C$ unless otherwise stated
TSX/NYSE/PSE: MFC
SEHK:945

Performance and strategic highlights:

• Asia Division – Delivered strong double digit growth, versus prior year, in insurance sales and new business value driven by sales in Japan, Hong Kong and Singapore; doubled wealth and asset management gross flows compared with prior year levels, reflecting the success of new funds launched in mainland China as well as continued strong growth in Hong Kong; expanded distribution in mainland China as the first foreign invested joint-venture life insurance company licensed to sell mutual funds through our agency force; launched a new affiliated advisor channel in Singapore.
• Canadian Division – Generated solid individual insurance sales; delivered strong wealth and asset management flows; announced the addition of more than 800 Manulife Bank automated banking machines across Canada.
• U.S. Division – Achieved our second highest quarter of mutual fund gross flows; completed the Retirement Plan Services acquisition and reinsurance agreement with New York Life; acquired Guide Financial, a software provider that uses behavioural finance and artificial intelligence to help advisors and customers make financial decisions; launched John Hancock Worldwide Investors, an Undertakings for Collective Investment in Transferrable Securities (“UCITS”) platform, to expand John HancockInvestments’ reach to non-U.S. domiciled investors.
• Global Wealth and Asset Management – Achieved $475 billion in assets under management and administration (“AUMA”) for our wealth and asset management businesses, lifting our total company AUMA to $883 billion; generated $14.5 billion of net flows in our wealth and asset management businesses; achieved record institutional gross flows at Manulife Asset Management, which included a large fixed-income mandate for a Canadian client.

TORONTO, Aug. 6, 2015 /PRNewswire/ – Manulife Financial Corporation (“MFC”) today announced net income attributed to shareholders of $600 million for the second quarter of 2015 (“2Q15”), fully diluted earnings per common share of $0.29 and return on common shareholders’ equity (“ROE”) of 6.4%, compared with $943 million, $0.49, and 13.1%, respectively, for the corresponding period in 2014. The decline in net income attributed to shareholders was primarily related to the direct impact of changes in interest rates. In 2Q15, MFC generated core earnings¹ of $902 million, fully diluted core earnings per common share¹ of $0.44 and core return on common shareholders’ equity (“Core ROE”)¹ of 9.8%, compared with $701 million, $0.36, and 9.6%, respectively, for the corresponding period in 2014.

Donald Guloien, President and Chief Executive Officer, stated, “We continued to deliver robust growth in wealth management and life insurance, our core earnings grew 29% to $902 million, and our assets under management and administration reached $883 billion. Core earnings were higher than our expectations, but net income, as a result of changes in interest rates, was lower than expected.”

“In terms of strategic developments, we became the first foreign invested life insurance company in mainland China to be granted a licence to sell mutual fund products through its agency force, and we also acquired an innovative software provider that uses behavioural finance and artificial intelligence to help advisors and customers make financial decisions,” added Mr. Guloien.

Steve Roder, Chief Financial Officer, said, “Our strong core earnings demonstrate our continued execution on the key drivers of earnings growth: increasing scale in our wealth and asset management businesses, generating strong insurance growth in Asia, and delivering on our Efficiency & Effectiveness initiative.”

“We generated solid investment results this quarter and are back in positive territory for the year so far, reflecting our high quality portfolio and disciplined approach to extending credit. We also maintained a high degree of financial flexibility, with strong capital levels and improved financial leverage,” added Mr. Roder.

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Highlights for the Second Quarter of 2015:

• Reported net income attributed to shareholders of $600 million, down $343 million from the second quarter of 2014 (“2Q14”). In 2Q15, net income attributed to shareholders included core earnings of $902 million and net charges excluded from core earnings of $302 million, primarily due to the steepening of the interest rate yield curve as well as integration costs related to our recent acquisitions, partially offset by favourable investment-related experience.
• Delivered core earnings of $902 million, up $201 million from 2Q14.  The increase included $37 million related to our recent acquisitions, as well as higher fee income on higher asset levels in our wealth and asset management businesses, strong insurance sales in Asia and the strengthening of the U.S. dollar. Higher than average realized gains on available-for-sale equities and a number of smaller items also positively impacted core earnings this quarter.
• Generated solid investment-related experience of $128 million. The investment-related experience gains were driven by fixed income redeployment and favourable credit experience, partially offset by fair value losses on oil and gas holdings. In 2Q15, we included $51 million of favourable investment-related experience in core earnings, reflecting our net year-to-date favourable investment-related experience (1Q15 – charge of $77 million; 2Q15 – gain of $128 million).
• Achieved insurance sales² of $771 million, an increase of 27%³ compared with 2Q14. All three divisions contributed to the year-over-year growth in insurance sales. Asia insurance sales increased 36%, driven by continued expansion and diversification of our distribution channels and a series of successful product launches.  Canadian insurance sales increased 28% driven by large-case Group Benefits sales and strong Retail Insurance sales. U.S. insurance sales increased 2%.
• Generated net wealth flows² of $14.5 billion in our wealth and asset management businesses, more than double 2Q14 levels. Driving the strong net flows were robust gross flows² of $34.9 billion, up 74%³ from 2Q14 (up 61% excluding recently acquired businesses). Asia achieved gross flows more than double 2Q14 levels, driven by successful fund launches in mainlandChina and a successful pension marketing campaign in Hong Kong.  Canadian gross flows increased 64%, driven by strong mutual fund deposits, large-case group retirement activity and the recent acquisition of the Canadian-based operations of Standard Life plc (“Standard Life”). U.S. gross flows increased 11%, driven by the inclusion of New York Life’s retirement business and the second highest quarterly gross flows at John Hancock Investments. Manulife Asset Management (“MAM”) achieved record gross flows of $11.0 billion, more than triple prior year levels mainly due to a significant fixed income mandate from a Canadian institutional client.
• Delivered Other Wealth sales of $1.8 billion in 2Q15, double prior year levels (up 59% excluding recent acquisitions). Other Wealth sales in Asia more than doubled driven by expanded distribution of the recently launched single premium wealth accumulation product in Japan, while Canada benefited from the inclusion of Standard Life’s segregated fund business.⁴
• Achieved assets under management and administration⁴ of $883 billion at June 30, 2015.  The record assets under management and administration was driven by the inclusion of group pension assets under administration acquired from New York Life. Wealth and asset management AUMA increased $189 billion over the prior year to a record $475 billion, including contributions of $109 billion from recent acquisitions.
• Reported a Minimum Continuing Capital and Surplus Requirements (“MCCSR”) ratio of 236% for The Manufacturers Life Insurance Company (“MLI”) as at June 30, 2015, down 9 points from 245% as at March 31, 2015. The decline reflects net financing activities⁵ and a four point reduction due to the closing of the acquisition of New York Life’s Retirement Plan Services business, a portion of which will reverse with the July 1, 2015 completion of the related reinsurance agreement. MFC’s financial leverage ratio was 26.2% as at June 30, 2015 compared with 26.6% as at March 31, 2015.
• Generated New Business Value⁶ of $227 million in 2Q15, up 34% from 2Q14.  The growth in new business value largely reflects volume growth and increased margins in Asia.
• Continued to make substantial progress on our Efficiency and Effectiveness (“E&E”) initiative, with 55% of the projects now completed. We estimate net pre-tax savings of $300 million for 2015 and remain on track to achieve $400 million in 2016⁷. We continue to invest in strategic initiatives outside of E&E to sustain our long-term earnings growth.

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Financial Highlights

SALES AND BUSINESS GROWTH

Asia Division

Roy Gori, Senior Executive Vice President and General Manager, Asia Division stated, “We sustained strong sales momentum and achieved record results in both insurance sales and wealth and asset management gross flows, on a constant currency basis, and doubled Other Wealth sales compared with 2Q14.  We continued to expand our distribution reach by launching an affiliated advisor channel in Singapore and we became the first foreign invested joint-venture life insurance company in mainland China to be licensed to sell mutual funds through our agency force, demonstrating our integrated approach to fulfilling the life insurance and wealth management needs of our customers.”

Insurance sales of US$374 million in 2Q15 were 36% higher than 2Q14, with record sales reported in both Japan and Asia Other. Year-to-date sales of US$712 million were 39% higher than the same period of 2014. (Percentages quoted below are for the period 2Q15 compared with 2Q14, unless stated otherwise.)

• Japan insurance sales in 2Q15 were US$169 million, a 27% increase driven by the continued momentum of corporate products and higher retail sales.
• Hong Kong insurance sales in 2Q15 were US$84 million, a 40% increase reflecting the success of products launched in 2014 and higher sales through our bank-distribution channel.
• Indonesia insurance sales in 2Q15 were US$24 million, a 4% increase with strong growth in bancassurance sales being largely offset by a decline in agency sales.
• Asia Other (excludes Japan, Hong Kong and Indonesia) insurance sales in 2Q15 were US$97 million, a 65% increase with continued strong growth from recent product launches in Singapore and China and the success of sales campaigns in Vietnam.

Wealth and Asset Management (“WAM”) gross flows of US$5.2 billion in 2Q15 were 176% higher than 2Q14, with record gross flows in Hong Kong and Asia Other. Year-to-date gross flows of US$7.9 billion were 131% higher than the same period of 2014.(Percentages quoted below are for the period 2Q15 compared with 2Q14, unless stated otherwise.)

• Japan gross flows in 2Q15 of US$110 million decreased 10%, reflecting the timing of fund launches.
• Hong Kong gross flows in 2Q15 of US$674 million increased 35%, reflecting continued growth of our pension business and the favourable impact of sales campaigns.
• Indonesia gross flows in 2Q15 of US$130 million decreased 35% due to the impact of unfavourable market conditions on mutual fund sales.
• Asia Other gross flows of US$4.2 billion were more than four times prior year levels. China gross flows were particularly strong and benefited from new fund launches combined with strong market sentiment resulting in record WAM gross flows.

Other Wealth sales of US$691 million in 2Q15 were 118% higher compared with 2Q14. Year-to-date sales of US$1.3 billion were 114% higher than the same period of 2014. (Percentages quoted below are for the period 2Q15 compared with 2Q14, unless stated otherwise.)

• Japan other wealth sales in 2Q15 of US$479 million were more than four times the same period of 2014, driven by expansion of our bank-distribution network.
• Hong Kong other wealth sales in 2Q15 of US$42 million were at a similar level to the prior year. Increased sales through our wealth specialist agents were offset by the non-recurrence of last year’s strong sales of a RMB product.
• Indonesia other wealth sales in 2Q15 of US$35 million decreased 33% due to the impact of unfavourable market conditions.
• Asia Other other wealth sales in 2Q15 of US$135 million increased 22%, reflecting strong performance in Philippines andSingapore.

Canadian Division

Marianne Harrison, Senior Executive Vice President and General Manager, Canadian Division stated, “We continue to deliver strong momentum in our wealth and asset management businesses, driven by success in large-case group retirement and strong mutual fund performance. The number of Four- or Five-Star Morningstar rated funds⁸ increased from 33 to 41 in the quarter. Our insurance sales reflected improved competitive positioning in both Group Benefits and Retail Insurance.”

Ms. Harrison added, “We launched Manulife Quick Issue Term life insurance featuring a simple, online application with a streamlined underwriting process and started the roll out of over 800 Manulife Bank-branded  automated banking machines across Canada, helping our customers access banking services however and whenever they like.  We achieved a significant milestone in our Standard Life integration, receiving regulatory approval to transfer legal and financial responsibility for Standard Life plans and policies to our main Canadian insurance company.  Overall, our integration activities are on track.”

Wealth and Asset Management gross flows in 2Q15 were $3.9 billion including $0.9 billion from Standard Life products compared with $2.4 billion in 2Q14. Year-to-date gross flows were $8.3 billion, an increase of $2.7 billion over the same period in 2014, reflecting strong momentum in mutual funds and the addition of Standard Life.

• Mutual Funds assets under management (“MF AUM”)⁹ and other funds assets under management were a record $43.3 billion at June 30, 2015, compared with $30.7 billion at June 30, 2014. The increase reflects $6.8 billion of Standard Life mutual funds assets under management and strong net flows, in addition to the favourable impact of market returns. Gross flows during 2Q15 of $2.0 billion were 39% higher compared with 2Q14, reflecting a 21% increase in Manulife mutual funds and the contribution from Standard Life mutual funds.
• Group Retirement Solutions gross flows of $1.9 billion in 2Q15 were more than double 2Q14, driven by large-case sales activity and the addition of Standard Life.  Gross flows from Standard Life plans contributed $655 million in the quarter.

Other Wealth sales of $923 million in 2Q15 were double those in 2Q14 driven by growth in segregated fund sales. On a year-to-date basis, other wealth sales were $2.0 billion with Standard Life products contributing $0.8 billion.

• Segregated Fund Products¹⁰ sales were $765 million in 2Q15 compared with $353 million in 2Q14. The increase includes $343 million from Standard Life products and a 20% year-over-year increase in Manulife product sales.
• Fixed Products sales were $158 million in 2Q15 compared with $109 million in 2Q14 driven by the addition of Standard Life which contributed $75 million. Our deliberate rate positioning continues to constrain fixed product sales in the continuing low interest rate environment.

Manulife Bank net lending assets were $19.3 billion as at June 30, 2015, in line with prior year levels, as growth continues to be impacted by continued intense competition in the residential mortgage market.

Insurance sales of $166 million in 2Q15 increased 28% compared with 2Q14 driven by large case Group Benefits sales and strong Retail Insurance sales.  Year-to-date sales were $380 million, 44% above the prior year period due to improved competitive positioning in Group Benefits.

• Retail Insurance sales of $48 million in 2Q15 increased by 23% over 2Q14 and were 30% above 1Q15 driven by strong universal life and term product sales.
• Institutional Markets sales of $118 million in 2Q15 increased 31% driven by large case Group Benefits sales.  Based on recent industry data¹¹, Group Benefits’ sales market share increased to 24% in 1Q15 reflecting the success of actions taken to improve our competitive positioning.

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U.S. Division

Craig Bromley, Senior Executive Vice President and General Manager, U.S. Division stated, “Our second quarter results are on track both financially and in terms of delivering on our strategy. John Hancock Investments enjoyed its second best quarter of gross flows in history and net flows continued to outpace the industry¹² in an economic environment where inflows favor passive funds and ETF’s and a number of competitors are suffering net outflows. In April, we completed the strategic acquisition of New York Life’s Retirement Plan Services business and by quarter end we successfully completed the first phase of integration activities.  The acquisition contributed US$1.1 billion of gross flows in the quarter and US$55 billion of new assets under administration. In addition, we acquired an innovative software provider that uses behavioural finance and artificial intelligence to help advisors and customers make financial decisions.”

“We launched an exclusive U.S. life insurance partnership with Vitality, the global leader in integrating wellness benefits with life insurance products. Through this agreement we became the first carrier in the U.S. to offer life insurance products fully integrated with wellness features on Term and Universal Life products,” added Mr. Bromley.

Wealth and Asset Management gross flows in 2Q15 were US$11.1 billion, an increase of 11% compared with 2Q14 driven by the above noted acquisition.  Year-to-date gross flows of US$20.8 billion increased 3% compared with the prior year period.

• John Hancock Investments (“JHI”) gross flows of US$6.9 billion in 2Q15 were consistent with 2Q14 (which included a US$1 billion institutional platform allocation).  Gross flows continued to be driven by a strong product line, including 38 Four- or Five-Star Morningstar rated funds. Assets under management increased 13% to a record US$80.0 billion and for the 15^th consecutive quarter JHI net flows were positive.  Our 12-month trailing organic growth rate through June 2015 (calculated as net new flows as a percentage of beginning assets) was 12% compared with an industry growth rate that was slightly negative¹².  JHI launched its first Undertakings for Collective Investment in Transferrable Securities (“UCITS”) products for non-U.S. investors, enabling it to enter new markets and expand its investor base.
• JH Retirement Plan Services gross flows of US$4.2 billion in 2Q15 increased 39% compared with 2Q14. Gross flows includedUS$1.1 billion in Total Retirement Solutions (“TRS”), the business acquired from New York Life, and also benefitted from increasing ongoing participant contributions in the business overall.  While TRS gross flows were primarily from in-force customers, several large committed cases are expected to close later in the year.¹³  Sales in our core small-case market grew 16% in 2Q15 compared with 2Q14 as the business is seeing the benefit of actions taken over the last year to improve competitiveness.

Insurance sales in 2Q15 of US$118 million increased 2%. Year-to-date sales of US$235 million increased 5% compared with the same period of 2014 driven by several product enhancements made last year that continue to generate strong sales momentum.

• JH Life sales of US$108 million in 2Q15 increased 6% compared with 2Q14, driven by sales of our flagship Protection universal life (“UL”) product and International products.  We have obtained a number of state approvals of the Vitality initiative for UL and term products and extended the Vitality feature to our indexed universal life product early in 3Q15.  These initiatives are expected to drive increased sales in the second half of the year.¹²
• JH Long-Term Care (“JH LTC”) sales of US$10 million in 2Q15 decreased 23% compared with 2Q14 due to the time it takes to transition sales to our innovative Performance LTC product launched in March 2015.

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Investment Division

Warren Thomson, Senior Executive Vice President and Chief Investment Officer, said, “For the General Fund, we delivered investment-related experience gains of $128 million driven by the impact of very strong fixed income redeployment and favourable credit experience. These gains were partially offset by fair value losses on oil and gas related investments. We are pleased that our investment-related experience rebounded and in the second quarter was in line with our through-the-cycle expectation.”

Kai Sotorp, President and CEO, Manulife Asset Management (“MAM”) & Executive Vice President and Global Head of Wealth and Asset Management, said, “Long-term investment performance continues to be very strong and we are increasing our global distribution capability to support our growth plans. Our institutional assets under management reached $64.7 billion at June 30, 2015, including $7.7 billion related to Standard Life, and in total were 72% higher than a year ago. Second quarter total institutional net sales of $8.3 billion were the strongest in our history, and more than four times those of second quarter 2014.”

Mr. Sotorp continued, “Manulife’s overall Global Wealth and Asset Management (“WAM”) businesses continued to generate strong net flows in the second quarter of 2015, raising a record $14.5 billion. Core EBITDA¹⁴ in the second quarter of 2015 was $290 million, up 18% from the second quarter of 2014. Core EBITDA margin was 27%, compared with 28% in the second quarter of 2014.”

At June 30, 2015, total assets managed by MAM were $390 billion, including $341 billion managed for external clients. Assets managed for external clients increased $6.9 billion from March 31, 2015. At June 30, 2015, MAM had a total of 101 Four- or Five-Star Morningstar rated funds, an increase of 15 funds since March 31, 2015.”

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CORPORATE ITEMS

In a separate news release today, the Company announced that the Board of Directors approved a quarterly shareholders’ dividend of 17 cents per share on the common shares of MFC, payable on and after September 21, 2015 to shareholders of record at the close of business on August 18, 2015.

The Board of Directors also approved that, in respect of MFC’s September 21, 2015 common share dividend payment date, and pursuant to MFC’s Canadian Dividend Reinvestment and Share Purchase Plan and its U.S. Dividend Reinvestment and Share Purchase Plan, the required common shares be purchased on the open market.  The purchase price of such shares will be based on the average of the actual cost to purchase such common shares. There are no applicable discounts because the common shares are being purchased on the open market and are not being issued from treasury.

Awards & Recognition

In Hong Kong, Manulife Hong Kong received “Fund Management Company of the Year, Hong Kong-MPF Provider” at The Asset – Triple A Asset Servicing, Investor and Fund Management Awards 2015. The awards aim to recognize excellent performance of institutional investors and fund managers as well as the top service providers in Asia-Pacific during the year.

In Indonesia, we received the Diamond Rank in the “Service Quality Award 2015, Life and Health Insurance Category” from the Customer Perception Survey. Manulife Indonesia was recognized for achieving exceptional total service quality satisfaction based on a national survey conducted in four major cities in Indonesia with more than 3,000 qualifying respondents.

In Vietnam, our “Manulife – My Beloved Family” product has been named “Trusted Product 2015” by the Intellectual Property and Creativity Magazine. This recognition is based on results from a yearly survey on Trusted products, Perfect services, and Favorite brands which is jointly facilitated by the Intellectual Property and Creativity Magazine, the Vietnam Science and Entrepreneurs’ Union and the Vietnam Association of Intellectual Property.

In the U.S., John Hancock was honoured by NASDAQ with the “Innovation in Financial Education Award”, which recognizes John Hancock’s significant efforts to improve the financial capability of young Americans. John Hancock has a partnership with EverFi, an education technology company, to deliver financial capability skills to students in our MLK Scholars program and we have also collaborated with EverFi to bring its financial education program to students across Michigan, at no cost to schools or taxpayers.

Notes:

Manulife Financial Corporation will host a Second Quarter Earnings Results Conference Call at 2:00 p.m. ET on August 6, 2015. For local and international locations, please call 416-340-8530 and toll free in North America please call 1-800-769-8320. Please call in ten minutes before the call starts. You will be required to provide your name and organization to the operator. A replay of this call will be available by 6:00 p.m. ET on August 6, 2015 through August 20, 2015 by calling 905-694-9451 or 1-800-408-3053 (passcode: 6718073).

The conference call will also be webcast through Manulife’s website at 2:00 p.m. ET on August 6, 2015. You may access the webcast at: www.manulife.com/quarterlyreports. An archived version of the webcast will be available at 6:00 p.m. ET on the website at the same URL as above.

The Second Quarter 2015 Statistical Information Package is also available on the Manulife website at:www.manulife.com/quarterlyreports.

MANAGEMENT’S DISCUSSION AND ANALYSIS

This Management’s Discussion and Analysis (“MD&A”) is current as of August 6, 2015, unless otherwise noted. This MD&A should be read in conjunction with the MD&A and audited consolidated financial statements contained in our 2014 Annual Report.

For further information relating to our risk management practices and risk factors affecting the Company, see “Risk Factors” in our most recent Annual Information Form, “Risk Management and Risk Factors” and “Critical Accounting and Actuarial Policies” in the MD&A in our 2014 Annual Report, and the “Risk Management” note to the consolidated financial statements in our most recent annual and interim reports.

In this MD&A, the terms “Company”, “Manulife”, “we”, “our” and “us” mean Manulife Financial Corporation (“MFC”) and its subsidiaries.

A OVERVIEW

A1 Earnings 

Manulife’s 2Q15 net income attributed to shareholders was $600 million compared with $943 million in 2Q14. The decline in earnings was primarily related to the direct impact of changes in interest rates and lower investment-related experience.

Net income attributed to shareholders is comprised of core earnings¹⁵ (consisting of items we believe reflect the underlying earnings capacity of the business), which amounted to $902 million in 2Q15 compared with $701 million in 2Q14, and items excluded from core earnings, which netted to charges of $302 million in 2Q15 compared with gains of $242 million in 2Q14.

The $201 million increase in core earnings included $37 million related to our recent acquisitions as well as higher fee income on higher asset levels in our wealth and asset management businesses, strong insurance sales in Asia and the strengthening of the U.S. dollar. Higher than average realized gains on available-for-sale equities and a number of smaller items also positively impacted core earnings this quarter.

Just over half of the $544 million unfavourable variance in items excluded from core earnings related to the direct impact of the steepening of the interest rate yield curve, largely reversing the gains reported in 4Q14 when the yield curve flattened.  The remainder of the variance is primarily due to lower investment-related experience and integration costs related to our recent acquisitions.

Our definition of core earnings (see G1 – “Performance and Non-GAAP Measures”) includes up to $400 million (2014 – $200 million) of favourable investment-related experience reported in a single year. In 2Q15 we included $51 million of favourable investment-related experience in core earnings, reflecting our net year-to-date favourable investment-related experience (1Q15 – charge of $77 million; 2Q15 – gain of $128 million).  The 2Q15 investment-related experience gains were driven by the impact of strong fixed income redeployment and favourable credit experience, partially offset by fair value losses on oil and gas holdings.

Net income attributed to shareholders for the 6 months ended June 30, 2015 was $1,323 million compared with $1,761 million for the 6 months ended June 30, 2014.  Of the $438 million decrease, $343 million is explained above, and the remainder was primarily due to unfavourable investment-related experience in 1Q15 compared with favourable investment-related experience in 1Q14. Core earnings for the 6 months ended June 30, 2015 was $1,699 million compared with $1,420 million for the 6 months ended June 30, 2014.

A2 Sales

We have aligned our sales disclosures with the enhanced business line disclosures introduced May 11, 2015 at our Investor Day.  Further information with respect to earnings by business line is included in section D of this MD&A.

Insurance sales¹⁵ were $771 million, an increase of 27%¹⁶ compared with 2Q14. All three divisions contributed to the year-over-year growth in insurance sales. Asia insurance sales increased 36%, driven by continued expansion and diversification of our distribution channels and a series of successful product launches.  Canadian insurance sales increased 28% driven by large-case Group Benefits sales and strong Retail Insurance sales. U.S. insurance sales increased 2%.

Wealth and asset management gross flows¹⁵ of $34.9 billion, increased 74% compared with 2Q14 (61% excluding recently acquired businesses), while net flows¹⁵ increased to $14.5 billion, more than double 2Q14 levels. Asia achieved gross flows more than double 2Q14 levels, driven by successful fund launches in mainland China and a successful pension marketing campaign inHong Kong.  Canadian gross flows increased 64%, driven by strong mutual fund deposits, large-case group retirement activity and the recent acquisition of Standard Life. U.S. gross flows increased 11%, driven by the inclusion of New York Life’s retirement business and the second highest quarterly gross flows at John Hancock Investments. Manulife Asset Management (“MAM”) achieved record gross flows of $11 billion, more than triple prior year levels, mainly due to a significant fixed income mandate from a Canadian institutional client. Total net flows were $14.5 billion in 2Q15, more than double 2Q14 levels.

Other Wealth sales were $1.8 billion in 2Q15, double prior year levels and an increase of 59% excluding recent acquisitions. Other Wealth sales in Asia more than doubled, driven by expanded distribution of the recently launched single premium wealth accumulation product in Japan, while Canada benefited from the inclusion of Standard Life’s segregated fund business.¹⁷ 

A3  MCCSR and financial leverage ratio

The Minimum Continuing Capital and Surplus Requirements (“MCCSR”) ratio was 236% for The Manufacturers Life Insurance Company (“MLI”) as at June 30, 2015, down 9 points from 245% as at March 31, 2015. The decline reflects net financing activities¹⁸  and a four point reduction due to the closing of the acquisition of New York Life’s Retirement Plan Services business, a portion of which will reverse with the July 1, 2015 completion of the related reinsurance agreement. MFC’s financial leverage ratio was 26.2% at June 30, 2015 compared with 26.6% as at March 31, 2015.

A4  Distribution agreement and acquisition

On April 8, 2015, we announced a 15-year exclusive distribution agreement with DBS, covering four mutually significant markets, namely Singapore, Hong Kong, mainland China and Indonesia. DBS is a leading financial services group in Asia, headquartered and listed in Singapore.  The agreement, effective January 1, 2016, significantly expands our existing, successful relationship with DBS. It accelerates Manulife’s Asia growth strategy, deepens and diversifies our insurance business, and gives us access to a wider range of customers. The agreement includes an initial payment by Manulife to DBS of US$1.2 billion, which Manulife intends to fund from internal resources. There will also be ongoing, variable payments, which are based on the success of the partnership. Manulife expects the agreement to be accretive to core earnings per share in 2017.¹⁹  The initial payment for this regional distribution agreement could reduce Manulife’s regulatory capital ratio by up to 10 points in January 2016.¹⁹

On April 14, 2015, the Company completed the acquisition of New York Life’s Retirement Plan Services business, the first of two components of the previously announced transaction with New York Life. The acquisition accelerates John Hancock’s expansion into the mid-case and large-case retirement plan markets, adds US$56.6 billion of plan assets under administration and supports Manulife’s global growth strategy for wealth and asset management businesses. The second component, in which New York Life agreed to assume a portion of certain John Hancock life insurance policies, closed on July 1, 2015. Under IFRS, the US$300 millionestimated accounting loss on the reinsurance component is accounted for as additional consideration on the acquired business.  This resulted in overall intangibles and goodwill of US$620 million.

A5  Q3 item

In 3Q15, we will complete our annual review of actuarial methods and assumptions.  While the review is not complete and the impact is difficult to estimate with precision, preliminary indications are that the impact could be a charge to net income attributed to shareholders of up to $400 million after-tax.¹⁹ The actual impact could differ from the Company’s early indications as the work is still ongoing.¹⁹

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B FINANCIAL HIGHLIGHTS

B1 Q2 and year-to-date earnings analysis

The table below reconciles reported net income attributed to shareholders to core earnings.

Components of the direct impact of equity markets and interest rates and variable annuity guarantee liabilities in the table above:

B2  Revenue

For 2Q15, total revenue was $1.1 billion compared with $13.2 billion in 2Q14.  The impact of fair value accounting materially impacts the reported realized and unrealized gains or losses on assets supporting insurance and investment contract liabilities, a component of revenue (see B6 – “Impact of fair value accounting”) below. Accordingly, we discuss specific divisional drivers of revenue before unrealized gains and losses in section C – “Performance by Division”. For 2Q15, revenue before realized and unrealized gains was$11.3 billion compared with $9.1 billion in 2Q14. This increase was driven by higher fee income from increased asset levels in our wealth and asset management businesses as well as the strengthening of the U.S. dollar.  Net premium income was higher in Asia on a constant currency basis, and in Canada, higher net income reflected contributions from Standard Life.

The net realized and unrealized losses on assets supporting insurance and investment contract liabilities and on the macro hedging program were $10.2 billion due to the impact of increases in North American interest rates.

On a year-to-date basis, revenue before realized and unrealized losses was $21.8 billion compared with $18.1 billion in 2Q14, driven by the same factors as noted above.  Premium income was higher across all divisions in the first half of 2015 compared with 2014. Net realized and unrealized losses on assets supporting insurance and investment contract liabilities and on the macro hedging program were $4.8 billion for the first half of 2015 compared with a gain of $9.3 billion in 2014.  The impact of higher interest rates in 2Q15 more than offset gains from the general decline in interest rates in 1Q15. The $9.3 billion gain in the first half of 2014 was due to general declines in interest rates in both 1Q14 and 2Q14.

Please see discussion below in section B6 “Impact of fair value accounting”.

B3  Premiums and deposits²⁰

Premiums and deposits is an additional measure of our top line growth.  It includes all new policyholder cash flows and, unlike total revenue, is not impacted by the volatility created by fair value accounting.  Premiums and deposits for insurance products were $7.1 billion in 2Q15, an increase of 13% on a constant currency basis compared with 2Q14.

Premiums and deposits for Wealth and Asset Management (“WAM”) products were $34.9 billion in 2Q15, an increase of $16.8 billion, or 74% on a constant currency basis, compared with 2Q14 (61% excluding recently acquired businesses).  Because the pension business acquired from New York Life is measured by assets under administration (“AUA”) and not assets under management (“AUM”), we do not report flows from this business as premiums or deposits.

Premiums and deposits for Other Wealth products were $1.7 billion in 2Q15, an increase of $0.9 billion, or 97% on a constant currency basis (70% excluding recently acquired businesses).

B4 Assets under management and administration²⁰

Assets under management and administration as at June 30, 2015 were $883 billion, an increase of $246 billion compared with June 30, 2014. Excluding the $130 billion increase related to the Standard Life and New York Life transactions, the increase was 7% on a constant currency basis.

B5 Capital²⁰

MFC’s total capital as at June 30, 2015 was $45.5 billion, an increase of $9.7 billion from June 30, 2014. The increase from June 30, 2014 was primarily driven by net income of $3.1 billion, favourable currency impacts of $3.6 billion, the Standard Life acquisition ($2.2 billion issuance of MFC common shares and $0.4 billion of outstanding Standard Life debt), other net capital issued of $1.5 billion, partially offset by cash dividends of $1.2 billion over the period. As noted in section A3 above, MLI’s MCCSR ratio was 236% at June 30, 2015.

B6 Impact of fair value accounting

Fair value accounting policies affect the measurement of both our assets and our liabilities. The impact on the measurement of both assets and liabilities of investment activities and market movements are reported as experience gains (losses) on investments, the direct impact of equity markets and interest rates and variable annuity guarantees, each of which impacts net income (see section A1 above for discussion of second quarter experience).

Net realized and unrealized losses reported in investment income were $10.2 billion for 2Q15.  This amount was driven by the mark-to-market impact of increases in interest rates on our bond and fixed income derivative holdings.

As outlined in the “Critical Accounting and Actuarial Policies” in the MD&A in our 2014 Annual Report, net insurance contract liabilities under IFRS are determined using CALM, as required by the Canadian Institute of Actuaries. The measurement of policy liabilities includes the estimated value of future policyholder benefits and settlement obligations to be paid over the term remaining on in-force policies, including the costs of servicing the policies, reduced by the future expected policy revenues and future expected investment income on assets supporting the policies.  Investment returns are projected using current asset portfolios and projected reinvestment strategies.  Experience gains and losses are reported when current period activity differs from what was assumed in the policy liabilities at the beginning of the period.  We classify gains and losses by assumption type. For example, current period investing activities that increase (decrease) the future expected investment income on assets supporting policies will result in an investment-related experience gain (loss).

B7 Impact of foreign exchange rates

Changes in foreign exchange rates, primarily due to the strengthening of the U.S. dollar compared with the Canadian dollar, increased core earnings by approximately $63 million in 2Q15 compared with 2Q14. The impact of foreign currency on items excluded from core earnings is not relevant given the nature of these items. Each line item on our financial statements has been impacted by changes in foreign exchange rates.

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C PERFORMANCE BY DIVISION

C1 Asia Division

Asia Division’s net income attributed to shareholders was $320 million in 2Q15 compared with $337 million in 2Q14. Net income attributed to shareholders is comprised of core earnings, which was $300 million in 2Q15 compared with $231 million in 2Q14, and items excluded from core earnings, which amounted to a $20 million gain in 2Q15 compared with a $106 million gain in 2Q14. Year-to-date net income attributed to shareholders and core earnings were $619 million and $596 million, respectively, in 2015 compared with $579 million and $475 million, respectively, for the same period of 2014.

Expressed in U.S. dollars, the presentation currency of the division, net income attributed to shareholders was US$261 million in 2Q15 compared with US$308 million for 2Q14 and core earnings were US$244 million in 2Q15 compared with US$212 million in 2Q14. Items excluded from core earnings were a gain of US$17 million for 2Q15 compared with US$96 million in 2Q14.

Core earnings increased US$45 million, or 23%, compared with 2Q14 after adjusting for the impact of changes in currency rates. The increase was driven by strong growth in new business volumes and favourable product mix, policyholder experience, higher fee income reflecting higher assets under management and insurance in-force growth. On a Canadian dollar basis core earnings increased by $69 million to $300 million due to the factors above, and reflect a net $18 million favourable impact of changes in currency rates in territories where we operate versus the Canadian dollar.

Year-to-date net income attributed to shareholders was US$502 million in 2015 compared with US$527 million for the same period of 2014. The decrease of US$25 million was primarily related to higher gains reported in 2014 related to the direct impact of equity markets and interest rates on variable annuity guarantee liabilities not dynamically hedged. Year-to-date core earnings in 2015 increased US$75 million, compared with the same period of 2014, after adjusting for the impact of changes in currency rates, reflecting growth in new business, in-force growth and favourable policyholder experience. On a Canadian dollar basis year-to-date core earnings increased by $121 million to $596 million due to the factors above, and reflect a net $36 million favourable impact due to changes in currency rates in territories where we operate versus the Canadian dollar.

Revenue before unrealized and realized investment gains was US$2.7 billion in 2Q15 compared with US$2.1 billion in 2Q14, an increase of 29% driven by higher premium income, fee income and investment income.

Premiums and deposits of US$7.6 billion in 2Q15 increased 111% on a constant currency basis compared with 2Q14. Premiums and deposits for insurance products of US$1.8 billion increased 23% driven by strong double digit insurance sales growth in most of the territories and from recurring premiums on in-force business. Wealth and Asset Management premiums and deposits of US$5.2 billion in 2Q15 increased by 176% driven by the success of new fund launches combined with strong market sentiment, notably inChina, and expanded distribution.

Assets under management were US$79.6 billion as at June 30, 2015, an increase of 13% on a constant currency basis compared with June 30, 2014, driven by net policyholder cash inflows of US$5.7 billion and the favourable impact of equity market appreciation and lower interest rates over the last 12 months.

C2  Canadian Division

Canadian Division’s 2Q15 net income attributed to shareholders was $191 million compared with $267 million in 2Q14.  Net income attributed to shareholders is comprised of core earnings, which was $304 million in 2Q15 compared with $232 million in 2Q14, and items excluded from core earnings, which were net charges of $113 million in 2Q15 compared with a gain of $35 million in 2Q14.

Core earnings increased $72 million of which $36 million related to the Standard Life acquisition. In-force business growth, including higher fee income from our wealth and asset management businesses, and the favourable impact of reinsurance treaty recaptures were mostly offset by unfavourable policyholder experience and the impact of lower interest rates on new business margins. The 2Q15 loss in items excluded from core earnings related to unfavourable market-related experience and, to a lesser extent, integration costs.

Year-to-date net income attributed to shareholders was $310 million compared with $644 million for the same period of 2014.  Year-to-date core earnings of $566 million were $106 million higher than the first 6 months of 2014 and included $55 million related to Standard Life.

Revenue before unrealized and realized investment gains was $2.8 billion in 2Q15 compared with $2.4 billion in 2Q14 due higher net premium income and higher fee income on higher asset levels.

Premiums and deposits in 2Q15 were $7.3 billion, $2.2 billion higher than in 2Q14. The acquisition of Standard Life added $1.3 billion to premiums and deposits in the quarter.  Manulife Mutual Funds and Group Retirement also contributed to the increase.

Assets under management were $217.5 billion as at June 30, 2015, an increase of $64.1 billion from June 30, 2014, including $53.3 billion related to Standard Life. Excluding Standard Life, AUM increased by $10.8 billion or 7% driven by growth in our wealth and asset management businesses and the impact of market factors, including the decline in interest rates and positive investment returns over the past 12 months.

C3  U.S. Division

U.S. Division’s 2Q15 net income attributed to shareholders was $183 million compared with $559 million in 2Q14. Net income attributed to shareholders is comprised of core earnings, which amounted to $402 million in 2Q15 compared with $329 million in 2Q14, and items excluded from core earnings, which amounted to net charges of $219 million in 2Q15 compared with a gain of $230 million in 2Q14. Year-to-date net income attributed to shareholders and core earnings were $665 million and $794 million, respectively, in the first half of 2015 compared with $962 million and $703 million, respectively, for the same period of 2014.  The unfavourable variance in items excluded from core earnings is largely consistent with the items described at the total Company level.

Expressed in U.S. dollars, the functional currency of the division, 2Q15 net income attributed to shareholders was US$149 millioncompared with US$513 million in 2Q14, core earnings was US$327 million compared with US$302 million in 2Q14, and items excluded from core earnings were a loss of US$178 million in 2Q15 compared with a gain of US$211 million in 2Q14. The US$25 million increase in core earnings was driven by lower amortization of deferred acquisition costs due to the run-off of the in-force variable annuity business, higher insurance new business margins, and higher wealth and asset management fee income reflecting increased asset levels. Unfavourable policyholder experience in JH Life was mostly offset by other one-time policy related items. On a Canadian dollar basis, core earnings increased by $73 million to $402 million due to the factors above, and includes the $45 millionfavourable impact from the strengthening of the U.S. dollar compared to the Canadian dollar.

Year-to-date net income attributed to shareholders was US$538 million in the first half of 2015 compared with US$879 million for the same period in 2014 and included core earnings of US$643 million, a US$2 million increase.  The favourable variance in the second quarter core earnings, noted above, and more favourable policyholder experience in 1Q15, was mostly offset by the unfavourable impact of declines in interest rates on the release of insurance margins and more favourable tax related items reported in 1Q14. The$343 million unfavourable variance in items excluded from core earnings is largely consistent with the items described at the total Company level. On a Canadian dollar basis, year-to-date core earnings increased by $91 million to $794 million due to the factors above, and includes the $89 million favourable impact from the strengthening of the U.S. dollar compared to the Canadian dollar.

Revenue before unrealized and realized investment gains was US$4.0 billion in 2Q15 compared with US$3.9 billion in 2Q14.  The increase was related to higher life insurance premiums and higher fee income on the business acquired from New York Life, partially offset by the continued run-off of the in-force variable annuity business.

Premiums and deposits for 2Q15 were US$13.1 billion, an increase of 10% compared with 2Q14.  The increase was primarily driven by additional deposits for 401k plans arising from the acquired business.  Excluding the impact of the acquisition, premiums and deposits increased by 2% driven by increased core small-case 401k deposits and universal life premiums.

Assets under management and administration as at June 30, 2015 were a record US$400.1 billion and increased US$62.4 billionfrom June 30, 2014. The acquisition contributed US$55.3 billion and the remainder of the increase was driven by the impact of market factors on fair values of assets and strong net mutual fund sales over the last 12 months, partially offset by variable and fixed annuity payments.

C4  Corporate and Other

Corporate and Other is composed of: investment performance on assets backing capital, net of amounts allocated to operating divisions and financing costs; Investment Division’s external asset management business; Property and Casualty (“P&C”) Reinsurance business; as well as run-off reinsurance operations including variable annuities and accident and health.

For segment reporting purposes, the impact of updates to actuarial assumptions, settlement costs for macro equity hedges and other non-operating items are included in this segment’s earnings.

Corporate and Other reported a net loss attributed to shareholders of $94 million in 2Q15 and a net loss of $220 million in 2Q14.  The net loss is comprised of core loss and items excluded from core loss.  The core loss was $104 million in 2Q15 and $91 million in 2Q14; items excluded from core loss amounted to income of $10 million in 2Q15 compared with charges of $129 million in 2Q14.

The $13 million increase in core loss is primarily related to lower yields and the strengthening of the U.S. dollar.  Other items netted to a small variance: the higher realized gains on AFS equities in 2Q15 were largely offset by the non-recurrence of a gain from a legal provision release in 2Q14.  Favourable variances in items excluded from core loss compared with 2Q14 were the direct impact of equity markets and interest rates, the impact of mark-to-market accounting and the changes in actuarial methods and assumptions.  In 2Q15, we also reported a $33 million gain reflecting the impact of the Alberta provincial tax rate change in Canada partially offset by $8 million of integration costs related to Standard Life.

On a year-to-date basis the net loss attributed to shareholders was $271 million in 2015 compared with a net loss of $424 million for the same period of 2014, reflecting a favourable variance from items excluded from core earnings of $192 million partially offset by the unfavourable core loss variance of $39 million. Core loss was $39 million larger than 2Q14 primarily due to lower investment-related experience included in core earnings. The $192 million favourable variance in items excluded from core loss includes the direct impact of equity markets and interest rates, the offset to lower investment-related experience gains included in core earnings, other mark-to-market movements, and the impact of tax rate changes in Canada and Japan, partially offset by closing and integration costs related to the acquisition of Standard Life.

Revenue was $187 million in 2Q15 compared with negative $10 million in 2Q14. The increase in revenue was primarily driven by macro hedging gains and higher than average realized gains on AFS securities, net of shortening swaps.

Premiums and deposits, primarily related to the Investment Division’s external asset management business, were $11,008 million in 2Q15, almost four times the $2,800 million reported in 2Q14. The increase reflects the impact of inflows from institutional asset management clients, including a significant new fixed-income mandate for a Canadian client.

Assets under management of $66.9 billion as at June 30, 2015 (June 30, 2014 – $42.0 billion) included assets managed by Manulife Asset Management on behalf of third-party institutional clients of $64.7 billion (June 30, 2014 – $37.6 billion).

D   PERFORMANCE BY BUSINESS LINE

D1 Additional information for Wealth and Asset Management

Manulife has a globally diversified wealth and asset management franchise spanning mutual funds, group retirement and savings products, and institutional asset management capabilities across all major asset classes.  We have achieved strong growth through expanding our broad-based extensive distribution platforms in the U.S., Canada and Asia, and leveraging our global asset management expertise.  With investment professionals on the ground in 17 countries, our deep local knowledge, and expertise in sought after asset classes such as alternative long-duration assets, positions us well for continued success.  In addition to mutual fund businesses in 11 markets, we have leading retirement platforms in Canada, the U.S. and Hong Kong, and a growing presence inIndonesia and Malaysia.  We continue to invest in these businesses with recent acquisitions of the Canadian-based operations of Standard Life plc (“Standard Life”) and New York Life’s Retirement Plan Services business.  WAM businesses are among our fastest growing earnings contributors.

We are providing additional financial information by line of business, to supplement our existing primary disclosure based on geographic segmentation. This information should help facilitate a better assessment of the financial performance of our WAM businesses and relevant comparisons to be made with global asset management peers. The supplemental information for WAM businesses includes an income statement, core earnings, core earnings before interest, taxes, depreciation and amortization (“core EBITDA”), net flows, gross flows and assets under management and administration²¹.  Core EBITDA was selected as a key performance indicator for WAM businesses, as EBITDA is widely used among asset management peers, and core earnings is a primary profitability metric for the Company overall.

Wealth and Asset Management highlights

In 2Q15, we generated strong net flows and added $68.9 billion of assets under administration as a result of the New York Life transaction.  Core EBITDA in 2Q15 and the first half of 2015 increased 18% and 24%, respectively, compared with the same periods in the prior year and operating leverage improved as fee income grew faster than expenses.

D2  Additional information by business line

In addition to the WAM businesses, the following two tables include core earnings and assets under management and administration for our Other Wealth and Insurance business lines.  Other Wealth consists of variable and fixed annuities, single premium products sold in Asia, and Manulife Bank in Canada²² and Insurance includes all individual and group insurance businesses.

Wealth and Asset Management – Our global WAM businesses contributed $155 million to core earnings in 2Q15, an increase of 20% compared with 2Q14. The increase was a result of higher fee income from higher asset levels, reflecting strong net flows and recent acquisitions and the favourable impact of the strengthening of the U.S. dollar, partially offset by higher non-deferrable acquisition costs.  On a year-to-date basis, WAM contributed $303 million to core earnings in 2015, up 24% from $244 million in 2014.

Insurance – Our insurance businesses contributed $518 million to core earnings in 2Q15, an increase of 22% compared with 2Q14. The increase was primarily a result of strong insurance sales in Asia, the strengthening of the U.S. dollar and a number of smaller items. Year-to-date core earnings of $1,017 million in 2015 were up 9% from 2014.

Other Wealth – Our other wealth businesses contributed $302 million to core earnings in 2Q15, an increase of 25% compared with 2Q14. The increase was primarily related to strong sales in Asia, lower amortization of deferred acquisition costs in the U.S. and the strengthening of the U.S. dollar.  Year-to-date core earnings of $594 million in 2015 were up 27% from 2014.

Core earnings by line of business

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Assets under management and administration by line of business

The following table shows the core earnings of the WAM, Insurance and Other Wealth business lines by division.

Core earnings by line of business by division

E.   RISK MANAGEMENT AND RISK FACTORS UPDATE

This section provides an update to our risk management practices and risk factors outlined in the MD&A in our 2014 Annual Report. The shaded text and tables in this section of the MD&A represent our disclosure on market and liquidity risk in accordance with IFRS7, “Financial Instruments – Disclosures”. Accordingly, the following shaded text and tables represent an integral part of our unaudited Interim Consolidated Financial Statements.

E1 Potential impact of recent deployments of capital and current macro environment

In our 2014 MD&A we noted macro-economic and other risk factors that may result in our inability to achieve our 2016 objective of core ROE of 13%.  Core ROE was 9.8% in 2Q15 and 9.6% for the first half of 2015, and given the recent deployments of capital to pursue long-term growth, along with the impact on equity of the strengthening U.S. dollar compared to the Canadian dollar, we no longer believe our core ROE objective of 13% is achievable in 2016.

E2 Variable annuity and segregated fund guarantees

As described in the MD&A in our 2014 Annual Report, guarantees on variable products and segregated funds may include one or more of death, maturity, income and withdrawal guarantees. Variable annuity and segregated fund guarantees are contingent and only payable upon the occurrence of the relevant event, if fund values at that time are below guaranteed values. Depending on future equity market levels, liabilities on current in-force business would be due primarily in the period from 2015 to 2038.

We seek to mitigate a portion of the risks embedded in our retained (i.e. net of reinsurance) variable annuity and segregated fund guarantee business through the combination of our dynamic and macro hedging strategies (see section E4 “Publicly traded equity performance risk” below).

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

Variable annuity and segregated fund guarantees, net of reinsurance

The amount at risk on variable annuity contracts and segregated fund guarantees, net of reinsurance, was $6.4 billion at June 30, 2015 compared with $5.5 billion at December 31, 2014.

The policy liabilities established for variable annuity and segregated fund guarantees were $4,751 million at June 30, 2015(December 31, 2014 – $4,862 million).  For non-dynamically hedged business, policy liabilities increased from $684 million atDecember 31, 2014 to $727 million at June 30, 2015. For the dynamically hedged business, the policy liabilities decreased from$4,178 million at December 31, 2014 to $4,024 million at June 30, 2015.

E3    Caution related to sensitivities 

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

E4    Publicly traded equity performance risk

As outlined in our 2014 Annual Report, our macro hedging strategy is designed to mitigate public equity risk arising from variable annuity guarantees not dynamically hedged and from other products and fees. In addition, our variable annuity guarantee dynamic hedging strategy is not designed to completely offset the sensitivity of policy liabilities to all risks associated with the guarantees embedded in these products (see pages 52 and 53 of our 2014 Annual Report).

The tables below show the potential impact on net income attributed to shareholders resulting from an immediate 10, 20 and 30% change in market values of publicly traded equities followed by a return to the expected level of growth assumed in the valuation of policy liabilities. The potential impact is shown after taking into account the impact of the change in markets on the hedge assets. While we cannot reliably estimate the amount of the change in dynamically hedged variable annuity guarantee liabilities that will not be offset by the profit or loss on the dynamic hedge assets, we make certain assumptions for the purposes of estimating the impact on shareholders’ net income.

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

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

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