Manulife Financial Corporation Reports Third Quarter Results
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TSX/NYSE/PSE: MFC SEHK: 945
- Charges due to lower corporate bond yields and changes in actuarial
assumptions offset strong operational results and gains due to equity
market increases, resulting in a modest net loss for the quarter
- Margins improved through increased pricing, adjustments to sales
compensation and more favourable reinsurance terms
- Strong sales growth across most products other than variable
annuities generated a more balanced business mix
- Equity risk profile improved through hedging, pricing, product and
asset mix changes
- Excellent credit experience given challenging markets - asset quality
remains a competitive strength
- Two attractive acquisitions - AIC mutual funds and Pottruff & Smith
travel insurance
- Equity markets, interest rates and credit will continue to impact the
Company's balance sheet and earnings
- Focused on building to fortress capital levels over time - expect
benefits from merging U.S. operating subsidiaries at the end of 2009
TORONTO, Nov. 5 /PRNewswire-FirstCall/ - Manulife Financial Corporation ("MFC") today reported a net loss attributed to shareholders of $172 million for the third quarter ended September 30, 2009, compared to net income of $510 million in the third quarter of 2008. The loss per share was $0.12 compared to fully diluted earnings per share of $0.33 in 2008. Current quarter results reflect equity market increases offset by lower corporate bond rates and changes in actuarial assumptions. The Manufacturers Life Insurance Company ("MLI") reported a Minimum Continuing Capital and Surplus Requirements ("MCCSR") ratio of 229 per cent as at September 30, 2009, up from 193 per cent last year.
In its second quarter earnings release, the Company included a forward-looking statement that estimated normalized earnings to be between $750 million and $850 million per quarter for the remainder of 2009 and 2010. The third quarter's adjusted earnings from operations(1) under this definition was approximately $803 million.
Chief Executive Officer Donald A. Guloien said, "Underlying earnings and performance were solid this quarter, but our results were negatively impacted by lower corporate bond rates and strengthening of reserves for changes in actuarial assumptions. We took actions to improve margins, increased our sales of products other than variable annuities, further improved our equity risk profile and continued to build toward fortress capital levels. We announced two attractive acquisitions and see numerous opportunities for strategic growth across a variety of markets. We remain highly disciplined and will continue to build upon Manulife's scale and key strengths including our superior asset quality, well recognized brands, leading products and distribution, excellence in investment management, and strong positioning in key growth markets."
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(1) Referred to in the second quarter report as normalized earnings. See
"Normalized Earnings and Adjusted Earnings from Operations -
Reconciliation with GAAP Measure" and "Performance and Non-GAAP
Measures" below.
FINANCIAL RESULTS
Chief Financial Officer Michael W. Bell said, "Continued declines in corporate bond rates required a further strengthening of actuarial reserves this quarter. We also increased reserves for changes in actuarial assumptions including those related to policyholder behaviour for variable annuity products. As a result of the decline in interest rates and changes in lapse assumptions, our interest rate sensitivity has increased. Nevertheless, Manulife's underlying business growth remains strong, and the quality of our investment portfolio remains a competitive strength. MLI's MCCSR remains strong at 229 per cent, and we continue to take focused action to improve our risk profile and strengthen our capital flexibility as we grow our Company. We anticipate that, at year end and subject to regulatory approvals, we will complete a reorganization of our U.S. subsidiaries which will deliver capital and operating efficiencies."
Increases in equity markets in North America, where the S&P 500 increased 15 per cent and the TSX increased 10 per cent in the quarter, generated non cash gains of $1.2 billion. Of this, $1.0 billion related to segregated fund guarantees and the remainder was attributable to future fees assumed on variable universal life products and gains on equities supporting policy liabilities.
The Company reported a non cash charge of $1.2 billion resulting from the decrease in interest rates and corporate spreads during the quarter. Changes in interest rates impact the actuarial valuation of in-force policies by changing the assumption for future returns on the investment of net future cash flows. The decline in interest rates also impacted the investment returns assumed for new business written in the quarter, particularly in U.S. Insurance.
As indicated in the prior quarter, the Company completed its annual review of all actuarial assumptions in the third quarter. This resulted in a charge to earnings of $783 million, including $469 million due to changes in assumptions of policyholder behaviour for segregated fund guarantee products (a charge that was within the Company's previously communicated expectations of less than $500 million). The remainder of the charge included assumption changes related to morbidity and other policyholder behaviour, partially offset by assumption changes related to mortality, expenses and investment related items.
The Company's investment portfolio continued to perform well relative to overall market conditions, with $111 million of impairments in the quarter. The third quarter results included charges of $30 million for credit losses, $6 million for credit downgrades, $32 million in other than temporary impairments ("OTTI") on equity positions in the Corporate and Other Segment, as well as $43 million on private equity investments.
MLI reported a MCCSR ratio of 229 per cent as at September 30, 2009, up from 193 per cent last year. Significant progress has also been made in the reorganization of the Company's U.S. subsidiaries, with a planned merger of the main U.S. operating companies, under MLI, on track to be completed effective as of year end. The merger will result in a more efficient capital structure and provide improved operating efficiencies. Post reorganization, MLI expects to benefit from more stable capital ratios and a more diversified risk profile. While MLI's MCCSR ratio is expected to decline as a result of the re-organization, the Company's cushion for equity market declines over minimum regulatory requirements is expected to remain approximately unchanged because of the reduced equity sensitivity.
SALES AND BUSINESS GROWTH
Chief Operating Officer John D. DesPrez III said, "This quarter we improved our margins through price increases, adjustments to compensation and more favourable reinsurance terms. We also reduced our variable annuity risk profile through pricing adjustments, changes to our product and asset mix and hedging of an additional $3.8 billion of our in-force business. Our Asian business delivered strong results with further expansion in China and notable insurance market share gains in Japan and Indonesia. Canada's group businesses and fixed wealth products recorded particularly strong sales increases and our two acquisitions in Canada will further strengthen our market position in mutual funds and travel insurance. In the U.S., we strengthened key distribution relationships, increased sales of targeted products over the previous quarter and we demonstrated our leadership in wealth management with three new Five Star Morningstar Ratings(2) for our mutual funds and continued high rankings for our John Hancock Lifestyle funds."
Insurance new business embedded value ("NBEV") was 17 per cent higher than prior year levels driven by growth across all geographies, while wealth NBEV was down 48 per cent, reflecting lower variable annuity sales, hedging costs and other product mix changes.
Insurance sales experienced sequential increases over the prior two quarters across most business segments. Total insurance sales increased by two per cent, on a constant currency basis, over the prior year as strong advances in Asia and Canada were partially offset by a decline in the U.S.
Total wealth sales excluding variable annuity products also experienced sequential increases over the prior two quarters. Sales excluding variable annuity products increased by four per cent over the prior year, on a constant currency basis, as fixed return wealth product sales in both the U.S. and Canada continued to outpace prior year levels, resulting from consumers seeking stable investment returns.
Premiums and deposits, excluding variable annuity products, were $14.3 billion for the quarter, a decrease of two per cent over the prior year on a constant currency basis. Growth of in-force insurance business and higher sales of fixed return wealth products were offset by lower new mandates in the Institutional Advisory business.
Variable annuity and segregated fund deposits of $1.9 billion declined by $2.1 billion from the prior year as a result of the Company's on-going risk management initiatives across all geographies and, to a lesser extent, the general economic conditions.
Total funds under management as at September 30, 2009 were $437 billion, a 13 per cent increase over the prior year as a result of net positive policyholder cash flows of $20 billion and favourable currency movements. Over the last four quarters, investment returns have contributed approximately $19 billion to the increase.
Capitalizing on strategic opportunities, Canadian Division announced two acquisitions since the end of the second quarter. Manulife Mutual Funds announced the acquisition of AIC Limited's Canadian retail investment fund business, which added approximately $3.8 billion of assets under management, increasing the Canadian Division's mutual fund platform by approximately 40 per cent. This adds significant scale and bolsters the Canadian Division's presence in the Canadian retail investment fund market. Affinity Markets also announced the acquisition of Pottruff & Smith Travel Insurance Brokers Inc., one of the largest travel insurance brokers and third-party administrators in Canada. This acquisition solidifies Manulife's position as one of Canada's largest providers of travel insurance services, with a stronger platform for long-term growth as a travel insurer.
The Company continued to rebalance the risk profile of its product mix by reviewing its variable annuity product portfolio and implementing changes to its product features and pricing. With the equity market rally in the quarter, the Company also opportunistically hedged an additional $3.8 billion of in-force variable annuity business. Substantially all new variable annuity business in the U.S. and Canada continues to be hedged on an on-going basis. By quarter end, $19.5 billion of Guaranteed Value was hedged, up from $14.5 billion at the end of the second quarter and $5.7 billion at December 31, 2008. At September 30th, approximately 30 per cent of the gross Guaranteed Value was reinsured or hedged, up from 20 per cent at the prior year end.
--------------------------------------
(2) For each fund with at least a 3-year history, Morningstar calculates
a Morningstar Rating based on a Morningstar Risk-Adjusted Return that
accounts for variation in a fund's monthly performance (including
effects of sales charges, loads and redemption fees), placing more
emphasis on downward variations and rewarding consistent performance.
The top 10% of funds in each category, the next 22.5%, 35%, 22.5% and
bottom 10% receive 5, 4, 3, 2 or 1 star respectively. The Overall
Morningstar Rating for a fund is derived from a weighted average of
the performance associated with its 3-, 5- and 10-year (if
applicable) Morningstar Rating metrics. Past performance is no
guarantee of future results. The overall rating includes the effects
of sales charges, loads and redemption fees, while the load-waived
does not. Load-waived rating for Class A shares should only be
considered by investors who are not subject to a front-end sales
charge.
OPERATING HIGHLIGHTS
Insurance
- Insurance sales experienced sequential increases over the prior two
quarters across most business segments. Total insurance sales
increased by two per cent over the prior year, on a constant currency
basis, as strong advances in Asia and Canada were partially offset by
a decline in the U.S.
- In the U.S., overall insurance sales improved by 18 per cent from the
prior quarter, but were down six per cent from prior year levels,
with both Life and Long-Term Care experiencing significant
improvements over the prior two quarters, but falling short of prior
year levels by four and 13 per cent, respectively. Despite general
economic trends, Life sales topped US$200 million in the quarter and
Long-Term Care sales were robust compared to strong prior year
comparables. Since the end of the first quarter, Life has introduced
higher prices on its Term and Universal Life offerings while Long-
Term Care has introduced new features and increased pricing on its
group segment.
- In Canada, overall insurance sales increased by six per cent over
prior year levels, with Group Benefits sales up 12 per cent,
partially offset by a four per cent decline in Individual Insurance
sales. Subsequent to the quarter, Affinity Markets announced the
acquisition of Pottruff & Smith Travel Insurance Brokers Inc., one of
the largest travel insurance brokers and third-party administrators
in Canada. This acquisition solidifies Manulife's position as one of
Canada's largest providers of travel insurance services, with a
stronger platform for long-term growth as a travel insurer.
- In Asia, record insurance sales levels were achieved in the quarter,
with overall sales exceeding the prior year by 16 per cent on a
constant currency basis. Japan sales were up seven per cent over the
prior year while Hong Kong sales increased by 29 per cent, with
strong sales momentum bolstered by new product offerings and
distribution initiatives. Japan and Indonesia reported significant
market share gains in 2009 reflecting consumer flight to quality.
China sales also continued to grow, up 18 per cent in the quarter,
reflecting contributions from new offices opened in the prior year
and recent marketing initiatives. During the quarter, Manulife
continued to expand its operations in China receiving an additional
license in the Province of Tianjin. This brought the total number of
licenses to 38, among the most of any foreign life insurance company
in China.
Wealth Management
- Wealth sales, excluding variable annuity products, increased by four
per cent over prior year levels on a constant currency basis, driven
by fixed return product sales in the U.S. and Canada. Fixed return
product sales continued to outpace prior year levels as consumers
sought more stable investment returns.
- Variable annuity sales were less than half of prior year levels
following from the Company's on-going risk management initiatives
across all geographies and, to a lesser extent, general economic
conditions.
- In the U.S., wealth sales excluding variable annuity products
improved by 21 per cent over the prior quarter, and were in line with
prior year levels. All product segments other than variable annuity
products experienced double digit growth over prior quarter levels,
with fixed return product sales up 16 per cent, retirement plan sales
up 30 per cent and mutual fund sales up 18 over the second quarter of
2009. Compared to prior year, fixed return product sales were up 37
per cent, retirement plan sales were flat, and mutual and other fund
sales were down 12 per cent. During the quarter, John Hancock
expanded its growing relationship with Edward Jones, announcing a
distribution agreement whereby financial advisors will have access to
the John Hancock 401(k) retirement plan platform. This has further
leveraged the strong relationship that has been built with Edward
Jones by the John Hancock Long-Term Care and Variable Annuity
businesses.
- John Hancock Lifestyle Portfolios offered through mutual fund,
variable annuity and 401(k) wealth management product lines have
continued to produce very strong returns through September 30, 2009.
The Lifestyle Portfolios that underlie the mutual fund and 401(k)
products rank in the 8th, 11th, 13th, 14th and 29th percentiles of
their Morningstar peer groups year-to-date for Balanced, Aggressive,
Growth, Moderate and Conservative, respectively(3). John Hancock is
ranked as the third largest provider of lifestyle/lifecycle asset
allocation solutions in the industry as of September 30, 2009,
according to data from Strategic Insight, with over $55 billion in
assets under management.
- In Canada, wealth sales excluding variable annuity products increased
by five per cent over the prior year. Strong increases in fixed
products and group retirement sales more than offset declines in
Manulife Bank loan volumes. Fixed products sales increased by 57 per
cent while group retirement sales more than quadrupled prior year
levels, driven by record sales of group annuities. Year-to-date,
group retirement sales exceeded $1 billion reflecting strong results
in the defined contribution market.
- During the quarter, Manulife Mutual Funds announced the acquisition
of AIC Limited's Canadian retail investment fund business. This
acquisition added $3.8 billion of assets under management, an
increase of approximately 40 per cent to the Canadian Division's
mutual fund platform, increasing scale and bolstering the division's
presence in the Canadian retail investment fund market.
- In Asia, wealth sales excluding variable annuity products increased
by 59 per cent over the prior year, driven by strong growth in
Indonesia. Indonesia fund sales more than tripled, benefiting from
the equity market recovery.
--------------------------------------
(3) The Morningstar percentile ranking compares a Fund's Morningstar risk
and return scores with all the Funds in the same Category, where
1= Best and 100= Worst. The rankings above are
based on the period from 1/1/09 to 9/30/09 for John Hancock Lifestyle
Portfolios, Class A. Lifestyle Aggressive was ranked 208 out of
2,028 funds in the Large Cap Blend category, Lifestyle Growth was
ranked 251 out of 2,028 funds in the Large Cap Blend category,
Lifestyle Balanced was ranked 97 out of 1,218 funds in the Moderate
Allocation category, Lifestyle Moderate was ranked 91 out of 647
funds in the Conservative Allocation category, and Lifestyle
Conservative was ranked 189 out of 647 funds in the Conservative
Allocation category.
Corporate
- During the quarter, the Company raised $1 billion through the
issuance of Innovative Tier 1 Notes. The notes pay 7.405 per cent per
annum until December 30, 2019, with 5 year resets thereafter equal to
5-year Government of Canada bonds plus 5 per cent. The notes may be
redeemed in whole or in part on or after December 31, 2014, with
regulatory (OSFI) approval.
- In a separate news release, the Company also announced today that the
Board of Directors approved a quarterly shareholders' dividend of
$0.13 per share on the common shares of the Company, payable on and
after December 21, 2009 to shareholders of record at the close of
business on November 17, 2009.
- The Company is proud to have recently appointed two highly qualified
and distinguished Directors to its Board:
- Linda Bammann was appointed to the Board of Directors of Manulife
Financial Corporation and The Manufacturers Life Insurance Company
effective August 5, 2009. Ms. Bammann joins Manulife's Board
possessing strong risk management expertise and first hand management
experience from her senior executive risk management positions with
several large U.S. banks, including JPMorgan Chase and Bank One.
- John Palmer was appointed to the Board of Directors of Manulife
Financial Corporation and The Manufacturers Life Insurance Company
effective November 4, 2009. Mr. Palmer brings extensive financial
institution experience to Manulife's Board, including seven years as
Superintendent of Financial Institutions of Canada. Mr. Palmer was
the Deputy Managing Director of the Monetary Authority of Singapore
and has advised other regulators including the Australian Prudential
Regulation Authority. He is a chartered accountant and previously was
Canadian Managing Partner and Deputy Chairman of KPMG LLP (Canada).
Awards & Recognition
Manulife Financial received recognition from several organizations in the quarter, including the following:
- In Canada, Individual Wealth Management operations received Level
Four certification and the prestigious gold award for outstanding
achievement in quality from the National Quality Institute ("NQI").
This is the highest level of achievement under NQI's Progressive
Excellence program which measures excellence in multiple categories,
including Customer, People, Process management, Partnerships,
Responsibility to society, and Owner/shareholder.
- In the U.S., John Hancock Long-Term Care was voted # 1 in all 11
categories of Agent's Sales Journal magazine's 2009 LTCI Carrier
Report Card. Categories included products and features, marketing and
sales materials, product and sales training, and meeting the overall
needs of the market segment.
- In Indonesia, Manulife was awarded "Best Life Insurance Company 2009"
by Bisnis Indonesia Daily, the first national business newspaper of
Indonesia. The awards theme for judging the 129 entrants this year
was "Survival and Profitability." Despite the global financial
crisis, Manulife Indonesia experienced strong growth and was
acknowledged with this prestigious award as the best company in the
life insurance category. This is the first time Manulife has been
awarded this honour.
- MFC Global Investment Management ("GIM") earned new Five Star
Morningstar Ratings for three of its managed John Hancock funds
including the Large Cap Equity, Global Opportunities and Strategic
Income funds in Morningstar's September 2009 U.S. mutual fund
rankings. Morningstar's Five Star Rating is the highest rating
achievable, and awarded to the top 10 per cent of funds in a given
category, based on past returns and volatility.
Notes:
Manulife Financial Corporation will host a Third Quarter Earnings Results Conference Call at 2:00 p.m. ET on November 5, 2009. For local and international locations, please call (416) 340-2216 and toll free in North America please call (866) 898-9626. Please call in ten minutes before the call starts. You will be required to provide your name and organization to the operator. A playback of this call will be available by 6:00 p.m. ET on November 5, 2009 until November 19, 2009 by calling (416) 695-5800 or (800) 408-3053 (passcode 3274828 followed by the number sign).
The conference call will also be webcast through Manulife Financial's website at 2:00 p.m. ET on November 5, 2009. You may access the webcast at: www.manulife.com/quarterlyreports. An archived version of the webcast will be available at 4:30 p.m. ET on the website at the same URL as above.
The Third Quarter 2009 Financial Statements and Statistical Information Package are also available on the Manulife website at: www.manulife.com/quarterlyreports. Each of these documents may be downloaded before the webcast begins.
MANAGEMENT'S DISCUSSION AND ANALYSIS ("MD&A")
FINANCIAL HIGHLIGHTS
(unaudited)
Quarterly Results
3Q09 2Q09 3Q08
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Net Income (Loss) Attributed to Shareholders
(C$ millions) (172) 1,774 510
Net Income (Loss) Available to Common
Shareholders (C$ millions) (193) 1,758 503
Diluted Earnings (Loss) per Common Share (C$) (0.12) 1.09 0.33
Return on Common Shareholders' Equity(1)
(%, annualized) (3.0) 26.9 8.2
Premiums & Deposits(1) (C$ millions) 16,238 19,196 18,090
Funds under Management(1) (C$ billions) 436.5 420.9 385.3
Capital(1) (C$ billions) 30.7 31.1 28.3
-------------------------------------------------------------------------
(1) This item is a non-GAAP financial measure. For a discussion of our
use of non-GAAP financial measures, see "Performance and Non-GAAP
Measures" below.
Net Income (Loss)
The Company's net loss attributed to shareholders for the third quarter was $172 million, compared to net income attributed to shareholders of $510 million reported a year ago. Earnings in both periods were affected by the capital markets and this quarter's results also included a charge of $783 million related to changes in actuarial methods and assumptions. These items are expanded on below.
During the quarter, North American equity markets increased (the S&P 500 increased 15 per cent and the TSX was up 10 per cent), and the Japanese TOPIX index was down two per cent. The overall positive market performance generated non cash gains of $1.2 billion, consisting of $1.0 billion related to segregated fund guarantees and the remainder split between capitalized variable universal life product fee income and gains on equities supporting policy liabilities. These equity related gains were offset by the impact of a decline in interest rates in the quarter.
During the quarter, interest rates on corporate bonds declined by approximately 15 to 35 basis points in Canada and by approximately 55 to 85 basis points in the U.S. As a result of the interest rate declines in the quarter, particularly for corporate bonds, we reported a non cash charge of $1.2 billion. Changes in interest rates impact the actuarial valuation of in-force policies by changing the future returns assumed on the investment of net future cash flows. The decline in interest rates similarly impacted the investment returns assumed for new business written in the quarter, particularly in U.S. Insurance.
Impairments recorded in the quarter reduced earnings by $111 million and consisted of $30 million related to credit losses, $6 million related to downgrades, $32 million of other than temporary impairments ("OTTI") on equity positions in the Corporate and Other Segment and $43 million of OTTI on private equity investments.
Market conditions also reduced the value of real estate appraisals and reduced private equity returns. These charges were mostly offset by the favourable impact of tax items and gains related to the recapture of reinsurance treaties.
The post tax charge of $783 million from the review of actuarial methods and assumptions included increases in policy liabilities related to changes in future morbidity assumptions and policyholder behaviour assumptions, partially offset by decreases in policy liabilities for changes in mortality, expenses and investment related assumptions. These items are expanded upon in the section below titled "Impact of Q3 Changes in Assumptions and Methodology". The charge included $469 million due to changes in assumptions on policyholder behaviour for segregated fund guarantee products, which was within the Company's previously communicated expectations of less than $500 million, after tax, provided with the second quarter results.
In addition to the tax items referred to above, a portion of the equity related gains as well as some interest related gains were subject to lower tax rates than were the other interest and investment related losses. The effective tax rate, in the quarter, adjusted for these tax items was similar to that in the prior year.
In the third quarter of 2008, market turmoil including unprecedented equity market volatility and financial sector credit related defaults reduced earnings by approximately $827 million; comprised of equity market related charges of $556 million, credit losses of $254 million and an OTTI charge of $17 million. Partially offsetting these investment losses were investment related gains of $318 million from supporting our long-term insurance obligations with more non fixed income assets, adding longer duration fixed income assets and the favourable impact of widening spreads and steepening interest rates. Also in the third quarter of 2008, net changes in actuarial methods and assumptions decreased earnings by $7 million pre tax or $27 million post tax. The changes included a $641 million, post tax, increase in segregated fund guarantee reserves to the high end of the range permitted by professional actuarial standards and a $578 million, post tax, reduction in the provision for adverse deviation for interest rate risk as well as other smaller basis changes in the quarter which netted to a $36 million post tax reduction in policy liabilities.
Year-to-date net income attributed to shareholders was $534 million compared to $2,387 million in 2008.
Normalized Earnings and Adjusted Earnings from Operations
In our second quarter report in the section entitled "Normalized Earnings", we provided forward-looking information for "normalized earnings", which is a non-GAAP measure. In this report we have compared our estimate at June 30, 2009 of normalized earnings with the adjusted earnings from operations for the third quarter which exclude the items that we excluded in arriving at our estimate of normalized earnings at June 30, 2009. For clarity, in this and future reports, we will refer to estimated adjusted earnings from operations, which is a non-GAAP measure. However, we have calculated adjusted earnings from operations and estimated future adjusted earnings from operations in this report on the same basis as we estimated normalized earnings in our second quarter report.
Comparison with Third Quarter Actual Adjusted Earnings from Operations
Our estimate of adjusted earnings from operations for the financial quarter ended September 30, 2009 excluded equity related gains and losses (to the extent actual gains and losses are different from those assumed in our estimates as described in footnote 1 to the "Reconciliation with GAAP Measure" table below and other than realized gains on our available-for-sale ("AFS") equity portfolio); interest and other investment related gains and losses; credit, OTTI and downgrades; policyholder experience gains and losses; tax related provisions on leveraged lease investments; other tax items such as the outcomes of tax appeals; and changes in actuarial methods and assumptions; the net effect of which we are unable to reliably estimate. Adjusted earnings from operations for the third quarter was $803 million, which is within our estimate of between $750 million and $850 million for the quarter.
Reconciliation with GAAP Measure
The following table reconciles adjusted earnings from operations to our reported net loss for the third quarter:
-------------------------------------------------------------------------
C$ millions
-------------------------------------------------------------------------
Adjusted earnings from operations 803
-------------------------------------------------------------------------
Adjusting items:
-------------------------------------------------------------------------
Equity market gains(1) 1,201
-------------------------------------------------------------------------
Interest rate charges(2) (1,222)
-------------------------------------------------------------------------
Credit and other impairments (111)
-------------------------------------------------------------------------
Changes in actuarial methods and assumptions (783)
-------------------------------------------------------------------------
Currency rates(3) (27)
-------------------------------------------------------------------------
Other items(4) (33)
-------------------------------------------------------------------------
Net Loss reported (172)
-------------------------------------------------------------------------
(1) Adjusted earnings from operations excludes equity market changes that
differ from our best estimate assumptions of 7.25% per annum in
Canada, 8.0% per annum in the U.S., 5.0% per annum in Japan and 9.5%
per annum in Hong Kong and excluding realized gains on our AFS
portfolio. For actuarial valuation purposes, these returns are
reduced by margins for adverse deviation to determine net yields used
in valuation.
(2) Changes in interest rates impact the actuarial valuation of in-force
policies by changing the future returns assumed on the investment of
net future cash flows. This impact is excluded when calculating
adjusted earnings from operations.
(3) Adjusted earnings from operations excludes the impact of changes in
currency exchange rates from those in effect at June 30, 2009 when we
originally provided our estimate of this amount. Since that time, the
Canadian dollar has strengthened and the Canadian dollar equivalent
of one U.S. dollar has declined from $1.1625 as at June 30, 2009 to
$1.0722 as at September 30, 2009. The average daily exchange rate for
the quarter was $1.098. This decline has reduced net income by $27
million during the quarter but did not reduce adjusted earnings from
operations.
(4) Adjusted earnings from operations excludes certain other items: the
impact of the reduced value of real estate appraisals and reduced
private equity returns partially offset by the favourable impact of
closing uncertain tax positions, changes in tax methodology related
to certain permanent differences, gains related to the recapture of
reinsurance treaties and a small amount of policyholder experience
gains.
Included in the adjusted earnings from operations for the third quarter of $803 million are $52 million of realized gains on our AFS equity portfolio which were largely offset by the negative impact of lower interest rates on new business written in the quarter.
Estimated Adjusted Earnings from Operations for remainder of 2009 and 2010
Given the current economic conditions including the volatility of equity markets, interest rates, the impact of current economic conditions on credit and other factors, we are providing forward-looking information for financial periods for the fourth quarter of 2009 and for all quarters in 2010 for what we refer to as adjusted earnings from operations. The information in this section is forward-looking information and should be read in conjunction with the section below entitled "Caution Regarding Forward-Looking Statements". This discussion should not be considered earnings guidance, particularly as it is not possible to predict near term market conditions and because adjusted earnings from operations excludes items that are included in GAAP net income or loss. Estimated adjusted earnings from operations are based on assumptions that include our book of business, equity market growth as described in footnote 1 to the "Reconciliation with GAAP Measure" table above, foreign currency rates that are consistent with levels as at June 30, 2009, and other investment returns and policyholder experience consistent with our current best estimate actuarial assumptions. As a result, it would exclude items such as: investment related gains and losses (equity, interest rate, credit and other non fixed income) where the returns differ from our best estimate policy liability assumptions (the assumptions for equity and interest rates are described in footnotes (1) and (2) to the "Reconciliation with GAAP Measure" table above); credit and OTTI losses on assets in the Corporate and Other segment; policyholder experience gains and losses; tax related provisions on leveraged lease investments; resolution of uncertain tax positions as a result of settlements or closing of tax years; changes to tax rates; changes in accounting policies; and changes in actuarial methods and assumptions. It would, however, include gains, but not losses or other impairments, realized on AFS assets. We adjust for these items because they affect the comparability of our financial results and could potentially distort the analysis of trends in business performance. We are unable to reliably estimate the net effect of these items and adjusting for these items does not imply they are non-recurring.
We estimate adjusted earnings from operations to be between $750 million and $850 million per quarter for the remainder of 2009 and 2010. Estimated adjusted earnings from operations would imply a return on common shareholders' equity of approximately 12 per cent. Actual reported quarterly results will differ from estimated adjusted earnings from operations as a result of any changes in the factors outlined above. See also "Risk Factors" in our most recent Annual Information Form, "Risk Management" and "Critical Accounting and Actuarial Policies" in the Management's Discussion and Analysis in our most recent annual and interim reports, and the "Risk Management" note to the consolidated financial statements in our most recent annual and interim reports for other factors that could impact adjusted earnings from operations and actual reported results.
Loss per Share and Return on Common Shareholders' Equity
Third quarter loss per common share was $0.12, compared to earnings per share of $0.33 in 2008 on a fully diluted basis. Return on common shareholders' equity was minus 3.0 per cent for the three months ended September 30, 2009 (plus 8.2 per cent for the three months ended September 30, 2008). Return on common shareholders' equity, a non-GAAP financial measure, is calculated excluding Accumulated Other Comprehensive Income (Loss) on AFS securities and cash flow hedges. See "Performance and Non-GAAP Measures" below.
Premiums and Deposits(4)
Premiums and deposits excluding variable annuities amounted to $14.3 billion in the third quarter of 2009, compared to $14.1 billion for the same period last year.
Premiums and premium equivalents(4) related to the insurance businesses were $5.1 billion, an increase over the prior year of seven per cent on a constant currency basis. The Company's Consolidated Statements of Operations show a decline in premiums as a result of an external reinsurance agreement related to Canada Group Benefits. As the agreement provides that the Company retains certain upside benefits and certain risks, we continue to include the associated direct premiums as part of the premiums and deposits metric. Driven by growth in the in-force business, insurance premiums and premium equivalents increased 10 per cent in the U.S., five per cent in Canada and 14 per cent in Asia and Japan.
Annuity and pension premiums excluding variable annuities were $1.8 billion compared to $1.2 billion in the prior year, fueled by the increased demand for fixed return wealth products and group annuity sales in Canada.
Deposits excluding variable annuities were $7.5 billion in the quarter, a decline of $0.8 billion from the prior year. The decline results from a decrease in Institutional Advisory Account deposits, where the deposit recognition is based on winning new mandates.
Variable annuity and segregated fund deposits of $1.9 billion declined by $2.1 billion, or more than half of the prior year's deposits, as a result of the Company's on-going risk management initiatives across all geographies and, to a lesser extent, general economic conditions.
Funds under Management(4)
Total funds under management as at September 30, 2009 were $436.5 billion, up from $385.3 billion at September 30 last year. The increase was a result of positive policyholder cash flows of $20 billion, an increase in capital of $2.4 billion as described in the section below, and the cumulative positive impact over the last four quarters of investment returns. The growth in funds under management also includes the acquisition of AIC Limited's retail investment fund business which closed in September 2009 and added $3.8 billion to mutual fund assets under management.
Capital(4)
Total capital was $30.7 billion as at September 30, 2009, $2.4 billion higher than $28.3 billion as at September 30, 2008. Capital increased by $2,275 million from the issuance of common shares in the fourth quarter of 2008, $800 million from the issuance of preference shares in the first half of 2009, $1,000 million from the issuance of Innovative Tier 1 notes in the third quarter of 2009, $565 million of net unrealized gains on AFS assets and $353 million from a weakening Canadian dollar. These increases were partially offset by the cumulative effect over the last twelve months of $1,294 million of net losses and $1,370 million of shareholder dividends paid in cash.
Regulatory capital adequacy is primarily managed at the operating insurance company level (MLI and John Hancock Life Insurance Company ("JHLICO")). MLI's Minimum Continuing Capital and Surplus Requirements ("MCCSR") ratio of 229 per cent as at September 30, 2009 has increased by 36 points from 193 per cent as at September 30, 2008. The increase in the ratio resulting from capital injections from Manulife Financial Corporation ("MFC")'s capital raising activities more than offset the aggregate impact of net losses and dividends paid.
--------------------------------------
(4) Premiums and deposits, premiums and premium equivalents, funds under
management and capital are all non-GAAP measures. See "Performance
and Non-GAAP Measures" below.
PERFORMANCE BY DIVISION
U.S. Insurance
Quarterly Results
Canadian dollars 3Q09 2Q09 3Q08
------------------------
Net Income (Loss) Attributed to Shareholders
(millions) (601) (631) 311
Premiums & Deposits (millions) 2,020 1,962 1,842
Funds under Management (billions) 66.3 67.7 59.9
------------------------
Quarterly Results
U.S. dollars 3Q09 2Q09 3Q08
------------------------
Net Income (Loss) Attributed to Shareholders
(millions) (547) (541) 298
Premiums & Deposits (millions) 1,838 1,682 1,769
Funds under Management (billions) 61.8 58.2 56.5
------------------------
U.S. Insurance recorded a net loss attributed to shareholders of US$547 million for the third quarter of 2009, compared with net income of US$298 million reported a year earlier. The results in the third quarter of 2009 were driven by investment related losses on in-force business. Other earnings components were also affected by the financial markets - the decline in interest rates also adversely impacted investment returns assumed for new business written in the quarter and was partially offset by the favourable impact on actuarial liabilities of the increase in equity markets on variable universal life products. Adverse long-term care claims experience also contributed to the loss in the third quarter of 2009. The results in the third quarter of 2008 included favourable investment related results. On a Canadian dollar basis, the net loss attributed to shareholders for the third quarter was $601 million, compared to net earnings of $311 million reported a year earlier. The year-to-date net loss attributed to shareholders was US$1,162 million compared to net earnings of US$727 million in 2008.
Premiums and deposits for the quarter were US$1.8 billion, up four per cent from the third quarter of 2008 primarily due to higher universal life premiums, dampened by lower variable life deposits.
Funds under management were US$61.8 billion, up nine per cent from September 30, 2008 due to business growth and an increase in the market value of funds under management.
U.S. Wealth Management
Quarterly Results
Canadian dollars 3Q09 2Q09 3Q08
------------------------
Net Income (Loss) Attributed to Shareholders
(millions) 593 1,551 (27)
Premiums & Deposits (millions) 7,169 7,956 8,367
Funds under Management (billions) 176.5 170.6 164.1
------------------------
Quarterly Results
U.S. dollars 3Q09 2Q09 3Q08
------------------------
Net Income (Loss) Attributed to Shareholders
(millions) 541 1,329 (25)
Premiums & Deposits (millions) 6,531 6,817 8,037
Funds under Management (billions) 164.6 146.7 154.8
------------------------
U.S. Wealth Management's net income attributed to shareholders for the third quarter of 2009 was US$541 million, compared with a net loss of US$25 million reported a year earlier. Earnings in the third quarter of 2009 benefited from the impact of the favourable equity market performance on segregated fund guarantee reserves, partially offset by unfavourable movement in interest rates and other investment related results. A loss was reported in the third quarter of 2008 as a result of the decline in equity markets and unfavourable investment related results, partially offset by the successful outcome of certain tax appeals. On a Canadian dollar basis, net income attributed to shareholders for the third quarter was $593 million compared with a net loss of $27 million in 2008. Year-to-date net income attributed to shareholders was US$1,365 million compared with US$391 million in 2008.
Premiums and deposits, excluding variable annuities, for the quarter were US$5.7 billion, down three per cent from US$5.9 billion for the third quarter of 2008 as a result of the impact of equity market volatility and the economic downturn on premiums and deposits in John Hancock Wealth Asset Management, partially offset by an increase in John Hancock Fixed Products sales. Premiums and deposits of variable annuities were US$0.8 billion compared to US$2.1 billion in the third quarter of 2008 as a result of ongoing risk management initiatives and, to a lesser extent, general economic conditions.
Funds under management were US$164.6 billion, up US$9.8 billion or six per cent from September 30, 2008. The increase was net of US$3.5 billion of scheduled maturities in Fixed Products over the last twelve months and driven by a combination of strong net policyholder cash flows, the cumulative four quarter impact of investment returns, and the additional assets to support the JH Variable Annuities segregated fund guarantee policy liabilities.
Canadian Division
Quarterly Results
Canadian dollars 3Q09 2Q09 3Q08
------------------------
Net Income Attributed to Shareholders (millions) 113 336 113
Premiums & Deposits (millions) 4,075 4,316 3,794
Funds under Management (billions) 101.1 91.2 84.2
------------------------
Canadian Division's net income attributed to shareholders for the third quarter of 2009 was $113 million, consistent with that reported a year ago. Earnings reflected good operational results, including favourable claims experience, focused expense management and business growth partially offset by adverse lapse experience on individual insurance. The increase due to the impact of improved market performance on segregated fund guarantee reserves was offset by net investment related losses in the quarter and lower allocated interest on surplus. Also included in the current quarter's income were gains related to the recapture of reinsurance agreements in accordance with treaty provisions. The division had a net tax recovery in the quarter, as a portion of the investment related gains was subject to lower tax rates than were the investment related losses. Year-to-date net income attributed to shareholders was $361 million compared to $669 million in 2008.
Premiums and deposits, excluding variable annuities, for the quarter were $3.3 billion, up 18 per cent from $2.8 billion in the third quarter of 2008. The growth was driven by an 18 per cent rise in premiums and premium equivalents to $2.7 billion, reflecting record sales of fixed annuities in Group Savings & Retirement Solutions ("GSRS") and higher volumes of retail fixed rate products as consumers' investment conservatism continued. Strong growth in retirement plan deposits from new sales and recurring deposit activity from a growing block of in-force participants also contributed to the increase. Premiums and deposits of variable annuity products were $0.8 billion compared to $1.0 billion a year ago.
Funds under management grew by 20 per cent, or $16.9 billion, to $101.1 billion as at September 30, 2009. Positive net sales of retail segregated funds and fixed rate products, combined with modestly favourable market growth, and strong sales momentum in GSRS were key contributors to the year-over-year increase. Continued growth in Manulife One drove a 38 per cent rise in Manulife Bank invested assets. In addition, the acquisition of the retail investment fund business of AIC Limited, which closed on September 25, added $3.8 billion to mutual fund assets under management.
Asia and Japan Division
Quarterly Results
Canadian dollars 3Q09 2Q09 3Q08
------------------------
Net Income Attributed to Shareholders (millions) 417 885 216
Premiums & Deposits (millions) 1,949 2,477 2,169
Funds under Management (billions) 58.4 56.5 42.6
------------------------
Quarterly Results
U.S. dollars 3Q09 2Q09 3Q08
------------------------
Net Income Attributed to Shareholders (millions) 380 758 208
Premiums & Deposits (millions) 1,775 2,122 2,084
Funds under Management (billions) 54.5 48.6 40.2
------------------------
Asia and Japan Division's net income attributed to shareholders for the third quarter of 2009 was US$380 million, up US$172 million from US$208 million a year earlier. Gains recorded on the variable annuity business in Japan as a result of improved equity market performance were partially offset by unfavourable investment related losses. On a Canadian dollar basis, net income attributed to shareholders was $417 million, up $201 million from a year ago. Year-to-date net income attributed to shareholders was US$1,256 million compared to US$606 million in 2008.
Premiums and deposits excluding variable annuity products for the quarter were US$1.5 billion, up 20 per cent from US$1.3 billion for the third quarter of 2008. Driving the result was the 13 per cent insurance premium growth from in-force business in Japan and Hong Kong coupled with higher mutual fund sales in Indonesia as a result of the market recovery. Premiums and deposits of variable annuity products were US$0.3 billion compared to US$0.8 billion a year ago.
Funds under management were US$54.5 billion, up 35 per cent from September 30, 2008. Growth was driven by net policyholder cash inflows of US$3.9 billion together with the positive impact of improving equity market performance, mainly in Hong Kong and Other Asia territories, in the past twelve months.
Reinsurance Division
Quarterly Results
Canadian dollars 3Q09 2Q09 3Q08
------------------------
Net Income Attributed to Shareholders (millions) 65 45 49
Premiums (millions) 267 292 272
------------------------
Quarterly Results
U.S. dollars 3Q09 2Q09 3Q08
------------------------
Net Income Attributed to Shareholders (millions) 59 38 47
Premiums (millions) 243 250 261
------------------------
Reinsurance Division's net income attributed to shareholders for the third quarter of 2009 was US$59 million, compared to US$47 million reported a year earlier. During the third quarter of 2009, favourable claims experience in Life Reinsurance and the favourable impact of the increase in the U.S. equity markets on segregated fund guarantee reserves were largely offset by investment related losses. In the third quarter of 2008, the losses related to segregated fund guarantees were offset by investment related gains. On a Canadian dollar basis, net income attributed to shareholders for the third quarter was $65 million, up $16 million from $49 million reported a year earlier. Year-to-date net income attributed to shareholders was US$145 million, compared to US$165 million in 2008.
Premiums for the quarter were US$243 million, down US$18 million or seven per cent from US$261 million for the third quarter of 2008. The decline was due to lower Life Reinsurance premiums as a result of higher experience refunds and reduced International Group Program premiums due to the impact of the weakened Euro against the U.S. dollar. Partly offsetting these declines were higher Property and Casualty premiums largely due to increased volumes. On a Canadian dollar basis, premiums for the quarter were $267 million, down two per cent from $272 million reported in the third quarter of 2008.
Corporate and Other
Quarterly Results
Canadian dollars 3Q09 2Q09 3Q08
------------------------
Net Loss Attributed to Shareholders (millions) (759) (412) (152)
Funds under Management (billions) 31.5 32.2 31.8
------------------------
Corporate and Other is comprised of the earnings on excess residual capital (assets backing capital, net of amounts allocated to operating divisions), changes in actuarial methods and assumptions, Investment Division's external asset management business and the John Hancock Accident and Health operation, which consists primarily of contracts in dispute, and other non-operating items.
Corporate and Other recorded a net loss attributed to shareholders of $759 million in the third quarter of 2009, compared to a net loss of $152 million a year earlier. The current quarter included a charge for changes in actuarial methods and assumptions of $783 million compared to a charge of $27 million a year earlier. Excluding the changes in actuarial methods and assumptions, earnings were $24 million in the third quarter of 2009 and a loss of $125 million the prior year. The increase of $149 million is primarily due to current period tax related benefits of $71 million and $52 million of realized gains on our available-for-sale equity portfolio. The year-to-date net loss attributed to shareholders was $1,635 million compared to a net loss of $203 million in 2008.
Funds under management were $31.5 billion, down one per cent from September 30, 2008. This decrease is primarily due to higher assets allocated to the operating divisions, partially offset by funds received from debt and share capital issuances in the past twelve months.
RISK MANAGEMENT
The significant disruption of financial markets and severe deterioration of the economy during 2008 and early 2009 presented extraordinary challenges for the risk management function at the Company. The Company's balance sheet and earnings are sensitive to equity market performance, as well as changes in interest rates and credit deterioration. As a result of the deterioration of the economy, these three factors have an increased impact, heightening the importance of managing risk and capital.
Under our equity and interest rate risk policies, we previously delegated authority to management to operate within enterprise-wide economic capital and earnings-at-risk limits related to equity and interest rate risks and required management to report to and seek authority from the Audit and Risk Management Committee of the Board of Directors when the exposure exceeded those limits. During the fiscal quarter ended September 30, 2009, we established new policies requiring management to develop plans to reduce publicly-traded equity risk and interest rate risk exposures to within specified economic capital, MCCSR and earnings-at-risk targets, but only when it is economical to do so. These plans would involve limiting risk exposure arising from new sales and hedging a portion of the risks arising from our existing business. In particular, the plan would include re-balancing our variable annuity sales relative to other lines of business, hedging the equity and interest rate risks arising from the vast majority of new variable annuity sales according to the hedging approach described in "Variable Annuity and Segregated Fund Investment Related Guarantees" below, as well as continued re-design and re-pricing of new products to reduce risk, improve margins and increase their expected hedge effectiveness. The plan would also include hedging a material portion of our unhedged variable annuity guarantees only when it is economic to do so and hedging a portion of the interest rate risk arising from the uncertainty of returns achievable on future long-term insurance and long-term care recurring premiums only when it is economic to do so.
There can be no assurance that the Company's exposure to publicly-traded equity performance and movements in interest rates will be reduced to within established targets. Depending on market conditions, including a sustained increase in equity market volatility or decline in interest rates, the costs of hedging the benefit guarantees provided in variable annuities may increase or become uneconomic, in which case we may reduce or discontinue sales of certain of these products. In addition, there can be no assurance that the Company's capital market hedging strategy will fully reduce the risks related to the guaranteed products being hedged. Please see "Variable Annuity and Segregated Fund Investment Related Guarantees" below.
For further information relating to our risk management practices and risk factors affecting the Company, see "Risk Factors" in our most recent Annual Information Form, "Risk Management" and "Critical Accounting and Actuarial Policies" in Management's Discussion and Analysis in our most recent annual and interim reports and the "Risk Management" note to consolidated financial statements in our most recent annual and interim reports.
Market Price and Interest Rate Risk
Due to the nature of the insurance business, invested assets and insurance liabilities as well as revenues and expenses are impacted by movements in capital markets and interest rates. Accordingly, the Company considers these risks together to ensure that the risks in its asset and liability positions are properly managed. These risks are referred to collectively as market price and interest rate risk - the risk of loss resulting from adverse movements in market price, risk-free interest rates and credit spreads.
Interest rate risk arises within the Comp
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