive incomeCurrent income tax expense (recovery) |
| | $ | 5 | | $ | 5 |
| Deferred income tax expense (recovery) | | (8) | | (15) |
| Total income tax recognized directly in equity | | $ | (3) | | $ | (10) |
| (b) Current tax receivable and payableAs at December 31, 2022, the Company had approximately $1,135 of current tax receivable included in other assets (2021 – $660) and acurrent tax payable of $195 included in other liabilities (2021 – $357). |
| (c) Tax reconciliationThe effective income tax rate reflected in the Consolidated Statements of Income varies from the Canadian tax rate of 27.50 per cent forthe year ended December 31, 2022 (2021 – 26.50 per cent) for the items outlined in the following table. The Canadian tax rate becamesubstantively enacted in December 2022 with an effective date of April 7, 2022. |
| For the years ended December 31, | | 2022 | | 2021 |
| Income before income taxes | | $ 8,747 | | $ 8,125 |
| Income tax expense at Canadian statutory tax rate | | $ 2,406 | | $ 2,153 |
| Increase (decrease) in income taxes due to: |
| Tax-exempt investment income | | (214) | | (261) |
| Differences in tax rate on income not subject to tax in Canada | | (835) | | (917) |
| Adjustments to taxes related to prior years | | (37) | | (38) |
| Tax losses and temporary differences not recognized as deferred taxes | | 86 | | 53 |
| | | | | | | |
| Tax rate change in Canada | | (201) | | – |
| Other differences | | 360 | | 223 |
| Income tax expense | | $ 1,565 | | $ 1,213 |
| | | | 205 |
| (d) Deferred tax assets and liabilitiesThe following table presents the Company’s deferred tax assets and liabilities reflected on the Consolidated Statement of FinancialPosition. |
| As at December, 31 | 2022 | 2021 |
| Deferred tax assets | $ 5,423 | $ 5,254 |
| Deferred tax liabilities | (2,774) | (2,769) |
| Net deferred tax assets (liabilities) | $ 2,649 | $ 2,485 |
| The following table presents movement of deferred tax assets and liabilities. |
| | | | | | Recognized in | Recognized in Other | Balance, |
| | | Balance, | | | Income | Comprehensive | | Recognized | Translation | | | | | | | | | December 31, |
| As at December 31, 2022 | | | | January 1, 2022 | Disposals | Statement | | Income | in Equity | and Other | 2022 |
| Loss carryforwards | | | $ | 517 | | $ | – | $ | | | | | 184 | $ | – | $ | | | – | $ | – | $ | 701 |
| Actuarial liabilities | | | 8,703 | | | – | (5,537) | | – | | | | 1 | 374 | 3,541 |
| Pensions and post-employment benefits | | | 161 | | | – | (1) | (17) | | | | – | – | 143 |
| Tax credits | | | 46 | | | – | 63 | – | | | | – | – | 109 |
| Accrued interest | | | | | 1 | – | – | – | | | | – | – | 1 |
| Real estate | | | (1,171) | | | – | (20) | (1) | | | | – | (36) | (1,228) |
| Securities and other investments | | | (5,139) | | | – | 4,552 | | 879 | | | | (1) | (250) | 41 |
| Sale of investments | | | (40) | | | – | 10 | – | | | | – | – | (30) |
| Goodwill and intangible assets | | | (804) | | | – | (4) | – | | | | – | (17) | (825) |
| Other | | | 211 | | | – | 22 | 2 | | | | 8 | (47) | 196 |
| Total | | | $ 2,485 | | $ | – | $ | | | | | (731) | $ 863 | $ | | | 8 | $ 24 | $ 2,649 |
| | | | | | Recognized | Recognized in Other | Balance, |
| | | Balance, | | | in Income | Comprehensive | | Recognized | Translation | | | | | | | | | December 31, |
| As at December 31, 2021 | | | | January 1, 2021 | Disposals | Statement | | Income | in Equity | and Other | 2021 |
| Loss carryforwards | | | $ | 497 | | $ (10) | $ | 22 | $ | – | $ | | | – | $ | 8 | $ | 517 |
| Actuarial liabilities | | | 9,372 | | | – | | | | | (666) | – | | | | – | (3) | 8,703 |
| Pensions and post-employment benefits | | | 215 | | | – | 7 | (61) | | | | – | – | 161 |
| Tax credits | | | 34 | | | – | 11 | 1 | | | | – | – | 46 |
| Accrued interest | | | | | 1 | – | – | – | | | | – | – | 1 |
| Real estate | | | (1,033) | | | – | | | | | (145) | – | | | | – | 7 | (1,171) |
| Securities and other investments | | | (5,950) | | | – | | | | | 643 | 119 | | | | – | 49 | (5,139) |
| Sale of investments | | | (56) | | | – | 16 | – | | | | – | – | (40) |
| Goodwill and intangible assets | | | (849) | | | – | 29 | – | | | | – | 16 | (804) |
| Other | | | (3) | | | 1 | | | | | 210 | 2 | | | | 15 | (14) | 211 |
| Total | | | $ 2,228 | | $ | (9) | $ | | | | | 127 | $ 61 | $ | | | 15 | $ 63 | $ 2,485 |
| The total deferred tax assets as at December 31, 2022 of $5,423 (2021 – $5,254) include $40 (2021 – $942) where the Company hassuffered losses in either the current or preceding year and where the recognition is dependent on future taxable profits in the relevantjurisdictions and feasible management actions. |
| As at December 31, 2022, tax loss carryforwards available were approximately $3,902 (2021 – $2,689) of which $3,684 expire betweenthe years 2025 and 2042 while $218 have no expiry date, and capital loss carryforwards available were approximately $1 (2021 – $1) andhave no expiry date. A $701 (2021 – $517) tax benefit related to these tax loss carryforwards has been recognized as a deferred tax assetas at December 31, 2022, and a benefit of $211 (2021 – $120) has not been recognized. The Company has approximately $273 (2021 –$200) of tax credit carryforwards which will expire between the years 2026 and 2042 of which a benefit of $164 (2021 – $154) has notbeen recognized. In addition, the Company has not recognized a deferred tax asset of $507 (2021 – $490) on other temporary differencesof $1,829 (2021 – $1,867). |
| The total deferred tax liability as at December 31, 2022 was $2,774 (2021 – $2,769). This amount includes the deferred tax liability ofconsolidated entities. The aggregate amount of taxable temporary differences associated with the Company’s own investments insubsidiaries is not included in the Consolidated Financial Statements and was $20,625 (2021 – $24,034). |
| Note 18 | | | | | | | | | | | | | Interests in Structured Entities |
| The Company is involved with both consolidated and unconsolidated structured entities (“SEs”) which are established to generateinvestment and fee income. The Company is also involved with SEs that are used to facilitate financing for the Company. These entities mayhave some or all the following features: control is not readily identified based on voting rights; restricted activities designed to achieve anarrow objective; high amount of leverage; and/or highly structured capital. |
| 206 | 2022 Annual Report | Notes to Consolidated Financial Statements |
| The Company only discloses its involvement in significant consolidated and unconsolidated SEs. In assessing the significance, theCompany considers the nature of its involvement with the SE, including whether it is sponsored by the Company (i.e. initially organized andmanaged by the Company). Other factors considered include the Company’s investment in the SE as compared to total investments, itsreturns from the SE as compared to total net investment income, the SE’s size as compared to total funds under management, and itsexposure to any other risks from its involvement with the SE. |
| The Company does not provide financial or other support to its SEs, when it does not have a contractual obligation to do so. |
| (a) Consolidated SEs |
| Investment SEsThe Company acts as an investment manager of timberlands and timber companies. The Company’s general fund and segregated fundsinvest in many of these companies. The Company has control over one timberland company which it manages, Hancock VictoriaPlantations Holdings PTY Limited (“HVPH”). HVPH is a SE primarily because the Company’s employees exercise voting rights over it onbehalf of other investors. As at December 31, 2022, the Company’s consolidated timber assets relating to HVPH were $1,264 (2021 –$979). The Company does not provide guarantees to other parties against the risk of loss from HVPH. |
| Financing SEsThe Company securitizes certain HELOC collateralized by residential property. This activity is facilitated by consolidated entities that areSEs because their operations are limited to issuing and servicing the Company’s funding. Further information regarding the Company’smortgage securitization program is included in note 4. |
| (b) Unconsolidated SEs |
| Investment SEsThe following table presents the Company’s investments and maximum exposure to loss from significant unconsolidated investment SEs,some of which are sponsored by the Company. The Company does not provide guarantees to other parties against the risk of loss fromthese SEs. |
| | Company’s maximum |
| Company’s investment(1) | exposure to loss(2) |
| As at December 31, | 2022 | | 2021 | 2022 | | 2021 |
| Leveraged leases(3) | $ 3,840 | | $ 3,457 | $ 3,840 | | $ 3,457 |
| Timberland companies(4) | 816 | | 842 | 816 | | 842 |
| Real estate companies(5) | 465 | | 513 | 465 | | 513 |
| Total | $ 5,121 | | $ 4,812 | $ 5,121 | | $ 4,812 |
| (1) | The Company’s investments in these unconsolidated SEs are included in invested assets and the Company’s returns from them are included in net investment income and AOCI. |
| (2) | The Company’s maximum exposure to loss from each SE is limited to amounts invested in each, plus unfunded capital commitments, if any. The Company’s investmentcommitments are disclosed in note 19. The maximum loss is expected to occur only upon the entity’s bankruptcy/liquidation, or in case a natural disaster in the case of thetimber companies. |
| (3) | These entities are statutory business trusts which use capital provided by the Company and senior debt provided by other parties to finance the acquisition of assets. Theseassets are leased to third-party lessees under long-term leases. The Company owns equity capital in these business trusts. The Company does not consolidate any of the truststhat are party to the lease arrangements because the Company does not have decision-making power over them. |
| (4) | These entities own and operate timberlands. The Company invests in their equity and debt. The Company’s returns include investment income, investment advisory fees, forestrymanagement fees and performance advisory fees. The Company does not control these entities because it either does not have the power to govern their financial and operatingpolicies or does not have significant variable returns from them, or both. |
| (5) | These entities, which include the Manulife U.S. REIT, own and manage commercial real estate. The Company invests in their equity. The Company’s returns include investmentincome, investment management fees, property management fees, acquisition/disposition fees and leasing fees. The Company does not control these entities because it eitherdoes not have the power to govern their financial and operating policies or does not have significant variable returns from them, or both. |
| Financing SEsThe Company’s interests in and maximum exposure to loss from significant unconsolidated financing SEs are as follows. |
| | Company’s interests(1) |
| As at December 31, | | 2022 | | 2021 |
| Manulife Finance (Delaware), L.P.(2) | | $ 691 | | $ 850 |
| Total | | $ 691 | | $ 850 |
| (1) | The Company’s interests include amounts borrowed from the SE; the Company’s investment in its equity and subordinated capital; and foreign currency and interest rate swapswith it. |
| (2) | This entity is a wholly owned partnership used to facilitate the Company’s financing. Refer to notes 11 and 19. |
| | | | | |
| (i) Other invested assetsThe Company has investment relationships with a variety of other entities, which result from its direct investment in their debt and/orequity and which have been assessed for control. These other entities’ investments include but are not limited to investments in power and |
| | | | 207 |
| infrastructure, oil and gas, private equity, real estate and agriculture, organized as limited partnerships and limited liability companies.Most of these other entities are not sponsored by the Company. The Company’s involvement with these other entities is not individuallysignificant. As such, the Company neither provides summary financial data for these entities nor individually assesses whether they areSEs. The Company’s maximum exposure to losses because of its involvement with these other entities is limited to its investment in themand amounts committed to be invested but not yet funded. The Company records its income from these entities in net investment incomeand AOCI. The Company does not provide guarantees to other parties against the risk of loss from these other entities. |
| (ii) Interest in securitized assetsThe Company invests in mortgage/asset-backed securities issued by securitization vehicles sponsored by other parties, including privateissuers and government sponsored issuers, to generate investment income. The Company does not own a controlling financial interest inany of the issuers. These securitization vehicles are SEs based on their narrow scope of activities and highly leveraged capital structures.Investments in mortgage/asset-backed securities are reported on the Consolidated Statements of Financial Position as debt securities andprivate placements, and their fair value and carrying value are disclosed in note 4. The Company’s maximum loss from these investments islimited to amounts invested. |
| Commercial mortgage-backed securities (“CMBS”) are secured by commercial mortgages and residential mortgage backed securities(“RMBS”) are secured by residential mortgages. Asset-backed securities (“ABS”) may be secured by various underlying assets includingcredit card receivables, automobile loans and aviation leases. The mortgage/asset-backed securities that the Company invests in primarilyoriginate in North America. |
| The following table presents investments in securitized holdings by the type and asset quality. |
| 2022 | 2021 |
| As at December 31, | | | CMBS | RMBS | ABS | Total | Total |
| AAA | | | $ 675 | $ | 5 | $ | | | | 1,095 | $ 1,775 | $ 2,346 |
| AA | | | – | 3 | | | | 6 | 9 | 11 |
| A | | | 56 | – | | | | 534 | 590 | 641 |
| BBB | | | – | – | | | | 232 | 232 | 227 |
| BB and below | | | – | – | | | | 3 | 3 | 4 |
| Total company exposure | | | $ 731 | $ | 8 | $ | | | | 1,870 | $ 2,609 | $ 3,229 |
| (iii) Mutual fundsThe Company sponsors and may invest in a range of public mutual funds with a broad range of investment styles. As sponsor, the Companyorganizes mutual funds that implement investment strategies on behalf of current and future investors. The Company earns fees which areat market rates for providing advisory and administrative services to these mutual funds. Generally, the Company does not control itssponsored mutual funds because either the Company does not have power to govern their financial and operating policies, or its returns inthe form of fees and ownership interests are not significant, or both. Certain mutual funds are SEs because their decision-making rightsare not vested in voting equity interests and their investors are provided with redemption rights. |
| The Company’s relationships with these mutual funds are not individually significant. As such, the Company neither provides summaryfinancial data for these mutual funds nor individually assesses whether they are SEs. The Company’s interest in mutual funds is limited toits investment and fees earned, if any. The Company’s investments in mutual funds are recorded as part of its investment in public equitieswithin the Consolidated Statements of Financial Position. For information regarding the Company’s invested assets, refer to note 4. TheCompany does not provide guarantees to other parties against the risk of loss from these mutual funds. |
| As sponsor, the Company’s investment in (“seed”) startup capital of mutual funds as at December 31, 2022 was $1,296 (2021 – $1,361).The Company’s retail mutual fund assets under management as at December 31, 2022 were $258,183 (2021 – $290,863). |
| Note 19 | | | | | | | Commitments and Contingencies |
| (a) Legal proceedingsThe Company is regularly involved in legal actions, both as a defendant and as a plaintiff. The legal actions where the Company is a partyordinarily relate to its activities as a provider of insurance protection or wealth management products, reinsurance, or in its capacity as aninvestment adviser, employer, or taxpayer. Other life insurers and asset managers, operating in the jurisdictions in which the Companydoes business, have been subject to a wide variety of other types of actions, some of which resulted in substantial judgments orsettlements against the defendants; it is possible that the Company may become involved in similar actions in the future. In addition,government and regulatory bodies in Canada, the United States, Asia and other jurisdictions where the Company conducts businessregularly make inquiries and, from time to time, require the production of information or conduct examinations concerning the Company’scompliance with, among other things, insurance laws, securities laws, and laws governing the activities of broker-dealers. |
| In June 2018, a class action was initiated against John Hancock Life Insurance Company (U.S.A.) (“JHUSA”) and John Hancock LifeInsurance Company of New York (“JHNY”) in the U.S. District Court for the Southern District of New York on behalf of owners of |
| 208 | 2022 Annual Report | Notes to Consolidated Financial Statements |
| approximately 1,500 Performance Universal Life (“PerfUL”) policies issued between 2003 and 2010 whose policies were subject to a Costof Insurance (“COI”) increase announced in 2018. On May 17, 2022, at a Fairness Hearing, the Court approved the class SettlementAgreement that it had preliminary approved on January 5, 2022. The settlement has been implemented. In the Class Notice process, aninstitutional investor which owns approximately 150 of the policies that met the class definition “opted out” of the settlement. Nosubsequent action has thus far been taken with respect to those opt out policies. |
| In addition to the class action, eleven individual lawsuits opposing the Performance UL COI increases were also filed. Each of the lawsuits,except two, is brought by plaintiffs owning multiple policies and/or by entities managing them for investment purposes. Three of thepending federal cases have now been settled and these involved a combined 46 PerfUL policies. On September 8, 2022, two newindividual lawsuits were filed in New York and California federal courts, with respect to the 16 policies owned by Skellig Capital. There arenow five lawsuits pending in federal courts in New York and California and three in New York state court. In the aggregate, approximately135 PerfUL policies are involved in these cases. There are also approximately 140 policies that have been “opted out” of the classsettlement, and although no litigation is pending with respect to those policies, future litigation is possible if not probable. Of the remainingnon-class/individual lawsuits, discovery has commenced. With respect to the non-class/individual lawsuits pending in the New York federaldistrict court (not including the recently filed Skellig lawsuits), the court has approved a briefing schedule and set the final pre-trial hearingfor February 23, 2023. The Company continues to defend the individual lawsuits. In 2021, the Company recorded an accrual in relation tothe class and individual lawsuits. In Q3 2022, the accrual was increased. |
| (b) Investment commitmentsIn the normal course of business, various investment commitments are outstanding which are not reflected in the Consolidated FinancialStatements. There were $14,193 (2021 – $12,233) of outstanding investment commitments as at December 31, 2022, of which $1,095(2021 – $957) mature in 30 days, $3,359 (2021 – $3,205) mature in 31 to 365 days and $9,739 (2021 – $8,071) mature after one year. |
| (c) Letters of creditIn the normal course of business, third-party relationship banks issue letters of credit on the Company’s behalf. The Company’s businessesutilize letters of credit for which third parties are the beneficiaries, as well as for affiliate reinsurance transactions between its subsidiaries.As at December 31, 2022, letters of credit for which third parties are beneficiary, in the amount of $215 (2021 – $99), were outstanding. |
| (d) Guarantees |
| (i) Guarantees regarding Manulife Finance (Delaware), L.P. (“MFLP”)MFC has guaranteed the payment of amounts on the $650 subordinated debentures due on December 15, 2041 issued by MFLP, a whollyowned unconsolidated financing entity. |
| The following table presents certain condensed consolidated financial information for MFC and MFLP. |
| Condensed Consolidated Statements of Income Information |
| | | Other |
| | | | subsidiaries of | | Total |
| MFC | | MFC on a | | Consolidation | | consolidated |
| For the year ended December 31, 2022 | | (Guarantor) | | combined basis | adjustments | amounts | | MFLP |
| Total revenue | $ 518 | | $ 17,732 | | $ (1,103) | | $ 17,147 | $ 64 |
| Net income (loss) attributed to shareholders | 7,294 | | 7,071 | | (7,071) | 7,294 | | 21 |
| | | Other |
| | | | subsidiaries on | | Total |
| MFC | | a combined | | Consolidation | | consolidated |
| For the year ended December 31, 2021 | | (Guarantor) | basis | | adjustments | amounts | | MFLP |
| Total revenue | $ 563 | | $ 62,323 | | $ (1,065) | | $ 61,821 | $ 41 |
| Net income (loss) attributed to shareholders | 7,105 | | 6,842 | | (6,842) | 7,105 | | 3 |
| | | | | | | | | |
| | | | | | | | 209 |
| Condensed Consolidated Statements of Financial Position |
| | | Other |
| | | subsidiaries | | | Total |
| MFC | | on a | | Consolidation | | consolidated |
| As at December 31, 2022 | | (Guarantor) | | combined basis | adjustments | amounts | | MFLP |
| Invested assets | | $ | 63 | | | $ 413,938 | $ | | – | $ 414,001 | $ | 21 |
| Total other assets | 67,543 | | 90,687 | | (71,852) | 86,378 | | 950 |
| Segregated funds net assets | – | | 348,562 | | | | – | 348,562 | | – |
| Insurance contract liabilities | – | | 371,405 | | | | – | 371,405 | | – |
| Investment contract liabilities | – | | 3,248 | | | | – | 3,248 | | – |
| Segregated funds net liabilities | – | | 348,562 | | | | – | 348,562 | | – |
| Total other liabilities | 11,545 | | 58,246 | | | | | | (444) | 69,347 | | 712 |
| | | Other |
| | | subsidiaries | | | Total |
| MFC | | on a | | Consolidation | | consolidated |
| As at December 31, 2021 | | (Guarantor) | | combined basis | adjustments | amounts | | MFLP |
| Invested assets | | $ | 78 | | | $ 427,020 | $ | | – | $ 427,098 | $ | 3 |
| Total other assets | 68,866 | | 94,615 | | (72,724) | 90,757 | | 1,088 |
| Segregated funds net assets | – | | 399,788 | | | | – | 399,788 | | – |
| Insurance contract liabilities | – | | 392,275 | | | | – | 392,275 | | – |
| Investment contract liabilities | – | | 3,117 | | | | – | 3,117 | | – |
| Segregated funds net liabilities | – | | 399,788 | | | | – | 399,788 | | – |
| Total other liabilities | 10,536 | | 53,962 | | | | | | (904) | 63,594 | | 852 |
| (ii) Guarantees regarding John Hancock Life Insurance Company (U.S.A.) (“JHUSA”)Details of guarantees regarding certain securities issued or to be issued by JHUSA are outlined in note 24. |
| (e) Pledged assetsIn the normal course of business, the Company pledges its assets in respect of liabilities incurred, strictly for providing collateral to thecounterparty. In the event of the Company’s default, the counterparty is entitled to apply the collateral to settle the liability. The pledgedassets are returned to the Company if the underlying transaction is terminated or, in the case of derivatives, if there is a decrease in the netexposure due to market value changes. |
| The amounts pledged are as follows. |
| | | 2022 | | | 2021 |
| As at December 31, | Debt securities | | | | Other | | Debt securities | Other |
| In respect of: |
| Derivatives | $ 11,944 | | | | $ | 23 | $ 5,525 | | $ | 23 |
| Secured borrowings | | | – | | 2,385 | – | | 2,575 |
| Regulatory requirements | | | 320 | | 77 | 367 | | 78 |
| Repurchase agreements | | | 886 | | | | | | – | 535 | | – |
| Non-registered retirement plans in trust | | | – | | 326 | – | | 377 |
| Other | | | – | | 404 | 2 | | 414 |
| Total | $ 13,150 | | | | $ 3,215 | $ 6,429 | | $ 3,467 |
| (f) Participating businessIn some territories where the Company maintains participating accounts, there are regulatory restrictions on the amounts of profit that canbe transferred to shareholders. Where applicable, these restrictions generally take the form of a fixed percentage of policyholderdividends. For participating businesses operating as separate “closed blocks”, transfers are governed by the terms of MLI’s and JohnHancock Mutual Life Insurance Company’s plans of demutualization. |
| (g) Fixed surplus notesA third party contractually provides standby financing arrangements for the Company’s U.S. operations under which, in certaincircumstances, funds may be provided in exchange for the issuance of fixed surplus notes. As at December 31, 2022, the Company had nofixed surplus notes outstanding. |
| 210 | 2022 Annual Report | Notes to Consolidated Financial Statements |
| Note 20 | Segmented Information |
| The Company’s reporting segments are Asia, Canada, U.S., Global WAM and Corporate and Other. Each reporting segment is responsiblefor managing its operating results, developing products, defining strategies for services and distribution based on the profile and needs ofits business and market. The Company’s significant product and service offerings by the reporting segments are mentioned below. |
| Wealth and asset management businesses (Global WAM) – branded as Manulife Investment Management, provides investment adviceand innovative solutions to retirement, retail, and institutional clients. Products and services are distributed through multiple distributionchannels, including agents and brokers affiliated with the Company, independent securities brokerage firms and financial advisors pensionplan consultants and banks. |
| Insurance and annuity products (Asia, Canada and U.S.) – include a variety of individual life insurance, individual and group long-termcare insurance and guaranteed and partially guaranteed annuity products. Products are distributed through multiple distribution channels,including insurance agents, brokers, banks, financial planners and direct marketing. Manulife Bank of Canada offers a variety of depositand credit products to Canadian customers. |
| Corporate and Other Segment – comprised of investment performance of assets backing capital, net of amounts allocated to operatingsegments; costs incurred by the corporate office related to shareholder activities (not allocated to the operating segments); financingcosts; Property and Casualty Reinsurance Business; and run-off reinsurance operations including variable annuities and accident andhealth. |
| Reporting segments |
| The following table presents results by reporting segments. |
| | | | | | Corporate |
| As at and for the year ended December 31, 2022 | | Asia | Canada | U.S. | Global WAM | and Other | Total |
| RevenueLife and health insurance |
| | | | | | | | $ | 18,690 | $ | 9,945 | | | | | | $ | 6,579 | $ | | | | | – | $ | 269 | | | | | $ | 35,483 |
| Annuities and pensions | | 2,786 | 447 | (863) | | | | | | – | – | 2,370 |
| Net premium income | | 21,476 | 10,392 | 5,716 | | | | | | – | 269 | 37,853 |
| Net investment income (loss) | | (7,972) | (7,911) | (13,003) | | | | | | (39) | (945) | (29,870) |
| Other revenue | | 1,458 | 1,426 | 458 | 6,350 | (528) | 9,164 |
| Total revenue | | 14,962 | 3,907 | (6,829) | 6,311 | (1,204) | 17,147 |
| Contract benefits and expensesLife and health insurance |
| | 4,976 | 5,945 | (11,868) | | | | | | – | 431 | (516) |
| Annuities and pensions | | 2,667 | (8,738) | (2,753) | | | | | | 41 | – | (8,783) |
| Net benefits and claims | | 7,643 | (2,793) | (14,621) | | | | | | 41 | 431 | (9,299) |
| Interest expense | | 234 | 573 | 67 | | | | | | 7 | 469 | 1,350 |
| Other expenses | | 5,024 | 3,506 | 2,847 | 4,717 | 255 | 16,349 |
| Total contract benefits and expenses | | 12,901 | 1,286 | (11,707) | 4,765 | 1,155 | 8,400 |
| Income (loss) before income taxes | | 2,061 | 2,621 | 4,878 | 1,546 | (2,359) | 8,747 |
| Income tax recovery (expense) | | (308) | (777) | (886) | (223) | 629 | (1,565) |
| Net income (loss) | | 1,753 | 1,844 | 3,992 | 1,323 | (1,730) | 7,182 |
| Less net income (loss) attributed to: |
| Non-controlling interests | | (4) | – | – | | | | | | 2 | 1 | (1) |
| Participating policyholders | | (467) | 314 | 42 | | | | | | – | – | (111) |
| Net income (loss) attributed to shareholders | | | | | | | | $ | 2,224 | $ | 1,530 | | | | | | $ | 3,950 | $ | 1,321 | $ (1,731) | | | | | $ | 7,294 |
| Total assets | | | | | | | | $ 158,036 | $ 155,049 | | | | | | $ 267,653 | $ 231,154 | $ 37,049 | | | | | $ 848,941 |
| | | | | | | | | | | | |
| | | | | | | 211 |
| | | | | Corporate |
| As at and for the year ended December 31, 2021 | Asia | Canada | U.S. | Global WAM | and Other | Total |
| RevenueLife and health insurance |
| | | | | | | $ | 20,428 | $ | 9,217 | | | | | | $ | 6,338 | $ | | | | | – | $ | 147 | | | | | $ | 36,130 |
| Annuities and pensions | 2,558 | 344 | 33 | | | | | | – | – | 2,935 |
| Net premium income | 22,986 | 9,561 | 6,371 | | | | | | – | 147 | 39,065 |
| Net investment income (loss) | 4,889 | 1,469 | 5,061 | | | | | | 28 | 177 | 11,624 |
| Other revenue | 1,696 | 1,336 | 1,824 | 6,513 | (237) | 11,132 |
| Total revenue | 29,571 | 12,366 | 13,256 | 6,541 | 87 | 61,821 |
| Contract benefits and expensesLife and health insurance |
| 18,240 | 10,276 | 9,307 | | | | | | – | 159 | 37,982 |
| Annuities and pensions | 2,638 | (3,371) | (1,528) | | | | | | 101 | – | (2,160) |
| Net benefits and claims | 20,878 | 6,905 | 7,779 | | | | | | 101 | 159 | 35,822 |
| Interest expense | 232 | 269 | 47 | | | | | | 1 | 462 | 1,011 |
| Other expenses | 5,273 | 3,401 | 2,947 | 4,798 | 444 | 16,863 |
| Total contract benefits and expenses | 26,383 | 10,575 | 10,773 | 4,900 | 1,065 | 53,696 |
| Income (loss) before income taxes | 3,188 | 1,791 | 2,483 | 1,641 | (978) | 8,125 |
| Income tax recovery (expense) | (445) | (336) | (385) | (233) | 186 | (1,213) |
| Net income (loss) | 2,743 | 1,455 | 2,098 | 1,408 | (792) | 6,912 |
| Less net income (loss) attributed to: |
| Non-controlling interests | 253 | – | – | | | | | | 2 | – | 255 |
| Participating policyholders | (567) | 101 | 18 | | | | | | – | – | (448) |
| Net income (loss) attributed to shareholders | | | | | | | $ | 3,057 | $ | 1,354 | | | | | | $ | 2,080 | $ | 1,406 | $ | (792) | | | | | $ | 7,105 |
| Total assets | | | | | | | $ 162,970 | $ 169,736 | | | | | | $ 290,838 | $ 259,363 | $ 34,736 | | | | | $ 917,643 |
| Geographical locationThe results of the Company’s reporting segments differ from its geographical location primarily due to the allocation of Global WAM andCorporate and Other segments into the geographical location to which its businesses relate. |
| The following table presents results by geographical location. |
| For the year ended December 31, 2022 | | | | | | | | Asia | Canada | | U.S. | Other | Total |
| RevenueLife and health insurance |
| | $ 18,786 | $ | 9,615 | $ | | | | | 6,580 | $ 502 | | | | | $ 35,483 |
| Annuities and pensions | | | | | | | | 2,786 | 447 | | (863) | | | | | – | 2,370 |
| Net premium income | | | | | | | | 21,572 | 10,062 | | | | | | 5,717 | 502 | 37,853 |
| Net investment income (loss) | | | | | | | | (8,468) | (8,435) | | | | | | (13,288) | 321 | (29,870) |
| Other revenue | | | | | | | | 2,702 | 3,246 | | | | | | 3,217 | (1) | 9,164 |
| Total revenue | | $ 15,806 | $ | 4,873 | $ (4,354) | $ 822 | | | | | $ 17,147 |
| For the year ended December 31, 2021 | | | | | | | | Asia | Canada | | U.S. | Other | Total |
| RevenueLife and health insurance |
| | $ 20,515 | $ | 8,905 | $ | | | | | 6,340 | $ 370 | | | | | $ 36,130 |
| Annuities and pensions | | | | | | | | 2,558 | 344 | | 33 | | | | | – | 2,935 |
| Net premium income | | | | | | | | 23,073 | 9,249 | | | | | | 6,373 | 370 | 39,065 |
| Net investment income (loss) | | | | | | | | 5,313 | 1,255 | | | | | | 4,830 | 226 | 11,624 |
| Other revenue | | | | | | | | 2,818 | 3,363 | | | | | | 4,952 | (1) | 11,132 |
| Total revenue | | $ 31,204 | $ 13,867 | $ 16,155 | $ 595 | | | | | $ 61,821 |
| Note 21 | | | | | | | | | | | Related Parties |
| The Company enters into transactions with related parties in the normal course of business and at the terms that would exist inarm’s-length transactions. |
| (a) Transactions with certain related partiesTransactions with MFLP, a wholly owned unconsolidated partnership, are described in notes 11, 18 and 19. |
| 212 | 2022 Annual Report | Notes to Consolidated Financial Statements |
| (b) Compensation of key management personnelThe Company’s key management personnel are those personnel who have the authority and responsibility for planning, directing andcontrolling the activities of the Company. Directors (both executive and non-executive) and senior management are considered keymanagement personnel. A summary of compensation of key management personnel is as follows. |
| For the years ended December 31, | 2022 | 2021 |
| Short-term employee benefits | $ | 73 | $ | 65 |
| Post-employment benefits | 6 | 5 |
| Share-based payments | 73 | 57 |
| Termination benefits | – | – |
| Other long-term benefits | 3 | 2 |
| Total | $ | 155 | $ 129 |
| Note 22 | | | Subsidiaries |
| The following is a list of Manulife’s directly and indirectly held major operating subsidiaries. |
| As at December 31, 2022(100% owned unless otherwise noted in brackets beside company name) | | | | Equity |
| | | | Interest | Address | Description |
| The Manufacturers Life Insurance Company | | | | $ 65,848 | Toronto, Canada | Leading Canadian-based financial servicescompany that offers a diverse range of financialprotection products and wealth managementservices |
| Manulife Holdings (Alberta) Limited | | | | $ 21,640 | Calgary, Canada | Holding company |
| John Hancock Financial Corporation | | | | | Boston, U.S.A. | Holding company |
| The Manufacturers Investment Corporation | | | | | Boston, U.S.A. | Holding company |
| | | | | | | John Hancock Reassurance Company Ltd. | Boston, U.S.A. | Captive insurance subsidiary that provides life,annuity and long-term care reinsurance toaffiliates |
| | | | | | | John Hancock Life Insurance Company (U.S.A.) | Boston, U.S.A. | U.S. life insurance company licensed in allstates, except New York |
| | | | | | | John Hancock Subsidiaries LLC | Boston, U.S.A. | Holding company |
| | | John Hancock Financial Network, Inc. | | Boston, U.S.A. | Financial services distribution organization |
| | | John Hancock Investment Management LLC | | Boston, U.S.A. | Investment advisor |
| | | John Hancock Investment Management | | Boston, U.S.A. | Broker-dealer |
| | | Distributors LLC |
| | | Manulife Investment Management (US) LLC | | Boston, U.S.A. | Investment advisor |
| | | Manulife Investment Management Timberland and | | Boston, U.S.A. | Manager of globally diversified timberland andagricultural portfolios |
| | | Agriculture Inc. |
| | | | | | | John Hancock Life Insurance Company of New York | New York, U.S.A. | U.S. life insurance company licensed inNew York |
| | | | | | | John Hancock Variable Trust Advisers LLC | Boston, U.S.A. | Investment advisor for open-end mutual funds |
| | | | | | | John Hancock Life & Health Insurance Company | Boston, U.S.A. | U.S. life insurance company licensed in all states |
| | | | | | | John Hancock Distributors LLC | Boston, U.S.A. | Broker-dealer |
| | | | | | | John Hancock Insurance Agency, Inc. | Boston, U.S.A. | Insurance agency |
| | | | | | | Manulife Reinsurance Limited | Hamilton, Bermuda | Provides life and financial reinsurance toaffiliates |
| | | | | | | Manulife Reinsurance (Bermuda) Limited | Hamilton, Bermuda | Provides life and annuity reinsurance to affiliates |
| Manulife Bank of Canada | | | | $ 1,788 | Waterloo, Canada | Provides integrated banking products and serviceoptions not available from an insurance company |
| Manulife Investment Management Holdings (Canada) Inc. | | | | $ 1,179 | Toronto, Canada | Holding company |
| | | | | | | Manulife Investment Management Limited | Toronto, Canada | Provides investment counseling, portfolio andmutual fund management in Canada |
| First North American Insurance Company | | | | $ 7 | Toronto, Canada | Property and casualty insurance company |
| Manulife Securities Investment Services Inc. | | | | $ 80 | Oakville, Canada | Mutual fund dealer for Canadian operations |
| Manulife Holdings (Bermuda) Limited | | | | $ 22,841 | Hamilton, Bermuda | Holding company |
| | | | | | | | | |
| | | | | | | Manufacturers P&C Limited | St. Michael, Barbados | Provides property and casualty reinsurance |
| | | | | | | Manulife Financial Asia Limited | Hong Kong, China | Holding company |
| | 213 |
| As at December 31, 2022(100% owned unless otherwise noted in brackets beside company name) | Equity |
| Interest | Address | Description |
| | | | Manulife (Cambodia) PLC | Phnom Penh, Cambodia | Life insurance company |
| | | | Manulife Myanmar Life Insurance Company Limited | Yangon, Myanmar | Life insurance company |
| | | | Manufacturers Life Reinsurance Limited | St. Michael, Barbados | Provides life and annuity reinsurance to affiliates |
| | | | Manulife (Vietnam) Limited | Ho Chi Minh City, Vietnam | Life insurance company |
| | | | Manulife Investment Fund Management (Vietnam) | Ho Chi Minh City, Vietnam | Fund management company |
| | | | Company Limited |
| | | | Manulife International Holdings Limited | Hong Kong, China | Holding company |
| | | | Manulife (International) Limited | Hong Kong, China | Life insurance company |
| | | | Manulife-Sinochem Life Insurance Co. Ltd. (51%) | Shanghai, China | Life insurance company |
| | | | Manulife Investment Management International | Hong Kong, China | Holding company |
| | | | Holdings Limited |
| | | | Manulife Investment Management (Hong Kong) | Hong Kong, China | Investment management and advisory companymarketing mutual funds |
| | | | | | Limited |
| | | | | | Manulife Investment Management (Taiwan) | Taipei, Taiwan (China) | Investment management company |
| | | | | | Co., Ltd. |
| | | | Manulife Life Insurance Company (Japan) | Tokyo, Japan | Life insurance company |
| | | | Manulife Investment Management (Japan) Limited | Tokyo, Japan | Investment management and advisory companyand mutual fund business |
| | | | Manulife Holdings Berhad (61.6%) | Kuala Lumpur, Malaysia | Holding company |
| | | | Manulife Insurance Berhad (61.6%) | Kuala Lumpur, Malaysia | Life insurance company |
| | | | Manulife Investment Management (Malaysia) Berhad | Kuala Lumpur, Malaysia | Asset management company |
| | | | (61.6%) |
| | | | Manulife (Singapore) Pte. Ltd. | Singapore | Life insurance company |
| | | | Manulife Investment Management (Singapore) Pte. Ltd. | Singapore | Asset management company |
| | | | The Manufacturers Life Insurance Co. (Phils.), Inc. | Makati City, Philippines | Life insurance company |
| | | | Manulife Chinabank Life Assurance Corporation | Makati City, Philippines | Life insurance company |
| | | | (60%) |
| | | | PT Asuransi Jiwa Manulife Indonesia | Jakarta, Indonesia | Life insurance company |
| | | | PT Manulife Aset Manajemen Indonesia | Jakarta, Indonesia | Investment management and investment advisor |
| | | | Manulife TEDA Fund Management Co., Ltd | Beijing, China | Mutual fund company in China |
| Manulife Investment Management (Europe) Limited | $ 34 | London, England | Investment management company for ManulifeFinancial’s international funds |
| Manulife Assurance Company of Canada | $ 64 | Toronto, Canada | Life insurance company |
| EIS Services (Bermuda) Limited | $ 902 | | | | Hamilton, Bermuda | Investment holding company |
| Berkshire Insurance Services Inc. | $ 1,868 | Toronto, Canada | Investment holding company |
| | | | JH Investments (Delaware) LLC | Boston, U.S.A. | Investment holding company |
| Manulife Securities Incorporated | $ 151 | Oakville, Canada | Investment dealer |
| Manulife Investment Management (North America) Limited | $ 4 | Toronto, Canada | Investment advisor |
| 214 | 2022 Annual Report | Notes to Consolidated Financial Statements |
| Note 23 | Segregated Funds |
| The Company manages a number of segregated funds on behalf of policyholders. Policyholders are provided with the opportunity to investin different categories of segregated funds that respectively hold a range of underlying investments. The Company retains legal title to theunderlying investments; however, returns from these investments belong to the policyholders. Accordingly, the Company does not bear therisk associated with these assets outside of guarantees offered on certain variable life and annuity products. The “Risk Management andRisk Factors” section of the Company’s 2022 MD&A provides information regarding the variable annuity and segregated fund guarantees. |
| The composition of net assets by categories of segregated funds was within the following ranges for the years ended December 31, 2022and 2021. |
| | Ranges in per cent |
| Type of fund | | 2022 | 2021 |
| Money market funds | | 2% to 3% | 2% to 3% |
| Fixed income funds | | | | 13% to 14% | 14% to 15% |
| Balanced funds | | | | 22% to 23% | 22% to 23% |
| Equity funds | | | | 61% to 62% | 60% to 62% |
| Money market funds consist of investments that have a term to maturity of less than one year. Fixed income funds primarily consist ofinvestments in fixed grade income securities and may contain smaller investments in diversified equities or high-yield bonds. Relative tofixed income funds, balanced funds consist of fixed income securities and a larger equity investment component. The types of equity fundsavailable to policyholders range from low volatility equity funds to aggressive equity funds. Equity funds invest in a varying mix of Canadian,U.S. and global equities. |
| The underlying investments of the segregated funds consist of both individual securities and mutual funds (collectively “net assets”), someof which may be structured entities. The carrying value and change in segregated funds net assets are as follows. Fair value relatedinformation of segregated funds is disclosed in note 4(g). |
| Segregated funds net assets |
| As at December 31, | | 2022 | 2021 |
| Investments at market value |
| Cash and short-term securities | | $ | 4,280 | | | $ | 3,955 |
| Debt securities | | 15,270 | 18,651 |
| Equities | | 15,499 | 16,844 |
| Mutual funds | | 308,707 | 354,882 |
| Other investments | | 4,293 | 4,613 |
| Accrued investment income | | 1,680 | 2,340 |
| Other assets and liabilities, net | | (796) | (1,089) |
| Total segregated funds net assets | | $ 348,933 | | | $ 400,196 |
| Composition of segregated funds net assetsHeld by policyholders |
| | $ 348,562 | | | $ 399,788 |
| Held by the Company | | 371 | 408 |
| Total segregated funds net assets | | $ 348,933 | | | $ 400,196 |
| Changes in segregated funds net assets |
| For the years ended December 31, | | 2022 | 2021 |
| Net policyholder cash flowsDeposits from policyholders |
| | $ | 42,427 | | | $ | 44,548 |
| Net transfers to general fund | | (1,267) | (732) |
| Payments to policyholders | | (46,333) | (52,182) |
| | (5,173) | (8,366) |
| Investment relatedInterest and dividends |
| | 21,900 | 24,092 |
| Net realized and unrealized investment gains (losses) | | (78,017) | 21,549 |
| | (56,117) | 45,641 |
| OtherManagement and administration fees |
| | (3,886) | (4,115) |
| Impact of changes in foreign exchange rates | | 13,913 | (773) |
| | 10,027 | (4,888) |
| | | | | | |
| Net additions (deductions) | | (51,263) | 32,387 |
| Segregated funds net assets, beginning of year | | 400,196 | 367,809 |
| Segregated funds net assets, end of year | | $ 348,933 | | | $ 400,196 |
| | | 215 |
| Segregated funds assets may be exposed to a variety of financial and other risks. These risks are primarily mitigated by investmentguidelines that are actively monitored by professional and experienced portfolio advisors. The Company is not exposed to these risksbeyond the liabilities related to the guarantees associated with certain variable life and annuity products included in segregated funds.Accordingly, the Company’s exposure to loss from segregated fund products is limited to the value of these guarantees. |
| These guarantees are recorded within the Company’s insurance contract liabilities. Assets supporting these guarantees are recognized ininvested assets according to their investment type. |
| Note 24 | Information Provided in Connection with Investments in Deferred Annuity Contracts and |
| SignatureNotes Issued or Assumed by John Hancock Life Insurance Company (U.S.A.) |
| The following condensed consolidated financial information, presented in accordance with IFRS, and the related disclosure have beenincluded in these Consolidated Financial Statements with respect to JHUSA in compliance with Regulation S-X and Rule 12h-5 of the UnitedStates Securities and Exchange Commission (the “Commission”). These financial statements are incorporated by reference in certain ofthe MFC and its subsidiaries registration statements that are described below and relate to MFC’s guarantee of certain securities to beissued by its subsidiaries. |
| JHUSA maintains a book of deferred annuity contracts that feature a market value adjustment, some of which are registered with theCommission. The deferred annuity contracts may contain variable investment options along with fixed investment period options, or mayoffer only fixed investment period options. The fixed investment period options enable the participant to invest fixed amounts of money forfixed terms at fixed interest rates, subject to a market value adjustment if the participant desires to terminate a fixed investment periodbefore its maturity date. The annuity contract provides for the market value adjustment to keep the parties whole with respect to the fixedinterest bargain for the entire fixed investment period. These fixed investment period options that contain a market value adjustmentfeature are referred to as “MVAs”. |
| JHUSA has sold medium-term notes to retail investors under its SignatureNotes program. |
| Effective December 31, 2009, John Hancock Variable Life Insurance Company (the “Variable Company”) and John Hancock Life InsuranceCompany (the “Life Company”) merged with and into JHUSA. In connection with the mergers, JHUSA assumed the Variable Company’srights and obligations with respect to the MVAs issued by the Variable Company and the Life Company’s rights and obligations with respectto the SignatureNotes issued by the Life Company. |
| MFC fully and unconditionally guaranteed the payment of JHUSA’s obligations under the MVAs and under the SignatureNotes (includingthe MVAs and SignatureNotes assumed by JHUSA in the merger), and such MVAs and the SignatureNotes were registered with theCommission. The SignatureNotes and MVAs assumed or issued by JHUSA are collectively referred to in this note as the “GuaranteedSecurities”. JHUSA is, and each of the Variable Company and the Life Company was, a wholly owned subsidiary of MFC. |
| MFC’s guarantees of the Guaranteed Securities are unsecured obligations of MFC and are subordinated in right of payment to the priorpayment in full of all other obligations of MFC, except for other guarantees or obligations of MFC which by their terms are designated asranking equally in right of payment with or subordinate to MFC’s guarantees of the Guaranteed Securities. |
| The laws of the State of New York govern MFC’s guarantees of the SignatureNotes issued or assumed by JHUSA and the laws of theCommonwealth of Massachusetts govern MFC’s guarantees of the MVAs issued or assumed by JHUSA. MFC has consented to thejurisdiction of the courts of New York and Massachusetts. However, because a substantial portion of MFC’s assets are located outside theUnited States, the assets of MFC located in the United States may not be sufficient to satisfy a judgment given by a federal or state court inthe United States to enforce the subordinate guarantees. In general, the federal laws of Canada and the laws of the Province of Ontario,where MFC’s principal executive offices are located, permit an action to be brought in Ontario to enforce such a judgment provided thatsuch judgment is subsisting and unsatisfied for a fixed sum of money and not void or voidable in the United States and a Canadian courtwill render a judgment against MFC in a certain dollar amount, expressed in Canadian dollars, subject to customary qualificationsregarding fraud, violations of public policy, laws limiting the enforcement of creditor’s rights and applicable statutes of limitations onjudgments. There is currently no public policy in effect in the Province of Ontario that would support avoiding the recognition andenforcement in Ontario of a judgment of a New York or Massachusetts court on MFC’s guarantees of the SignatureNotes issued orassumed by JHUSA or a Massachusetts court on guarantees of the MVAs issued or assumed by JHUSA. |
| MFC is a holding company. MFC’s assets primarily consist of investments in its subsidiaries. MFC’s cash flows primarily consist of dividendsand interest payments from its operating subsidiaries, offset by expenses and shareholder dividends and MFC stock repurchases. As aholding company, MFC’s ability to meet its cash requirements, including, but not limited to, paying any amounts due under its guarantees,substantially depends upon dividends from its operating subsidiaries. |
| These subsidiaries are subject to certain regulatory restrictions under laws in Canada, the United States and certain other countries, whichmay limit their ability to pay dividends or make contributions or loans to MFC. For example, some of MFC’s subsidiaries are subject torestrictions prescribed by the ICA on their ability to declare and pay dividends. The restrictions related to dividends imposed by the ICA aredescribed in note 13. |
| 216 | 2022 Annual Report | Notes to Consolidated Financial Statements |
| In the United States, insurance laws in Michigan, New York, and Massachusetts, the jurisdictions in which certain of MFC’s U.S. insurancecompany subsidiaries are domiciled, impose general limitations on the payment of dividends and other upstream distributions or loans bythese insurance subsidiaries. These limitations are described in note 13. |
| In Asia, the insurance laws of the jurisdictions in which MFC operates either provide for specific restrictions on the payment of dividends orother distributions or loans by subsidiaries or impose solvency or other financial tests, which could affect the ability of subsidiaries to paydividends in certain circumstances. |
| There can be no assurance that any current or future regulatory restrictions in Canada, the United States or Asia will not impair MFC’sability to meet its cash requirements, including, but not limited to, paying any amounts due under its guarantees. |
| The following condensed consolidated financial information, presented in accordance with IFRS, reflects the effects of the mergers and isprovided in compliance with Regulation S-X and in accordance with Rule 12h-5 of the Commission. |
| Condensed Consolidated Statement of Financial Position |
| MFC | | JHUSA | Other | Consolidation | Consolidated |
| As at December 31, 2022 | | (Guarantor) | (Issuer) | subsidiaries | adjustments | | MFC |
| AssetsInvested assets |
| | $ | 63 | | $ 116,463 | | | | | $ 297,996 | $ | | | | (521) | $ 414,001 |
| Investments in unconsolidated subsidiaries | 67,209 | | 8,819 | 22,053 | (98,081) | | – |
| Reinsurance assets | – | | 61,511 | 12,137 | (25,936) | 47,712 |
| Other assets | 334 | | 9,456 | 48,135 | (19,259) | 38,666 |
| Segregated funds net assets | – | | 173,417 | 177,361 | (2,216) | 348,562 |
| Total assets | | $ 67,606 | $ 369,666 | | | | | $ 557,682 | $ (146,013) | $ 848,941 |
| Liabilities and equityInsurance contract liabilities |
| | $ | – | | $ 156,205 | | | | | $ 241,830 | $ | (26,630) | $ 371,405 |
| Investment contract liabilities | – | | 1,418 | 1,830 | | – | 3,248 |
| Other liabilities | 451 | | 20,159 | 55,304 | (18,923) | 56,991 |
| Long-term debt | 6,234 | | – | – | | – | 6,234 |
| Capital instruments | 4,860 | | 614 | 648 | | – | 6,122 |
| Segregated funds net liabilities | – | | 173,417 | 177,361 | (2,216) | 348,562 |
| Shareholders’ and other equity holders’ equity | 56,061 | | 17,853 | 80,391 | (98,244) | 56,061 |
| Participating policyholders’ equity | – | | – | (1,346) | | – | (1,346) |
| Non-controlling interests | – | | – | 1,664 | | – | 1,664 |
| Total liabilities and equity | | $ 67,606 | $ 369,666 | | | | | $ 557,682 | $ (146,013) | $ 848,941 |
| Condensed Consolidated Statement of Financial Position |
| MFC | | JHUSA | Other | Consolidation | Consolidated |
| As at December 31, 2021 | | (Guarantor) | (Issuer) | subsidiaries | adjustments | | MFC |
| AssetsInvested assets |
| | $ | 78 | | $ 116,705 | | | | | $ 310,679 | $ | | | | (364) | $ 427,098 |
| Investments in unconsolidated subsidiaries | 68,655 | | 9,107 | 20,788 | (98,550) | | – |
| Reinsurance assets | – | | 63,838 | 11,309 | (30,568) | 44,579 |
| Other assets | 211 | | 18,085 | 49,956 | (22,074) | 46,178 |
| Segregated funds net assets | – | | 204,493 | 197,220 | (1,925) | 399,788 |
| Total assets | | $ 68,944 | $ 412,228 | | | | | $ 589,952 | $ (153,481) | $ 917,643 |
| Liabilities and equityInsurance contract liabilities |
| | $ | – | | $ 166,535 | | | | | $ 257,044 | $ | (31,304) | $ 392,275 |
| Investment contract liabilities | – | | 1,227 | 1,890 | | – | 3,117 |
| Other liabilities | 899 | | 21,806 | 50,836 | (21,809) | 51,732 |
| Long-term debt | 4,882 | | – | – | | – | 4,882 |
| Capital instruments | 4,755 | | 579 | 1,646 | | – | 6,980 |
| Segregated funds net liabilities | – | | 204,493 | 197,220 | (1,925) | 399,788 |
| Shareholders’ and other equity holders’ equity | 58,408 | | 17,588 | 80,855 | (98,443) | 58,408 |
| Participating policyholders’ equity | – | | – | (1,233) | | – | (1,233) |
| Non-controlling interests | – | | – | 1,694 | | – | 1,694 |
| Total liabilities and equity | | $ 68,944 | $ 412,228 | | | | | $ 589,952 | $ (153,481) | $ 917,643 |
| | | | | | | | | | |
| | | | | | | 217 |
| Condensed Consolidated Statement of Income |
| MFC | | JHUSA | Other | Consolidation | Consolidated |
| For the year ended December 31, 2022 | | (Guarantor) | (Issuer) | subsidiaries | adjustments | | MFC |
| RevenueGross premiums |
| $ | – | | $ | 7,924 | $ 37,041 | $ | | | (863) | $ 44,102 |
| Premiums ceded to reinsurers | – | | (2,561) | (4,662) | | | | 974 | (6,249) |
| Net premium income | – | | 5,363 | 32,379 | | | | 111 | 37,853 |
| Net investment income (loss) | 554 | | (9,714) | (19,446) | (1,264) | (29,870) |
| Other revenue | (36) | | 281 | 7,871 | 1,048 | 9,164 |
| Total revenue | 518 | | (4,070) | 20,804 | | | | (105) | 17,147 |
| Contract benefits and expensesNet benefits and claims |
| – | | (8,505) | (1,572) | | | | 778 | (9,299) |
| Commissions, investment and general expenses | 42 | | 3,099 | 13,798 | (1,034) | 15,905 |
| Other expenses | 440 | | 264 | 939 | | | | 151 | 1,794 |
| Total contract benefits and expenses | 482 | | (5,142) | 13,165 | | | | (105) | 8,400 |
| Income (loss) before income taxes | 36 | | 1,072 | 7,639 | | – | 8,747 |
| Income tax (expense) recovery | 32 | | (23) | (1,574) | | – | (1,565) |
| Income (loss) after income taxes | 68 | | 1,049 | 6,065 | | – | 7,182 |
| Equity in net income (loss) of unconsolidated subsidiaries | 7,226 | | 997 | 2,046 | (10,269) | | – |
| Net income (loss) | $ 7,294 | | $ | 2,046 | $ | 8,111 | $ (10,269) | $ | 7,182 |
| Net income (loss) attributed to: |
| Non-controlling interests | $ | – | | $ | – | $ | (1) | $ | – | $ | (1) |
| Participating policyholders | – | | (236) | 125 | | – | (111) |
| Shareholders and other equity holders | 7,294 | | 2,282 | 7,987 | (10,269) | 7,294 |
| $ 7,294 | | $ | 2,046 | $ | 8,111 | $ (10,269) | $ | 7,182 |
| Condensed Consolidated Statement of Income |
| MFC | | JHUSA | Other | Consolidation | Consolidated |
| For the year ended December 31, 2021 | | (Guarantor) | (Issuer) | subsidiaries | adjustments | | MFC |
| Revenue |
| Gross premiums | $ | – | | $ | 7,782 | $ 37,563 | $ (1,001) | $ 44,344 |
| Premiums ceded to reinsurers | – | | (3,243) | (3,031) | | | | 995 | (5,279) |
| Net premium income | – | | 4,539 | 34,532 | | (6) | 39,065 |
| Net investment income (loss) | 530 | | 3,779 | 8,440 | (1,125) | 11,624 |
| Other revenue | 33 | | 2,042 | 9,605 | | | | (548) | 11,132 |
| Total revenue | 563 | | 10,360 | 52,577 | (1,679) | 61,821 |
| Contract benefits and expensesNet benefits and claims |
| – | | 6,478 | 28,467 | | | | 877 | 35,822 |
| Commissions, investment and general expenses | 12 | | 3,451 | 14,419 | (1,436) | 16,446 |
| Other expenses | 390 | | 212 | 1,946 | (1,120) | 1,428 |
| Total contract benefits and expenses | 402 | | 10,141 | 44,832 | (1,679) | 53,696 |
| Income (loss) before income taxes | 161 | | 219 | 7,745 | | – | 8,125 |
| Income tax (expense) recovery | (28) | | 115 | (1,300) | | – | (1,213) |
| Income (loss) after income taxes | 133 | | 334 | 6,445 | | – | 6,912 |
| Equity in net income (loss) of unconsolidated subsidiaries | 6,972 | | 1,218 | 1,552 | (9,742) | | – |
| Net income (loss) | $ 7,105 | | $ | 1,552 | $ | 7,997 | $ (9,742) | $ | 6,912 |
| Net income (loss) attributed to: |
| Non-controlling interests | $ | – | | $ | – | $ | 255 | $ | – | $ | 255 |
| Participating policyholders | – | | (4) | (448) | | 4 | (448) |
| Shareholders | 7,105 | | 1,556 | 8,190 | (9,746) | 7,105 |
| $ 7,105 | | $ | 1,552 | $ | 7,997 | $ (9,742) | $ | 6,912 |
| 218 | 2022 Annual Report | Notes to Consolidated Financial Statements |
| Consolidated Statement of Cash Flows |
| MFC | JHUSA | Other | Consolidation | Consolidated |
| For the year ended December 31, 2022 | (Guarantor) | (Issuer) | subsidiaries | adjustments | | MFC |
| Operating activitiesNet income (loss) |
| $ 7,294 | $ 2,046 | $ 8,111 | $(10,269) | $ 7,182 |
| Adjustments: |
| Equity in net income of unconsolidated subsidiaries | (7,226) | (997) | (2,046) | 10,269 | | – |
| Increase (decrease) in insurance contract liabilities | – | (20,032) | (13,381) | | – | (33,413) |
| Increase (decrease) in investment contract liabilities | – | 44 | (3) | | – | 41 |
| (Increase) decrease in reinsurance assets excluding coinsurance |
| | | | | | | transactions | – | 6,869 | (6,710) | | – | 159 |
| Amortization of (premium) discount on invested assets | – | 46 | (78) | | – | (32) |
| Other amortization | 9 | 125 | 404 | | – | 538 |
| Net realized and unrealized (gains) losses and impairment on assets | (36) | 15,150 | 32,156 | | – | 47,270 |
| Gain on U.S. variable annuity reinsurance transaction (pre-tax) | – | (1,026) | (44) | | – | (1,070) |
| Gain on derecognition of Joint Venture interest during Manulife TEDA |
| | | | | | | acquisition (pre-tax) | – | – | (95) | | – | (95) |
| Deferred income tax expense (recovery) | (33) | 294 | 470 | | – | 731 |
| Stock option expense | – | (3) | 8 | | – | 5 |
| Cash provided by (used in) operating activities before undernoted items | 8 | 2,516 | 18,792 | | – | 21,316 |
| Dividends from unconsolidated subsidiary | 6,200 | 399 | 734 | (7,333) | | – |
| Cash decrease due to U.S. variable annuity reinsurance transaction | – | (1,263) | (114) | | – | (1,377) |
| Changes in policy related and operating receivables and payables | 45 | 2,805 | (5,054) | | – | (2,204) |
| Cash provided by (used in) operating activities | 6,253 | 4,457 | 14,358 | (7,333) | 17,735 |
| Investing activitiesPurchases and mortgage advances |
| – | (28,798) | (82,970) | | – | (111,768) |
| Disposals and repayments | 1 | 23,505 | 69,901 | | – | 93,407 |
| Changes in investment broker net receivables and payables | – | (11) | (56) | | – | (67) |
| Net cash increase (decrease) from sale (purchase) of subsidiary | – | – | (182) | | – | (182) |
| Investment in common shares of subsidiaries | (2,479) | – | – | 2,479 | | – |
| Capital contribution to unconsolidated subsidiaries | – | (1) | – | | 1 | – |
| Return of capital from unconsolidated subsidiaries | – | 19 | – | | | | | (19) | – |
| Notes receivable from parent | – | – | 415 | | | | | (415) | – |
| Notes receivable from subsidiaries | 46 | (7) | – | | | | | (39) | – |
| Cash provided by (used in) investing activities | (2,432) | (5,293) | (12,892) | 2,007 | (18,610) |
| Financing activitiesIssue of long-term debt, net |
| 946 | – | – | | – | 946 |
| Redemption of capital instruments | – | – | (1,000) | | – | (1,000) |
| Secured borrowings | – | – | 437 | | – | 437 |
| Change in repurchase agreements and securities sold but not yet purchased | – | – | (551) | | – | (551) |
| Changes in deposits from Bank clients, net | – | – | 1,703 | | – | 1,703 |
| Lease payments | – | (5) | (115) | | – | (120) |
| Shareholders’ dividends and other equity distributions | (2,787) | – | – | | – | (2,787) |
| Common shares repurchased | (1,884) | – | – | | – | (1,884) |
| Common shares issued, net | 23 | – | 2,479 | (2,479) | | 23 |
| Preferred shares and other equity issued, net | 990 | – | – | | – | 990 |
| Preferred shares redeemed, net | (711) | – | – | | – | (711) |
| Contributions from (distributions to) non-controlling interests, net | – | – | (51) | | – | (51) |
| Dividends paid to parent | – | (734) | (6,599) | 7,333 | | – |
| Capital contributions by parent | – | – | 1 | | (1) | – |
| Return of capital to parent | – | – | (19) | | | | | 19 | – |
| Notes payable to parent | – | – | (39) | | | | | 39 | – |
| Notes payable to subsidiaries | (415) | – | – | | | | | 415 | – |
| Cash provided by (used in) financing activities | (3,838) | (739) | (3,754) | 5,326 | (3,005) |
| Cash and short-term securitiesIncrease (decrease) during the year |
| (17) | (1,575) | (2,288) | | – | (3,880) |
| Effect of foreign exchange rate changes on cash and short-term securities | 2 | 225 | 358 | | – | 585 |
| Balance, beginning of year | 78 | 3,565 | 18,287 | | – | 21,930 |
| Balance, end of year | 63 | 2,215 | 16,357 | | – | 18,635 |
| Cash and short-term securitiesBeginning of yearGross cash and short-term securities |
| 78 | 4,087 | 18,429 | | – | 22,594 |
| Net payments in transit, included in other liabilities | – | (522) | (142) | | – | (664) |
| Net cash and short-term securities, beginning of year | 78 | 3,565 | 18,287 | | – | 21,930 |
| End of yearGross cash and short-term securities |
| 63 | 2,614 | 16,476 | | – | 19,153 |
| Net payments in transit, included in other liabilities | – | (399) | (119) | | – | (518) |
| Net cash and short-term securities, end of year | $ | 63 | $ 2,215 | $ 16,357 | $ | – | $18,635 |
| Supplemental disclosures on cash flow information:Interest received | | | | | | | | | |
| $ | 512 | $ 4,050 | $ 8,732 | $ (1,161) | $12,133 |
| Interest paid | 424 | 118 | 1,867 | (1,161) | 1,248 |
| Income taxes paid | – | 124 | 1,114 | | – | 1,238 |
| | | | | | 219 |
| Consolidated Statement of Cash Flows |
| MFC | JHUSA | Other | Consolidation | Consolidated |
| For the year ended December 31, 2021 | (Guarantor) | (Issuer) | subsidiaries | adjustments | | MFC |
| Operating activitiesNet income (loss) |
| $ 7,105 | $ | 1,552 | | | | | $ | 7,997 | $ (9,742) | $ | 6,912 |
| Adjustments: |
| Equity in net income of unconsolidated subsidiaries | (6,972) | (1,218) | (1,552) | 9,742 | | – |
| Increase (decrease) in insurance contract liabilities | – | (562) | 11,281 | | – | 10,719 |
| Increase (decrease) in investment contract liabilities | – | 50 | (6) | | – | 44 |
| (Increase) decrease in reinsurance assets excluding coinsurance |
| | | | | | | | transactions | – | 1,544 | (790) | | – | 754 |
| Amortization of (premium) discount on invested assets | – | 57 | 124 | | – | 181 |
| Other amortization | 16 | 124 | 389 | | – | 529 |
| Net realized and unrealized (gains) losses and impairment on assets | 62 | 1,533 | 3,229 | | – | 4,824 |
| Deferred income tax expense (recovery) | 34 | 190 | (351) | | – | (127) |
| Stock option expense | – | (2) | 11 | | – | 9 |
| Cash provided by (used in) operating activities before undernoted items | 245 | 3,268 | 20,332 | | – | 23,845 |
| Dividends from unconsolidated subsidiary | 5,000 | 489 | 742 | (6,231) | | – |
| Changes in policy related and operating receivables and payables | (22) | 424 | (1,092) | | – | (690) |
| Cash provided by (used in) operating activities | 5,223 | 4,181 | 19,982 | (6,231) | 23,155 |
| Investing activitiesPurchases and mortgage advances |
| – | (31,746) | (89,219) | | – | (120,965) |
| Disposals and repayments | – | 27,194 | 69,534 | | – | 96,728 |
| Changes in investment broker net receivables and payables | – | (202) | 16 | | – | (186) |
| Investment in common shares of subsidiaries | (3,700) | – | – | 3,700 | | – |
| Net cash flows from acquisition and disposal of subsidiaries and businesses | – | – | (19) | | – | (19) |
| Capital contribution to unconsolidated subsidiaries | – | (1) | – | | 1 | – |
| Return of capital from unconsolidated subsidiaries | – | 1 | – | | (1) | – |
| Notes receivable from parent | – | – | (129) | | | | | | 129 | – |
| Notes receivable from subsidiaries | (13) | – | – | | | | | | 13 | – |
| Cash provided by (used in) investing activities | (3,713) | (4,754) | (19,817) | 3,842 | (24,442) |
| Financing activitiesRedemption of long-term debt |
| (1,250) | – | – | | – | (1,250) |
| Redemption of capital instruments | (468) | – | (350) | | – | (818) |
| Secured borrowings | – | – | 26 | | – | 26 |
| Change in repurchase agreements and securities sold but not yet purchased | – | – | 186 | | – | 186 |
| Changes in deposits from Bank clients, net | – | – | (164) | | – | (164) |
| Lease payments | – | (7) | (117) | | – | (124) |
| Shareholders’ dividends and other equity distributions | (2,500) | – | – | | – | (2,500) |
| Contributions from (distributions to) non-controlling interests, net | – | – | (13) | | – | (13) |
| Common shares issued, net | 51 | – | 3,700 | (3,700) | | 51 |
| Preferred shares and other equity issued, net | 3,171 | – | – | | – | 3,171 |
| Preferred shares redeemed, net | (612) | – | – | | – | (612) |
| Dividends paid to parent | – | (742) | (5,489) | 6,231 | | – |
| Capital contributions by parent | – | – | 1 | | (1) | – |
| Return of capital to parent | – | – | (1) | | 1 | – |
| Notes payable to parent | – | – | 13 | | | | | | (13) | – |
| Notes payable to subsidiaries | 129 | – | – | | | | | | (129) | – |
| Cash provided by (used in) financing activities | (1,479) | (749) | (2,208) | 2,389 | (2,047) |
| Cash and short-term securitiesIncrease (decrease) during the year |
| 31 | (1,322) | (2,043) | | – | (3,334) |
| Effect of foreign exchange rate changes on cash and short-term securities | – | (20) | (299) | | – | (319) |
| Balance, beginning of year | 47 | 4,907 | 20,629 | | – | 25,583 |
| Balance, end of year | 78 | 3,565 | 18,287 | | – | 21,930 |
| Cash and short-term securitiesBeginning of yearGross cash and short-term securities |
| 47 | 5,213 | 20,907 | | – | 26,167 |
| Net payments in transit, included in other liabilities | – | (306) | (278) | | – | (584) |
| Net cash and short-term securities, beginning of year | 47 | 4,907 | 20,629 | | – | 25,583 |
| End of yearGross cash and short-term securities |
| 78 | 4,087 | 18,429 | | – | 22,594 |
| Net payments in transit, included in other liabilities | – | (522) | (142) | | – | (664) |
| Net cash and short-term securities, end of year | $ | 78 | $ | 3,565 | | | | | $ 18,287 | $ | – | $ | 21,930 |
| Supplemental disclosures on cash flow information:Interest received |
| $ | 499 | $ | 4,112 | | | | | $ | 7,847 | $ (1,082) | $ | 11,376 |
| Interest paid | 396 | 73 | 1,594 | (1,082) | | 981 |
| Income taxes paid (refund) | – | (118) | 689 | | – | 571 |
| 220 | 2022 Annual Report | Notes to Consolidated Financial Statements |
| Note 25 | Significant accounting policies in accordance with IFRS 9 and IFRS 17 |
| As discussed in note 2 “Accounting and Reporting Changes”, the Company adopted IFRS 9 (“Financial Instruments”) and IFRS 17(“Insurance Contracts”) as a replacement of IAS 39 and IFRS 4 effective January 1, 2023. The Consolidated Financial Statements startingfrom January 1, 2023, and any required comparatives, will be prepared in accordance with the new standards. This note outlines theCompany’s accounting policies on invested assets, derivatives and hedging instruments that are in accordance with IFRS 9, as well as theaccounting policies on insurance contract liabilities and reinsurance contract assets that are in accordance with IFRS 17. Refer to note 2for adoption impacts of IFRS 9 and IFRS 17. |
| Invested assets |
| Invested assets are recognized initially at fair value plus, in the case of investments not at FVTPL, directly attributable transaction costs.Invested assets that are considered financial instruments are classified as fair value through other comprehensive income (“FVOCI”), fairvalue through profit or loss (“FVTPL”) or as amortized cost. The Company determines the classification of its financial assets at initialrecognition. |
| The classification of invested assets which are financial instruments depends on their contractual terms and the Company’s businessmodel for managing the assets. |
| The Company assesses the contractual terms of the assets to determine whether their contractual terms give rise on specified dates tocash flows that are solely payments of principal and interest (“SPPI”) on the principal amount outstanding. Only debt instruments may haveSPPI cash flows. The most significant elements of interest within a lending arrangement are typically the consideration for the time value ofmoney and credit risk. To make the SPPI assessment, the Company applies judgment and considers relevant factors such as prepaymentand redemption rights, conversion features, and subordination of the instrument to other instruments of the issuer. Contractual terms thatintroduce a more than de minimis exposure to risks of not collecting principal or interest would not meet the SPPI test. |
| Debt instruments which qualify as having SPPI cash flows are classified as amortized cost or FVOCI based on the business model underwhich they are held. If held within a business model whose objective is to hold the assets in order to collect contractual cash flows, they areclassified as amortized cost. If held within a business model whose objective is achieved by both collecting contractual cash flows andselling the assets, they are classified as FVOCI. In either case, the company may designate them as FVTPL in order to reduce accountingmismatches with FVTPL liabilities they support. Debt instruments which fail the SPPI test are required to be measured at FVTPL. To identifythe business model financial assets are held within, considerations include the business purpose of the portfolio holding them, the risksthat are being managed and the business activities which manage the risks, the basis on which performance of the portfolio is beingevaluated, and the frequency and significance of sales activity within the portfolio. |
| Realized and unrealized gains and losses on debt instruments classified as FVTPL and realized gains and losses on debt instruments heldat amortized cost and FVOCI are recognized in investment income immediately. Unrealized gains and losses on FVOCI debt securities arerecorded in OCI, except for unrealized gains and losses on foreign currency translation which are included in income. |
| Investments in equity which are financial instruments are not subject to the SPPI test and are accounted for as FVTPL unless the option todesignate them as FVOCI is taken. |
| Valuation methods for the Company’s invested assets are described above in note 1(c). All fair value valuations are performed inaccordance with IFRS 13 “Fair Value Measurement”. Disclosure of financial instruments carried at fair value within the three levels of thefair value hierarchy and disclosure of the fair value for financial instruments not carried at fair value on the Consolidated Statements ofFinancial Position are presented in note 4. Fair value valuations are performed by the Company and by third-party service providers. Whenthird-party service providers are engaged, the Company performs a variety of procedures to corroborate pricing information. Theseprocedures may include, but are not limited to, inquiry and review of valuation techniques, inputs to the valuation and vendor controlsreports. |
| Cash and short-term securities comprise of cash, current operating accounts, overnight bank and term deposits, and fixed incomesecurities held for meeting short-term cash commitments. Short-term securities are carried at fair value. Short-term securities arecomprised of investments due to mature within one year of the date of purchase. Commercial paper and discount notes are classified asLevel 2 because these securities are typically not actively traded. Net payments in transit and overdraft bank balances are included inother liabilities. |
| Debt securities are carried at fair value or amortized cost. Debt securities are generally valued by independent pricing vendors usingproprietary pricing models incorporating current market inputs for similar instruments with comparable terms and credit quality (matrixpricing). The significant inputs include, but are not limited to, yield curves, credit risks and spreads, prepayment rates and volatility ofthese inputs. These debt securities are classified as Level 2 but can be Level 3 if significant inputs are market unobservable. |
| Public equities are comprised of common and preferred equities and are carried at fair value. Public equities are generally classified asLevel 1, as fair values are normally based on quoted market prices. Realized and unrealized gains and losses on equities designated asFVTPL are recognized in investment income immediately. Unrealized gains and losses on equity securities designated as FVOCI are | | | |
| | 221 |
| recorded in OCI and are never reclassified to investment income. Upon sale of an FVOCI equity security, related AOCI is reclassified toretained earnings. The Company’s risk management policies and procedures related to equities can be found in the denoted componentsof the “Risk Management and Risk Factors” section of the MD&A. |
| Mortgages are classified as Level 3 for fair value purposes due to the lack of market observability of certain significant valuation inputs. |
| The Company accounts for insured and uninsured mortgage securitizations as secured financing transactions since the criteria for saleaccounting are not met. For these transactions, the Company continues to recognize the mortgages and records a liability in otherliabilities for the amounts owed at maturity. Interest income from these mortgages and interest expense on the borrowings are recordedusing the effective interest rate method. |
| Private placements, which include corporate loans for which there is no active market, are generally classified as Level 2 for fair valuedisclosure purposes or as Level 3 if significant inputs are market unobservable. |
| Loans to Manulife Bank of Canada (“Manulife Bank” or “Bank”) clients are carried at amortized cost and are classified as Level 2 for fairvalue disclosure purposes. |
| Interest income is recognized on debt securities, mortgages, private placements, policy loans and loans to Bank clients as it accrues and iscalculated using the effective interest rate (“EIR”) method. Premiums, discounts, and transaction costs are amortized over the life of theunderlying investment using the effective yield method for all debt securities as well as mortgages and private placements. |
| The Company records purchases and sales of invested assets on a trade date basis. Loans originated by the Company are recognized on asettlement date basis. |
| Real estate consists of both own use and investment property. Own use property is carried at cost less accumulated depreciation and anyaccumulated impairment losses, or at revalued amount which is the fair value as at the most recent revaluation date minus accumulatedamortization and any accumulated impairment losses. Depreciation is calculated based on the cost of an asset less its residual value andis recognized in income on a straight-line basis over the estimated useful life ranging from 30 to 60 years. Impairment losses are recordedin income to the extent the recoverable amount is less than the carrying amount. Own use property is classified as Level 3 for fair valuedisclosure purposes. Own use real estate properties which are underlying items for insurance contracts with direct participating featuresare measured at fair value as if they were investment properties, as permitted by IFRS 17. |
| An investment property is a property held to earn rental income, for capital appreciation, or both. Investment properties are measured atfair value, with changes in fair value recognized in income. Fair value of own use properties and investment properties is determined usingthe same processes. Fair value for properties is determined using external appraisals that are based on the highest and best use of theproperty. The valuation techniques include discounted cash flows, the direct capitalization method as well as comparable sales analysisand include both observable and unobservable inputs. Inputs include existing and assumed tenancies, market data from recentcomparable 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 valueat the date of transfer is recognized in OCI, to the extent that it is not reversing a previous impairment loss. Reversals of impairment lossesare recognized in income. When a property changes from investment property to own use, the property’s deemed cost for subsequentaccounting is its fair value as at the date of change in use. |
| Other invested assets include private equity investments and property investments held in infrastructure and timber, as well as inagriculture 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 and carried at fair value. Timber and agriculture properties are measured at fairvalue with changes in fair value recognized in income, except for buildings, equipment and bearer plants which are measured at amortizedcost. The fair value of other invested assets is determined using a variety of valuation techniques as described in note 4. Other investedassets 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 valueunder the equity method reflects the amortized cost of the lease receivable and related non-recourse debt using the effective yield method. |
| Expected Credit Loss Impairment |
| The expected credit loss (“ECL”) impairment allowance model applies to invested assets which are debt instruments and measured atFVOCI or amortized cost. ECL allowances are measured under four probability-weighted macroeconomic scenarios, which measure thedifference between all contractual cash flows that are due to the Company in accordance with the contract and all the cash flows that theCompany expects to receive, discounted at the original EIR. This process includes consideration of past events, current market conditionsand reasonable supportable information about future economic conditions. Forward-looking macroeconomic variables used within theestimation models represent variables that are the most closely related with credit losses in the relevant portfolio. |
| The estimation and measurement of impairment losses requires significant judgment. These estimates are driven by many elements,changes in which can result in different levels of allowances. Elements include the estimation of the amount and timing of future cashflows, the Company’s criteria for assessing if there has been a significant increase in credit risk (“SICR”), the selection of forward-looking |
| 222 | 2022 Annual Report | Notes to Consolidated Financial Statements |
| macroeconomic scenarios and their probability weights, the application of expert credit judgment in the development of the models, inputsand, when applicable, overlay adjustments. It is the Company’s process to regularly review its models in the context of actual lossexperience and adjust when necessary. The Company has implemented formal policies, procedures, and controls over all significantimpairment processes. |
| The Company’s definitions of default and credit-impaired are based on quantitative and qualitative factors. A financial instrument isconsidered to be in default when significant payments of interest, principal or fees are past due for more than 90 days, unless remedialarrangements with the issuer are in place. A financial instrument may be credit impaired as a result of one or more loss events thatoccurred after the date of initial recognition of the instrument and the loss event has a negative impact on the estimated future cash flowsof the instrument. This includes events that indicate or include: significant financial difficulty of the counterparty; a breach of contract; foreconomic or contractual reasons relating to the counterparty’s financial difficulty, concessions are granted that would not otherwise beconsidered; it is becoming probable that the counterparty will enter bankruptcy or other financial reorganization; the disappearance of anactive market for that financial asset because of the counterparty’s financial difficulties; or the counterparty is considered to be in defaultby any of the major rating agencies such as S&P, Moody’s and Fitch. |
| The ECL calculations include the following elements: |
| • Probability of default (“PD”), is an estimate of the likelihood of default over a given time horizon.• Loss given default (“LGD”), is an estimate of the loss arising on a future default. This is based on the difference between the contractual |
| cash flows due and those that the Company expects to receive, including from collateral. It is based on credit default studies performedbased on internal credit experience. |
| • Exposure at default (“EAD”), is an estimate of the exposure at a future default date, considering both the period of exposure and the |
| amount of exposure at a given reporting date. The EADs are determined by modelling the range of possible exposure outcomes atvarious points in time, corresponding to the multiple economic scenarios. The probabilities are then assigned to each economicscenario based on the outcome of the models. |
| The Company measures ECLs using a three-stage approach: |
| • Stage 1 comprises all performing financial instruments that have not experienced an SICR since initial recognition. The determination of |
| SICR varies by product and considers the relative change in the risk of default since origination. 12-month ECLs are recognized for allStage 1 financial instruments. |
| • 12-month ECLs represent the portion of lifetime ECLs that result from default events possible within 12 months of the reporting date. |
| These expected 12-month default probabilities are applied to a forecast EAD, multiplied by the expected LGD, and discounted by theoriginal EIR. This calculation is made for each of four macroeconomic scenarios. |
| • Stage 2 comprises all performing financial instruments that have experienced an SICR since original recognition or have become 30 |
| days in arrears for principal or interest payments, whichever happens first. When assets move to Stage 2, full lifetime ECLs arerecognized, which represent ECLs that result from all possible default events over the remaining lifetime of the financial instrument. Themechanics are consistent with Stage 1, except PDs and LGDs are estimated over the remaining lifetime of the instrument instead of overthe coming year. In subsequent reporting periods, if the credit risk of a financial instrument improves such that there is no longer aSICR compared to credit risk at initial recognition, the financial instrument will migrate back to Stage 1 and 12-month ECLs will berecognized; and |
| • Stage 3 comprises financial instruments identified as credit-impaired. Similar to Stage 2 assets, full lifetime ECLs are recognized for |
| Stage 3 financial instruments, but the PD is set at 100%. A Stage 3 ECL is calculated using the unpaid principal balance multiplied byLGD which reflects the difference between the asset’s carrying amount and its discounted expected future cash flows. |
| Interest income is calculated based on the gross carrying amount for both Stage 1 and 2 exposures. Interest income on Stage 3 financialinstruments is determined by applying the EIR to the amortized cost of the instrument, which represents the gross carrying amountadjusted for any credit loss allowance. |
| For Stage 1 and Stage 2 exposures, an ECL is generated for each individual exposure; however, the relevant parameters are modelled on acollective basis with all collective parameters captured by the individual security level. The exposures are grouped into smallerhomogeneous portfolios, based on a combination of internal and external characteristics, such as origination details, balance history,sector, geographic location, and credit history. Stage 3 ECLs are either individually or collectively assessed, depending on the nature ofthe instrument and impairment. |
| In assessing whether credit risk has increased significantly, the risk of default occurring is compared over the remaining expected life fromthe reporting date and as of the date of initial recognition. The assessment varies by product and risk segment. The assessmentincorporates internal credit risk ratings and a combination of security-specific and portfolio-level assessments, including the incorporationof forward-looking macroeconomic data. The assessment of SICR considers both absolute and relative thresholds. If contractual paymentsare more than 30 days past due, the credit risk is automatically deemed to have increased significantly since initial recognition. |
| | |
| 223 |
| When estimating ECLs, the four probability-weighted macroeconomic scenarios are considered. Economic forward-looking inputs includestock price indices (“SPI”), unemployment rates (“UEs”), oil prices and the 7-10 year BBB US Corporate Index. Application of each inputvaries by product. Depending on their usage in the models, macroeconomic inputs are projected at the country, province, or more granularlevel. Each macroeconomic scenario used includes a projection of all relevant macroeconomic variables for a five-year period,subsequently reverting to long-run averages. In order to achieve an unbiased estimate, economic data used in the models is supplied by anexternal source. This information is compared to other publicly available forecasts, and the scenarios are assigned a probability weightingbased on statistical analysis and management judgment. |
| The inputs and models used for calculating ECLs may not always capture all characteristics of the market at the date of the ConsolidatedFinancial Statements. |
| Changes in the required ECL allowance are recorded in the provision for credit losses in the Consolidated Statements of Income. Investedassets are written off, either partially or in full, against the related allowance for credit losses when there is no realistic prospect ofrecovery in respect of those amounts. This is considered a (partial) derecognition of the financial asset. In subsequent periods, anyrecoveries of amounts previously written off are credited to the provision for credit losses. |
| Derivative and hedging instruments |
| The Company uses derivative financial instruments (“derivatives”) including swaps, forward and futures agreements, and options tomanage current and anticipated exposures to changes in interest rates, foreign exchange rates, commodity prices and equity marketprices, and to replicate permissible investments. Derivatives embedded in other financial instruments are separately recorded asderivatives when their economic characteristics and risks are not closely related to those of the host instrument, the terms of theembedded derivative are the same as those of a standalone derivative and the host instrument itself is not recorded at FVTPL. Derivativeswhich are separate financial instruments are recorded at fair value, and those with unrealized gains reported as derivative assets and thosewith unrealized losses reported as derivative liabilities. |
| A determination is made for each derivative as to whether to apply hedge accounting. Where hedge accounting is not applied, changes inthe fair value of derivatives are recorded in investment income. |
| Where the Company has elected to apply hedge accounting, a hedging relationship is designated and documented at inception. Hedgeeffectiveness is evaluated at inception and throughout the term of the hedge. Hedge accounting is only applied when the Company expectsthat the risk management objective will be met and the hedging relationship will qualify for hedge accounting requirements both atinception and throughout the hedging period. The assessment of hedge effectiveness is performed at the end of each reporting periodprospectively. When it is determined that the risk management objective is no longer met, a hedging relationship is no longer effective, orthe hedging instrument or the hedged item ceased to exist, the Company discontinues hedge accounting prospectively. In such cases, ifthe 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 beinghedged, as discussed below. |
| In a fair value hedging relationship, changes in fair value of the hedging instruments are recorded in investment income, offsettingchanges in fair value of the hedged items attributable to the hedged risk, which would otherwise not be carried at fair value through profitor loss. Hedge ineffectiveness is recognized in total investment results and arises from differences between changes in the fair values ofhedging instruments and hedged items. When hedge accounting is discontinued, the carrying value of the hedged item is no longeradjusted and the cumulative fair value adjustments are amortized to total investment results over the remaining term of the hedged itemunless the hedged item ceased to exist, at which time the balance is recognized immediately in total investment results. |
| In a cash flow hedging relationship, the effective portion of the change in the fair value of the hedging instrument is recorded in OCI whilethe ineffective portion is recognized in total investment results. Gains and losses in accumulated other comprehensive income (“AOCI”) arerecognized in income during the same periods that the variability in the hedged cash flows or the hedged forecasted transactions arerecognized in income. The reclassifications from AOCI are made to total investment results, except for total return swaps that hedge stock-based compensation awards, which are reclassified to general expenses. |
| Gains and losses on cash flow hedges in AOCI are reclassified immediately to total investment results when the hedged item ceased toexist or the forecasted transaction is no longer expected to occur. When a hedge is discontinued, but the hedged forecasted transaction isexpected to occur, the amounts in AOCI are reclassified to total investment results in the periods during which variability in the cash flowshedged 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 recordedin OCI. Gains and losses in AOCI are recognized in income during the periods when gains or losses on the underlying hedged netinvestment in foreign operations are recognized in income upon disposal of the foreign operation. |
| 224 | 2022 Annual Report | Notes to Consolidated Financial Statements |
| Insurance contract liabilities and reinsurance contract assets |
| Classification and separation of components |
| Most contracts issued by the Company are considered insurance, investment, or service contracts. Contracts under which the Companyaccepts significant insurance risk from a policyholder are classified as insurance contracts in the Consolidated Financial Statements. Acontract is considered to have significant insurance risk if, and only if, an insured event could cause an insurer to pay additional amountsthat are significant in any single scenario, excluding scenarios that lack commercial substance. The additional amounts refer to thepresent value of amounts that exceed those that would be payable if no insured event had occurred. Contracts held by the Company underwhich it transfers significant insurance risk related to underlying insurance contracts to other parties are classified as reinsurancecontracts. Both insurance and reinsurance contracts are accounted for in accordance with IFRS 17 “Insurance Contracts”. Contracts underwhich the Company does not accept significant insurance risk are either classified as investment contracts or considered service contractsand are accounted for in accordance with IFRS 9 “Financial Instruments” or IFRS 15 “Revenue from Contracts with Customers”,respectively. |
| Insurance contracts are classified as direct participation contracts or contracts without direct participation features based on specificcriteria. Insurance contracts with direct participation features are insurance contracts that are substantially investment-related servicecontracts under which an entity promises an investment return based on underlying items. They are viewed as creating an obligation to paypolicyholders an amount that is equal to the fair value of the underlying items, less a variable fee for service. |
| At inception of insurance and reinsurance contracts, the Company analyses whether they contain the following components that should beseparated and accounted for under other IFRS standards: derivatives embedded within insurance contracts that are required to beseparated (IFRS 9); cash flows relating to distinct investment components (IFRS 9); and promises to transfer distinct goods or distinct non-insurance services (IFRS 15). Investment components of an insurance (or reinsurance held) contract represent cash flows paid (received)in all circumstances regardless of whether an insurance event has occurred or not. Investment components are distinct if they are notinterrelated with insurance component cash flows and if they could be issued on a standalone basis. The Company applies IFRS 17 to allremaining components of the insurance and reinsurance contracts. |
| There are three measurement models that insurance contracts can be measured under: the variable fee approach (“VFA”), the generalmeasurement model (“GMM”) and the premium allocation approach (“PAA”). For insurance contracts with direct participation featuressuch as participating life insurance contracts, unit linked type contracts, and variable annuity contracts the Company applies the VFAmeasurement model. For many group benefits contracts that have a one-year (or shorter) term of coverage, the Company generally appliesthe PAA measurement model. For the remainder of the Company’s insurance contracts the GMM measurement model is applied. |
| Level of aggregation/unit of account |
| Insurance contracts are aggregated into portfolios of insurance contracts which are managed together and are subject to similar risks. TheCompany has defined portfolios by considering various factors such as legal entities, measurement model, major product line and type ofinsurance risk. The portfolios of insurance contracts are further grouped into annual cohorts and by expected profitability at inception intoone of three categories: onerous contracts, contracts with no significant risk of becoming onerous and other remaining contracts. Onerouscontracts are those contracts that at initial inception, the Company expects to generate net outflow, without considering investmentreturns or the benefit of any reinsurance held. |
| Initial recognition and subsequent measurement |
| The Company includes in the measurement of a group of insurance contracts all future cash flows within the boundary of the contracts inthe group. Cash flows are within the boundary of an insurance contract if they arise from substantive rights and obligations that existduring the reporting period and in which the Company can compel the policyholder to pay the premiums or has a substantive obligation toprovide services to the policyholder. A substantive obligation to provide services ends when: |
| • The Company has the practical ability to reassess the risks of the particular policyholder and as a result, can set a price or level of |
| benefits that fully reflects those risks, or |
| • The Company has the practical ability to reassess the risks of the portfolio of insurance contracts that contain the contract and, as a |
| result, can set a price or level of benefits that fully reflects the risk of that portfolio, and the pricing of the premiums up to the date whenthe risks are reassessed does not take into account the risks that relate to periods after the reassessment date. |
| The Company recognizes groups of insurance contracts that it issues from the earliest of the following: |
| • The beginning of the coverage period of the group of contracts,• The date when the first payment from a policyholder in the group is due or when the first payment is received if there is no due date, and• For a group of onerous contracts, as soon as facts and circumstances indicate that the group is onerous. |
| Insurance contracts measured under the VFA and the GMM measurement model |
| At initial recognition, the Company measures a group of insurance contracts as the total of: (a) fulfilment cash flows, which comprise ofestimates of future cash flows, adjusted to reflect the time value of money and financial risks, and a risk adjustment for non-financial risk;and (b) a contractual service margin (“CSM”), which represents the unearned profit the Company will recognize as it provides service underthe insurance contracts. For reinsurance contracts, the CSM represents the reinsurance gain or cost at initial recognition. |
| | |
| 225 |
| In determining the fulfilment cash flows, the Company uses estimates and assumptions considering a range of scenarios which havecommercial substance and give a good representation of possible outcomes. The Company’s CSM is a component of the insurance assetor liability for the group of insurance contracts and results in no income at initial recognition. The unit of account for CSM is on a group ofcontracts basis consistent with the level of aggregation specified above. If the fulfilment cash flows are allocated to the group of insurancecontracts, any previously recognized insurance acquisition cash flows and any cash flows arising from the contracts at the date of initialrecognition in total are a net outflow, then the group of contracts is considered to be onerous. A loss from onerous insurance contracts isrecognized in profit and loss immediately. The Company establishes the groups at initial recognition and may add contracts to the groupsafter the end of a reporting period, however, the Company does not reassess the composition of the groups subsequently. |
| In the subsequent periods, the carrying amount of a group of insurance contracts at each reporting date is the sum of the liability forremaining coverage (“LRC”) and the liability for incurred claims (“LIC”). The LRC comprises the fulfilment cash flows that relate to servicesto be provided in the future and any remaining CSM at that date. The LIC comprises the fulfilment cash flows for incurred claims andexpenses that have not yet been paid. The fulfilment cash flows at the reporting dates are measured using the current estimates ofexpected cash flows and current discount rates. |
| The carrying amount of CSM at end of the reporting period is adjusted to reflect the following changes under the GMM for contractswithout direct participation features: (a) effect of new contracts added to the group; (b) interest accreted on the carrying amount of CSM,measured at locked-in rate; (c) effect of any currency exchange differences on the CSM; (d) changes in fulfilment cash flows that relate tofuture services (non-financial), except for loss component; and (e) recognition of insurance revenue for services provided in the year. TheCSM is recognized into insurance revenue over the duration of the group of insurance contracts based on the respective coverage units.The locked-in discount rate is the weighted average of the rates applicable at the date of initial recognition of contracts that joined a groupover a 12-month period. The discount rate used for accretion of interest on the CSM is determined using the bottom-up approach. |
| The changes in fulfilment cash flows relating to future services (non-financial) that adjust the CSM comprise of: |
| • Experience adjustments that arise from the difference between the premium receipts (and any related cash flows such as insurance |
| acquisition cash flows and insurance premium taxes) and the expected amounts at the beginning of the period. Differences related topremiums received (or due) related to current or past services are recognized immediately in profit or loss while differences related topremiums received (or due) for future services are adjusted against the CSM. |
| • Changes in estimates of the present value of future cash flows in the LRC, except those relating to the time value of money and changes |
| in financial risk that are recognized in profit or loss and OCI. |
| • Differences between any investment component expected to become payable in the period and the actual investment component that |
| becomes payable in the period. Those differences are determined by comparing (i) the actual investment component that becomespayable in the period with (ii) the payment in the period that was expected at the start of the period plus any insurance finance incomeor expenses related to that expected payment before it becomes payable. The same applies to a policyholder loan that becomesrepayable. |
| • Changes in the risk adjustment for non-financial risk that relate to future service. |
| A loss is created when there is an increase in fulfilment cash flows that exceeds the carrying amount of the CSM. Once a change infulfilment cash flows reduces CSM to nil, the excess establishes a loss which is recognized in profit and loss immediately. Any subsequentdecrease in the fulfilment cash flows will reverse the losses previously recognized in profit or loss. Any remaining loss will be releasedbased on a systematic allocation of subsequent changes relating to future service in the fulfilment cash flows (refer to Presentation andDisclosure below). |
| For contracts with direct participation features under the VFA measurement model, the cash flows impacting policyholders andshareholders are treated differently. The change in the policyholders’ share of the fair value of underlying items does not impact CSM. Thechange in the effect of the time value of money and financial risk not arising from the underlying items, such as financial guarantees,adjust the CSM. The change in fulfilment cash flows that do not vary with the return of underlying items and that do not relate to futureservice does not impact CSM consistent with the GMM. In contrast, under the VFA measurement model, the change in the amount ofshareholders’ share of the fair value of underlying items does impact CSM, except to the extent that the Company has elected the riskmitigation option. The Company uses derivatives, non-derivative financial instruments measured at fair value through profit or loss, andreinsurance contracts to mitigate the financial risk arising from interest rate guarantees in certain contracts with direct participationfeatures. Under the risk mitigation option, the Company recognizes changes in the shareholders’ share of the underlying items and thechanges in fulfilment cash flows in profit or loss or OCI instead of adjusting CSM. For groups of insurance contracts applying the VFAmeasurement model, in addition to those conditions (both loss recognition and reversal) previously described for groups of contractsapplying the GMM, a loss in profit or loss is also recognized when declines in the shareholder’s share of fair value of underlying itemsexceeds the carrying value of CSM. Any subsequent increase in the shareholder’s share of fair value of underlying items will reverse thelosses previously recognized in profit or loss. |
| 226 | 2022 Annual Report | Notes to Consolidated Financial Statements |
| Reinsurance contracts measured under the GMM measurement model |
| The measurement of reinsurance contracts follows the same principles as the GMM, with the following exceptions or modificationsspecified in this section below. Reinsurance contracts held and assumed cannot use the VFA measurement model. |
| The Company recognizes a group of reinsurance contracts held it has entered into from the earliest of the following: |
| • The beginning of the coverage period of the group of reinsurance contracts held. However, the Company delays the recognition of a |
| group of reinsurance contracts held that provide proportionate coverage until the date when any underlying insurance contract isinitially recognized, if that date is later than the beginning of the coverage period of the group of reinsurance contracts held, and |
| • The date the Company recognizes an onerous group of underlying insurance contracts if the Company entered into the related |
| reinsurance contract held in the group of reinsurance contracts held at or before that date. |
| At initial recognition, the Company recognizes any net gain or net cost as a CSM in the consolidated statement of financial position, withsome exceptions. If any net cost of obtaining a reinsurance contract relates to an insured event that occurred before initial recognition ofany insurance contract, it is recognized immediately in profit or loss. In addition, if the underlying insurance contracts are in an onerousposition, the Company is allowed to recognize a reinsurance gain immediately in profit or loss for the portion of claims that the Companyexpects to recover from the reinsurance, if the reinsurance held was entered into prior to or at the same time as the onerous contract.Consequently, a loss-recovery is created and adjusted for the group of reinsurance contracts. This determines the amounts that aresubsequently presented in profit or loss as reversals of recoveries of losses from the reinsurance contracts and are excluded from theallocation of reinsurance premiums paid. The Company adjusts the loss-recovery to reflect changes in the loss of an onerous group ofunderlying insurance contracts. The carrying amount of the loss-recovery must not exceed the portion of the carrying amount of the loss ofthe onerous group of underlying insurance contracts that the Company expects to recover from the group of reinsurance contracts (referto Presentation and Disclosure below). |
| Measurement of reinsurance contract cash flows is consistent with the underlying insurance contracts, but with an adjustment for any riskof non-performance by the reinsurer. The risk adjustment for non-financial risk is the amount of risk being transferred by the Company tothe reinsurer. |
| Subsequently, the carrying amount of a group of reinsurance contracts at each reporting date is the sum of the asset for remainingcoverage and the asset for incurred claims. The asset for remaining coverage comprises: (a) the fulfilment cash flows that relate toservices that will be received under the contracts in future periods and (b) any remaining CSM at that date. |
| Insurance and reinsurance contracts measured under the PAA measurement model |
| The Company applies the PAA to all insurance contracts it issues and reinsurance contracts that it holds if the coverage period of thecontract is one year or less; or the coverage period is longer than one year and the measurement of the LRC for the contracts under thePAA does not differ materially from the measurement that would be produced applying the GMM approach under possible future scenarios. |
| For insurance contracts, generally, the LRC is measured as the premium received at initial recognition minus any insurance acquisitioncash flows at that date. There is no allowance for time value of money as the premiums are received within one year of the coverage period.Subsequently, the Company measures the carrying amount of the LRC at the end of each reporting period as: (a) the LRC balance atbeginning of the period; plus (b) premium received in the period; minus (c) directly attributable acquisition costs net of relatedamortization (unless expensed as incurred); minus (d) amount recognized as insurance revenue for the period; minus (e) investmentcomponent paid or transferred to the LIC. The amount recognized as insurance revenue for the period is typically based on the passage oftime. For the Company’s property and casualty reinsurance business, the expected pattern of release of risk during the coverage perioddiffers significantly from the passage of time and as such the amount recognized as insurance revenue is on the basis of the expectedtiming of incurred service expenses. |
| Under the PAA measurement method, entities are permitted to either defer directly attributable acquisition costs to future periods for agroup of contracts that are one year or less, or recognize the costs in profit or loss as incurred. This election can be made at the level ofeach group of insurance contracts. For most of the PAA products such as Canadian Group Benefit, some Canadian Affinity products, andsome Asia short-term individual and group products, the Company has elected to defer directly attributable acquisition costs to futureperiods. Where directly attributable acquisition costs are deferred, insurance acquisition cash flows are allocated to the group ofinsurance contracts, in which the Company expects to recover the acquisition costs. Insurance acquisition costs arising before therecognition of the related group of contracts are recognized as an asset or contra insurance contract liability as part of the same portfoliothat the related group of contracts is expected to be included. When facts and circumstances indicate the asset maybe impaired, theCompany conducts impairment tests. If the asset is impaired, an impairment loss will be recognized in profit or loss. |
| If at any time during the coverage period, facts and circumstances indicate that a group of contracts is onerous, the Company willrecognize a loss in profit or loss and an increase in the LRC to the extent that the current estimate of the fulfilment cash flows that relate toremaining coverage (including the risk adjustment for non-financial risk) exceed the carrying amount of the LRC. |
| | |
| The Company estimates the LIC as the fulfilment cash flows related to incurred claims. The Company does not adjust the future cash flowsfor the time value of money, except when claims are expected to settle more than one year after the actual claim occurs. |
| 227 |
| For reinsurance contracts held applying the PAA, the Company measures them on the same basis as insurance contracts that it issues,adapted to reflect the features of reinsurance contracts held that differ from insurance contracts issued. If a loss-recovery is created for agroup of reinsurance contracts measured under the PAA, the Company adjusts the carrying amount of the asset for remaining coverageinstead of adjusting the CSM. |
| Derecognition of insurance contracts |
| The Company derecognizes insurance contracts when the rights and obligations relating to the contract are extinguished (i.e., discharged,cancelled, or expired) or the contract is modified such that the modification results in a change in the measurement model, or theapplicable standard for measuring a component of the contract. In such cases, the Company derecognizes the initial contract andrecognizes the modified contract as a new contract. |
| Presentation and Disclosure |
| The Company presents the carrying amount of portfolios of insurance contracts that are in a net asset or liability position, and portfolios ofreinsurance contracts that are in a net asset or liability position separately in the consolidated statements of financial position. |
| The Company separately presents the insurance service results, which comprises of insurance revenue and insurance service expenses,from investment results, which comprises of insurance finance income or expenses in the consolidated statements of income. Thestandard allows the option on whether to disaggregate the changes in risk adjustment between insurance service results and insurancefinance income. The Company elected to disaggregate the change in risk adjustment for non-financial risk between the insurance serviceexpenses and insurance finance income or expenses. |
| The insurance revenue depicts the performance of insurance services and excludes investment components. For the GMM and the VFAcontracts, the insurance revenue represents the change in the LRC relating to services for which the Company expects to receiveconsideration, comprising of: (a) expected claims and other insurance expenses; (b) changes in risk adjustment for non-financial risk; (c)release of CSM based on coverage units; and (d) portion of premiums that relate to recovering of insurance acquisition cash flows. Forcontracts measured under the PAA, the insurance revenue for each period is the amount of expected premium receipts for providingservices in the period. |
| The insurance service expenses arising from insurance contracts are recognized in profit or loss generally as they are incurred andexcludes repayment of investment components. The insurance service expenses comprise of: (a) incurred claims and other insuranceservice expenses; (b) losses on onerous contracts and reversal of such losses; (c) adjustments to LIC; (d) amortization of insuranceacquisition cash flows; and (e) impairment losses on assets for insurance acquisition cash flows, if any, and reversals of such impairmentlosses. |
| The amortization of insurance acquisition cash flows is equal to the recovery of insurance acquisition cash flows in insurance revenue forcontracts measured under the GMM. For contracts measured under the PAA with deferred acquisition cash flows, the Company amortizesinsurance acquisition cash flows over the duration of the group of insurance contracts based on the respective coverage units. |
| Net expenses from reinsurance contracts comprise of allocation of reinsurance premiums paid and the amounts expected to be recoveredfrom reinsurers. Reinsurance cash flows that are contingent on claims on the underlying contracts are treated as part of the claimsexpected to be recovered from reinsurers, whereas reinsurance cash flows that are not contingent on claims on the underlying contracts(for example, some types of ceding commissions) are treated as a reduction in reinsurance premiums paid. For reinsurance contractsmeasured under the GMM, the allocation of reinsurance premiums paid represents the total of the changes in the asset for remainingcoverage that relate to services for which the Company expects to pay consideration. For reinsurance contracts measured under the PAA,the allocation of reinsurance premiums paid is the amount of expected premium payments for receiving services in the period. |
| Insurance finance income or expenses comprise the change in the carrying amount of the group of insurance contracts arising from: (a)the effect of the time value of money and changes in the time value of money; and (b) the effect of financial risk and changes in financialrisk. |
| The Company disaggregates insurance finance income or expenses on insurance contracts issued for most of its group of insurancecontracts measured under the GMM between profit or loss and OCI. The impact of changes in market interest rates on the value of the lifeinsurance and related reinsurance assets and liabilities are reflected in OCI in order to minimize accounting mismatches between theaccounting for insurance assets and liabilities and supporting financial assets. The impacts from differences between current period ratesand locked-in rates are presented in OCI. |
| 228 | 2022 Annual Report | Notes to Consolidated Financial Statements |
| The Company’s invested assets which are debt instruments (including bonds, private placements, mortgages, and loans) backing thegroups of insurance contracts measured under the GMM are predominantly measured at FVOCI. As a result, the effect of the time value ofmoney for the groups of insurance contracts and supporting fixed maturity assets are reflected in profit or loss and the effect of financialrisk and changes in financial risk is reflected in OCI. |
| The systematic allocation of expected total insurance finance income or expenses depends on whether changes in assumptions that relateto financial risk have a substantial effect on the amount paid to the policyholder. |
| • For groups of insurance contracts for which changes in assumptions that relate to financial risk do not have a substantial effect on the |
| amounts paid to the policyholder, the Company systematically allocates expected total insurance finance income or expenses over theduration of the group of contracts to profit or loss using discount rates determined on initial recognition of the group of contracts. |
| • For groups of insurance contracts for which changes in assumptions that relate to financial risk have a substantial effect on the |
| amounts paid to the policyholders, the Company systematically allocates expected total insurance finance income or expenses over theduration of the group of contracts to profit or loss using an allocation that is based on the amounts credited in the period and expectedto be credited in future periods for fulfilment cash flows, and using the discount rates determined on initial recognition of the group ofcontracts for contractual service margin. |
| In the event of transfer of a group of insurance contracts or derecognition of an insurance contract, the Company reclassifies any amountsthat were previously recognized in OCI to profit or loss as insurance income finance or expense. There are no changes in the basis ofdisaggregation of insurance finance expenses between profit or loss and OCI in the period. |
| The Company groups contracts that are onerous at initial recognition separately from contracts in the same portfolio that are not onerousat initial recognition. Groups that were not onerous at initial recognition can also subsequently become onerous if assumptions andexperience changes. The Company has established a loss component of the LRC for any onerous group representing the future lossesrecognized. |
| A loss component represents a notional record of the losses attributable to each group of onerous insurance contracts (or contractsprofitable at inception that have become onerous). The loss component is released based on a systematic allocation of the subsequentchanges relating to future service in the fulfilment cash flows to: (i) the loss component; and (ii) the LRC excluding the loss component. Theloss component is also updated for subsequent changes relating to future service in estimates of the fulfilment cash flows and the riskadjustment for non-financial risk. The systematic allocation of subsequent changes to the loss component results in the total amountsallocated to the loss component being equal to zero by the end of the coverage period of a group of contracts (since the loss componentwill have been occurred in the form of incurred claims). The Company uses the proportion on initial recognition to determine thesystematic allocation of subsequent changes in future cash flows between the loss component and the liability for remaining coverageexcluding the loss component. |
| For reinsurance contracts, when the Company recognizes a loss on initial recognition of an onerous group of underlying insurancecontracts or when further onerous underlying insurance contracts are added to a group, the Company establishes a loss-recoverycomponent of the asset for remaining coverage for a group of reinsurance contracts held representing the recovery of losses. |
| Where a loss component has been set up subsequent to initial recognition of a group of underlying insurance contracts, the portion ofincome that has been recognized from related reinsurance contracts held is disclosed as a loss-recovery component. |
| Where a loss-recovery component has been set up at initial recognition or subsequently, the Company adjusts the loss-recoverycomponent to reflect changes in the loss component of an onerous group of underlying insurance contracts. |
| The carrying amount of the loss-recovery component must not exceed the portion of the carrying amount of the loss component of theonerous group of underlying insurance contracts that the Company expects to recover from the group of reinsurance contracts. On thisbasis, the loss-recovery component recognized at initial recognition is reduced to zero in line with reductions in the onerous group ofunderlying insurance contracts and is nil when the loss component of the onerous group of underlying insurance contracts is nil. |
| Note 26 | Comparatives |
| Certain comparative amounts have been reclassified to conform to the current year’s presentation. |
| | | |
| | 229 |
