The Performax Gold Investment Fund 2015 Annual Report THE MANUFACTURERS LIFE INSURANCE COMPANY
Performax Gold is permanent, whole life insurance that provides lifetime insurance protection with guaranteed cash values. The payments clients make to their Performax Gold policies are put into the Performax Gold Investment Fund. The Fund is backed by the strength and stability of Manulife. A DIFFERENT APPROACH TO WHOLE LIFE INSURANCE Performax Gold offers policy owners a different risk profile than traditional, participating whole life insurance products. With Performax Gold, policy owners share the investment risk with Manulife. However, unlike participating whole life insurance products, the risks related to assumptions on mortality, lapses and expenses are taken on by Manulife, not the policy owners. HOW THE GOLD FUND PERFORMANCE INCREASES POLICY VALUES The investment performance of the Gold Fund has an impact on the Performance Credit. The Performance Credit is a dollar amount that Performax Gold policies earn every year that helps increase the policy s cash value and/or death benefit. The Performance Credit calculation is disclosed in the policy contract and all the factors included in this calculation are pre determined, except for, of course, the investment performance of the Gold Fund. Every year, we calculate the smoothed Fund yield as at December 31st. The Performance Credit rate used in the Performance Credit calculation for the upcoming 12-month period starting on March 31 is based on this rate. Gold Fund Yield Performance Credit Rate Performance Credit Calculation Annual Performance Credit Policy Values % POLICY CONTRACT $ 2
THE MANULIFE ADVANTAGE Significant scale Manulife s size and scale translate into a substantial capital base, a diversified operating platform and ample resources to fund growth opportunities all factors indicative of our financial strength. As at December 31, 2015, our market capitalization was US$29.4 billion (C$40.9 billion), making Manulife one of the largest life insurance companies in the world. Global life insurers 81.6 72.4 66.5 Market cap in US$ billions Allianz AIA AXA 58.0 53.6 39.2 36.6 30.8 29.4 28.7 25.6 19.0 18.5 13.2 PRU PLC MetLife Zurich PRU (U.S.) Aviva Plc Manulife Generali Aflac Sun Life Ameriprise Principal Market data as at December 31, 2015. Source: Ipreo Rating agency Rating Outlook A.M. Best A+ ( Superior 2 nd of 13 ratings) Stable Dominion Bond Rating Service Fitch Ratings Moody s Investors Service Standard & Poor s AA (low) AA- A1 AA- (Excellent - 4 th of 22 ratings) ( Very Strong 4 th of 19 ratings) ( Low Credit Risk 5 th of 21 ratings) ( Very Strong 4 th of 21 ratings) Stable Stable Stable Stable Financial Strength Ratings apply to the main life operating companies of Manulife Financial Corporation including The Manufacturers Life Insurance Company, John Hancock Life Insurance Co. (U.S.A.), John Hancock Life & Health Insurance Co., and John Hancock Life Insurance Co. of New York. DBRS does not rate the U.S. Insurance subsidiaries separarely. All ratings current as of February 1, 2016. Strong Capital Levels Strong and stable capital levels are also a good measure of financial strength. Having a large capital base enables us to sustain strong credit ratings, finance new opportunities, and most importantly, maintain our commitments to our policyholders. Our consolidated capital levels totaled C$49.9 billion as at December 31, 2015. Additionally, The Manufacturers Life Insurance Company ended the fourth quarter 2015 with a Minimum Continuing Capital and Surplus Requirements (MCCSR) ratio of 223%, well above the supervisory target of 150%. Capital 49.9 Current Regulatory Capital Position (MLI)* Minumum Continuing Capital and Surplus Requirements Ratio (MCCSR) C$ billions 29.0 29.2 33.5 39.6 216 211 248 248 223 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 *The Manufacturers Life Insurance Company 3
THE GOLD FUND ADVANTAGE Backed by Manulife s 125+ years of demonstrated financial strength, integrity, and prudent investment management Benefits from the size and scale of one of the largest life insurance companies in the world diversified operating platform and ample resources to fund growth opportunities Equity portfolio managed by the Manulife Asset Management team, a global asset manager with expertise across a full range of asset classes and in providing investment management solutions for financial institutions, pension plans, and other institutional clients Access to Manulife s superior quality commercial real estate portfolio Access to Manulife s diversified alternative long-duration assets portfolio YOU SHOULD KNOW In today s changing economic climate, liquidity is critical to any financial institution. Manulife is fully self-funded meaning our businesses generate enough cash flow to sustain our operations without being dependent on the commercial paper markets or other short-term funding arrangements. We have consciously avoided businesses that give rise to immediate liquidity needs and this allows us to maintain high levels of liquidity. Manulife has consistently retained a high level of cash and high grade short-term assets, which totaled C$17.9 billion as at December 31, 2015. THE GOLD FUND INVESTMENT PHILOSOPHY The Gold Fund s asset mix has been developed to match the long term needs of our policy owners. The stable nature of the cash flows associated with whole life insurance products permits asset investment in longer term holdings. The Fund targets an allocation of approximately 60% of fixed income assets, and 40% of non-fixed income assets. We believe that this balanced approach is optimal to drive attractive returns and reduce risk for our policy owners, and we manage the Fund in adherence to prudent investment guidelines. Asset mix as at December 31, 2015 37.3 Public bonds 6.9 Private placement and debt 16.6 Mortgages 14.2 Public equities 5.1 Alternative Long- Duration Assets 19.9 Real estate FUND FACTS Launched: November 2007 Total Cash Values as at December 31, 2015: $655M Investment expenses* for 2015: 13 basis points Number of inforce policies as at December 31, 2015: 24,731 * Investment expenses may vary from year to year due to the number and nature of transactions required to maintain the target asset mix 4
PUBLIC BONDS This segment represents 37.3% of the total assets of the Gold Investment Fund, as at December 31, 2015. This high quality bond portfolio is managed to ensure diversification by industry sector and geography. As at December 31, 2015 Public bonds quality grade AAA 52.4 AA 1.9 A 13.1 BBB and lower 24.7 Other 7.8 Total 100.0 Public bond term to maturity Less than five years 19.1 Five years and over 80.9 Total 100.0 PRIVATE PLACEMENT AND DEBT This segment represents 6.9% of the total assets of the Gold Investment Fund as at December 31, 2015. Including private placement debt in the Gold Investment Fund portfolio helps further diversify the fixed income portfolio by name and by industry as it provides opportunities not available in the public markets. Private placements also benefit from covenants and collateral which typically provide better credit protection and higher potential recoveries. As at December 31, 2015 Private bonds quality grade Cash and cash equivalents 6.7 A 15.8 BBB and lower 77.4 Total 100.0 Major public bond holdings as at December 31, 2015 Public bond holdings Government of Canada 35.30 Province of British-Columbia 10.66 Province of Ontario 6.50 Telus Corporation 6.37 Westcoast Energy 4.06 Rogers Communication 3.94 Capital Desjardins 3.71 Glacier Credit 3.31 Bell Canada 3.29 Pembina Pipeline Corporation 2.28 Total 79.43 Public bonds sector mix 32.5 Federal 16.5 Provincial 33.7 Corporate/Municipal 9.5 Asset/Mortgage backed securities 7.8 Other 5
MORTGAGES This segment represents 16.6% of the total assets of the Gold Investment Fund as at December 31, 2015. Mortgages are diversified by location and property type. They consist of first commercial mortgages that have been conservatively underwritten and continue to have a low loan-to-value and high debt-service-coverage ratios. PUBLIC EQUITIES This segment represents 14.2% of the total assets of the Gold Investment Fund as at December 31, 2015. The objective of the public equity portion of the Performax Gold Investment Fund is to mimic the S&P/TSX 60 Index and the public equity portion is rebalanced as required. The S&P/TSX 60 Index includes 60 of the largest (by market capitalization) and most liquid securities listed on the TSX. As at December 31, 2015 Years to maturity Less than five years 53.0 Five years and over 47.0 Total 100 Investments by location as at December 31, 2015 32.3 Toronto 21.4 Vancouver 20.4 Calgary 16.4 Waterloo 6.1 Montreal 2.7 Ottawa 0.6 Halifax Major common stock holdings as at December 31, 2015 Common stock holdings Royal Bank of Canada 8.80 Toronto-Dominion Bank 8.04 Bank of Nova Scotia 5.38 Canadian National Railway Co. 4.90 Suncor Energy Inc. 4.13 Bank of Montreal 4.01 BCE Inc. 3.69 Valeant Pharmaceuticals International Inc. 3.60 Manulife Financial Corp. 3.54 Enbridge Inc. 3.17 Total 49.27 Investments by sector as at December 31, 2015 39.7 Financials 18.9 Energy 8.1 Materials 7.6 Industrials 6.9 Telecommunication Services 6.9 Consumer Discretionary 5.0 Consumer Staples 3.6 Health Care 2.6 Information Technology 0.8 Utilities 6
ALTERNATIVE LONG-DURATION ASSETS This segment represents 5.1% of the total assets of the Gold Investment Fund as at December 31, 2015. The Gold Fund may include some of Manulife s alternative long-duration assets, as they offer an alternative source of asset supply to long term Corporate bonds, and constitute a good match for long duration liabilities. The majority of these exclusive assets are managed in-house and represent diverse sectors of the economy such as, but not limited to, timber, farmland, infrastructures and oil and gas. Not all sectors are necessarily represented in the Gold Fund. REAL ESTATE This segment represents 19.9% of the total assets of the Gold Investment Fund as at December 31, 2015. Real estate assets are managed by Manulife Real Estate, the global real estate arm of Manulife. The Performax Gold Investment Fund participates in a diversified pool of properties that focuses on top quality buildings located in premium urban locations and large suburban markets usually across Canada. The portfolio is diversified by location and property type, and the real estate operation tracks the total yield of all real estate and then allocates the yields to Manulife s different asset segments. This results in more stability in returns since specific buildings are not allocated to specific investment accounts. MANULIFE REAL ESTATE North American Centre Toronto Centre Manuvie Montreal Manulife Place Edmonton Manulife Place Ottawa Manulife Place Vancouver 7
UNDERSTANDING THE PERFORMANCE OF THE GOLD INVESTMENT FUND A smoothed approach The investment performance of the Performax Gold Investment Fund will ultimately affect policy values. Manulife smooths the yield of the Performax Gold Investment Fund to reduce volatility which, in turn, over time, helps reduce the volatility of the policy values. Performance over time To illustrate the effect of smoothing, the following chart and table show the historical performance of the Manulife Canadian Participating Account 1 and the Performax Gold Investment Fund relative to other economic indicators. The Manulife Canadian Participating Account asset mix is similar to the Performax Gold Investment Fund target asset mix and we use a similar smoothing approach for both. As such, the Manulife Canadian Participating Account historical yield 2 provides relevant information on the pattern of returns provided by a smoothed yield; however, since the asset mix is not identical, there may be some differences in yields over time. The 5-year GIC rate provides an indication of the investment returns that are available for the current period for new fixed interest investments and how these rates have changed over time. The S&P/TSX Composite Index 3 returns show how equity performance has varied over the same period. By comparing these lines, you can see how both the Manulife Canadian Participating Account s yield and Performax Gold Investment Fund s yield are influenced by the investment returns. Historical performance of Canadian Participating Account, TSX Composite Index, 5-Year GIC and Performax Gold Investment Fund 40 30 20 Return 10 0-10 -20-30 -40 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Par Fund Yield 5-Year GIC S&P/TSX Composite Total Return Index ishares Canadian Universe Bond Index Performax Gold Investment Fund The above chart demonstrates only annualized rates of return and is not investment advice. It is not a complete comparison of the Canadian Participating Account, TSX Composite Index, 5-Year GIC and the Performax Gold Investment Fund as not all the features of these investments have been analyzed. Past results are not indicative of future performance. Actual investment returns may be higher or lower than past investment returns. 1 The Manulife Canadian Participating Account is also known as the Performax Participating Account. 2 Performax Gold is a long-term product whose performance depends upon investment returns in the Performax Gold Investment Fund. Performance credits will vary with investment returns. Past returns are not necessarily indicative of future performance and investment returns will fluctuate. 3 The Gold Fund s public equity portion is invested to match the S&P/TSX 60. 8
Average annualized returns The values in this table are as at December 31, 2015. Average Gold Fund Yield Par Account Yield 4 S&P/TSX Composite Total Return Index 5 ishares Canadian Universe Bond Index 6 5-Year GIC 7 Consumer Price Index 7 1-year 3.9 5.7-8.3 3.5 1.5 1.6 3-year 4.0 5.8 4.6 3.6 1.7 1.4 5-year 4.3 5.9 2.3 4.8 1.7 1.5 10-year - 6.7 4.4 5.0 2.2 1.6 15-year - 7.2 5.1 5.8 2.6 1.8 Average Annualized Return (since 1985) Standard Deviation (since 1985) - 9.0 8.4 8.4 5.2 2.4-2.3 15.8 6.2 3.2 1.3 4 Prior to 2007, Canadian Generally Accepted Accounting Principles (CGAAP) allowed the smoothing of returns for investment income. Effective, January 1, 2007, CGAAP rules were changed for financial reporting purposes so that returns were a closer match to market value. The Performax Participating Account s yields shown after December 31, 2006 were calculated using Manulife s new smoothing rules. 5 Source: S&P Dow Jones indices. 6 Source: BlackRock. 7 Source: Bank of Canada. YOU SHOULD KNOW It s important to remember that the Gold Fund is in its early years and in a young fund, smoothing doesn t necessarily provide the same results as it does for a steady state fund that has been in existence for several years. It may take a few years for the smoothing mechanism to start functioning in a manner that reduces volatility to a level consistent with the Manulife Canadian Participating Account. 9
FUND YIELDS AND PERFORMANCE CREDIT RATE The smoothed yield of the Performax Gold Investment Fund is used to determine the Performax Gold Performance Credit rate. Every year, effective March 31, we set the Performance Credit rate based on the Performax Gold Investment Fund s yield as at December 31 of the previous year. This rate remains in effect for a 12-month period (March 31 until March 30 of the following year). Historical smoothed yields of the Performax Gold Investment Fund and Manulife Canadian Participating Account and Performance Credit rate since 2006 Year Gold Fund Yield 8 Par Account Yield 8 Performance Credit rate 8 Performance Credit rate effective date 2006-8.20 8.20 November 2007 9 March 30, 2008 2007-8.50 8.50 March 31, 2008 March 30, 2009 2008-7.60 7.60 March 31, 2009 March 30, 2010 2009 4.00 6.40 7.00* March 31, 2010 March 30, 2011 2010 4.50 6.50 7.00* March 31, 2011 March 30, 2012 2011 5.50 6.84 6.84 March 31, 2012 March 30, 2013 2012 4.11 5.13 6.50* March 31, 2013 March 30, 2014 2013 3.91 5.61 6.25* March 31, 2014 March 30, 2015 2014 4.08 6.19 6.25* March 31, 2015 March 30, 2016 2015 3.87 5.70 6.00* March 31, 2016 - March 30, 2017 * The Performance Credit rate was enhanced beyond the Par Account yield. Enhancements are assigned at management s discretion, and are not a product feature. There continues to be downward pressure on fixed income yields as this historically low interest rate environment persists. It is possible that further decreases in investment returns and the Performance Credit rate will be experienced. Product illustrations should be run using a reasonable and realistic long-term projection of the fund performance. YOU SHOULD KNOW Until March 30, 2019, the Performance Credit rate will be calculated using a combination of the Performax Gold Investment Fund s annual smoothed yield and/or the Canadian Participating Account s annual smoothed yield. From March 31, 2019 onward, the Performance Credit rate will be determined by using only the smoothed yield of the Performax Gold Investment Fund. 10 8 The Gold Fund Yield, Par Account Yield and the Performance Credit rate are not directly related to a policy s cash value growth. Yields are net of investment expenses. For 2015, the investment expenses for the Gold Fund were 13 basis points. Past results are not indicative of future performance and investment returns and interest rates may be higher or lower. 9 Product launch. 10 The smoothed yield of the Performax Gold Investment Fund may be higher or lower than the smoothed yield of the Manulife Canadian Participating Account. 10
If you would like more information on Manulife s strength and stability and investment performance, please visit manulife.com Performax and Performax Gold are registered trademarks of, and Performax Gold is sold by, Manulife (The Manufacturers Life Insurance Company). This document is protected by copyright. Reproduction is prohibited without Manulife s written permission. Manulife, the Block Design, the Four Cube Design, and Strong Reliable Trustworthy Forward-thinking are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under licence. MK2519E 04/16