Manulife Financial (MFC) 40-F 2002 FY Annual report (Canada)

RESPONSIBILITY FOR FINANCIAL REPORTING

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

The consolidated financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles and the accounting requirements of the Superintendent of Financial Institutions (Canada). Appropriate accounting policies and estimates are also used in the determination of the information prepared in accordance with United States generally accepted accounting principles. When alternative accounting methods exist, or when estimates and judgement are required, management has selected those amounts that present the Company’s financial position and results of operations in a manner most appropriate to the circumstances.

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

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

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

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

The consolidated financial statements have been audited by the Company’s external auditors, Ernst & Young LLP, in accordance with Canadian generally accepted auditing standards. Ernst & Young LLP has full and free access to the Audit and Risk Management Committee.

/s/ DOMINIC D’ALESSANDRO	/s/ PETER H. RUBENOVITCH
President and	Executive Vice President and
Chief Executive Officer	Chief Financial Officer

Toronto, Canada February 4, 2003

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APPOINTED ACTUARY’S REPORT TO THE SHAREHOLDERS AND DIRECTORS

I have valued the policy liabilities of Manulife Financial Corporation for its Consolidated Balance Sheets as at December 31, 2002 and 2001 and their change in the Consolidated Statements of Operations for the years then ended in accordance with actuarial practice generally accepted in Canada,including selection of appropriate assumptions and methods.

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

/s/ GEOFF I. GUY, F.C.I.A.
Executive Vice President and Appointed Actuary

Toronto, Canada February 4, 2003

AUDITORS’ REPORT TO THE SHAREHOLDERS AND DIRECTORS

We have audited the Consolidated Balance Sheets of Manulife Financial Corporation and the Consolidated Statements of Net Assets of its Segregated Funds as at December 31, 2002 and 2001 and the Consolidated Statements of Operations, Equity, Cash Flows and Changes in Net Assets of its Segregated Funds for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company and its Segregated Funds as at December 31, 2002 and 2001 and the results of the Company’s operations and cash flows and the changes in the net assets of its Segregated Funds for the years then ended in accordance with Canadian generally accepted accounting principles, including the accounting requirements of the Superintendent of Financial Institutions (Canada).

/s/ ERNST & YOUNG LLP
Chartered Accountants

Toronto, Canada February 4, 2003

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CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF OPERATIONS

For the years ended December 31
(Canadian $ in millions, except per share amounts)		2002			2001
Revenue
Premium income		$	10,779		$	10,247
Investment income (note 3(b))			4,235			4,479
Other revenue			1,518			1,505
Total revenue		$	16,532		$	16,231
Policy benefits and expenses
To policyholders and beneficiaries
	Death and disability benefits	$	3,388		$	3,186
	Maturity and surrender benefits		4,045			4,171
	Annuity payments		1,342			1,307
	Policyholder dividends and experience rating refunds		932			900
	Net transfers to segregated funds		656			1,470
	Change in actuarial liabilities (note 4)		307			(208	)
General expenses			2,490			2,478
Commissions			1,207			1,133
Interest expense			243			257
Premium taxes			111			105
Non-controlling interest in subsidiaries			72			4
Trust preferred securities issued by subsidiaries			65			65
Total policy benefits and expenses		$	14,858		$	14,868
Income before income taxes		$	1,674		$	1,363
Income taxes (note 5)			(304	)		(196	)
Net income		$	1,370		$	1,167
Net income (loss) attributed to participating policyholders		$	(8	)	$	8
Net income attributed to shareholders		$	1,378		$	1,159
Net income		$	1,370		$	1,167
Weighted average number of common shares outstanding(in millions)			476			482
Weighted average number of diluted common shares outstanding(in millions)			479			486
Basic earnings per share		$	2.90		$	2.40
Diluted earnings per share		$	2.88		$	2.38

The accompanying notes to these consolidated financial statements are an integral part of these statements.

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CONSOLIDATED BALANCE SHEETS

As at December 31
(Canadian $ in millions)			2002		2001
ASSETS
Invested assets(note 3)
Bonds			$	46,677	$	46,070
Mortgages				9,294		7,902
Stocks				6,898		6,964
Real estate				3,570		3,484
Policy loans				4,939		4,644
Cash and short-term investments				5,143		4,995
Other investments				1,041		693
Total invested assets			$	77,562	$	74,752
Other assets
Accrued investment income			$	1,010	$	1,041
Outstanding premiums				558		482
Future income taxes (note 5)				132		517
Goodwill				634		595
Miscellaneous				1,299		1,226
Total other assets			$	3,633	$	3,861
Total assets			$	81,195	$	78,613
Segregated funds net assets			$	58,831	$	59,206
LIABILITIES AND EQUITY
Actuarial liabilities (note 4)			$	56,397	$	54,690
Benefits payable and provision for unreported claims				2,693		2,411
Policyholder amounts on deposit				2,835		2,702
Deferred realized net gains (note 3)				3,297		3,583
Banking deposits				1,437		769
Other liabilities				2,499		2,881
			$	69,158	$	67,036
Subordinated debt(note 6)				1,436		1,418
Non-controlling interest in subsidiaries(note 7)				1,059		1,064
Trust preferred securities issued by subsidiaries(note 8)				794		802
Equity
	Participating policyholders’ equity			92		62
	Shareholders’ equity
		Common shares (note 9)		596		614
		Shareholders’ retained earnings		8,060		7,617
Total equity			$	8,748	$	8,293
Commitments and contingencies(note 13)
Total liabilities and equity			$	81,195	$	78,613
Segregated funds net liabilities			$	58,831	$	59,206

The accompanying notes to these consolidated financial statements are an integral part of these statements.

/s/ DOMINIC D’ALESSANDRO	/s/ ARTHUR R. SAWCHUK
President and	Chairman of the
Chief Executive Officer	Board of Directors

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CONSOLIDATED STATEMENTS OF EQUITY

For the years ended December 31	Participating
(Canadian $ in millions)	policyholders			Shareholders			2002			2001
Operating retained earnings
Balance, January 1	$	62		$	7,330		$	7,392		$	6,468
Net income (loss)		(8	)		1,378			1,370			1,167
Shareholder dividends		–			(285	)		(285	)		(231	)
Issuance costs		–			–			–			(12	)
Purchase and cancellation of common shares (note 9)		–			(700	)		(700	)		–
Transfer of participating policyholders’ retained earnings from acquisition		38			–			38			–
Balance, December 31	$	92		$	7,723		$	7,815		$	7,392
Currency translation account
Balance, January 1	$	–		$	287		$	287		$	131
Change during the year		–			50			50			156
Balance, December 31	$	–		$	337		$	337		$	287
Total retained earnings	$	92		$	8,060		$	8,152		$	7,679
Common shares
Balance, January 1	$	–		$	614		$	614		$	612
Common shares issued on exercise of options (note 9)		–			8			8			2
Purchase and cancellation of common shares (note 9)		–			(26	)		(26	)		–
Balance, December 31	$	–		$	596		$	596		$	614
Total equity	$	92		$	8,656		$	8,748		$	8,293

The accompanying notes to these consolidated financial statements are an integral part of these statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended December 31
(Canadian $ in millions)	2002			2001
Operating activities
Operating cash inflows
Premiums and annuity considerations	$	10,705		$	10,255
Investment income received		4,124			3,839
Other revenue		1,518			1,471
Total operating cash inflows	$	16,347		$	15,565
Operating cash outflows
Benefit payments	$	8,505		$	10,981
Insurance expenses and taxes (notes 5 and 6)		4,042			3,980
Dividends paid to policyholders		932			900
Net transfers to segregated funds		656			1,470
Change in other assets and liabilities		(46	)		1,143
Total operating cash outflows	$	14,089		$	18,474
Cash provided by (used in) operating activities	$	2,258		$	(2,909	)
Investing activities
Purchases and mortgage advances	$	(46,259	)	$	(48,468	)
Disposals and repayments		44,980			39,718
Cash received from assumptions and acquisition of businesses, net of cash paid		(139	)		10,874
Net cash proceeds on disposition of Seamark Asset Management Ltd.		–			29
Cash provided by (used in) investing activities	$	(1,418	)	$	2,153
Financing activities
Increase (decrease) in repurchase agreements and securities sold but not yet purchased	$	(356	)	$	273
Banking deposits, net		668			177
Shareholder dividends		(285	)		(231	)
Borrowed (repaid) funds, net		(2	)		32
Issue of subordinated debt, net (note 6)		–			796
Issue of Manulife Financial Capital Securities, net (note 7)		–			988
Common shares issued on exercise of options (note 9)		8			2
Purchase and cancellation of common shares (note 9)		(726	)		–
Cash provided by (used in) financing activities	$	(693	)	$	2,037
Cash and short-term investments
Increase during the year	$	147		$	1,281
Balance, January 1		4,761			3,480
Balance, December 31	$	4,908		$	4,761
COMPOSITION OF CASH AND SHORT-TERM INVESTMENTS
Beginning of year
Gross cash and short-term investments	$	4,995		$	3,783
Net payments in transit, included in other liabilities		(234	)		(303	)
Net cash and short-term investments, January 1	$	4,761		$	3,480
End of year
Gross cash and short-term investments	$	5,143		$	4,995
Net payments in transit, included in other liabilities		(235	)		(234	)
Net cash and short-term investments, December 31	$	4,908		$	4,761

The accompanying notes to these consolidated financial statements are an integral part of these statements.

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SEGREGATED FUNDS

CONSOLIDATED STATEMENTS OF NET ASSETS

As at December 31
(Canadian $ in millions)		2002			2001
Investments, at market values
	Bonds	$	3,698		$	2,405
	Stocks		51,014			53,511
	Mortgages		26			–
	Real estate		–			2
	Cash and short-term investments		4,119			3,390
Accrued investment income			10			9
Other assets (liabilities), net			(36	)		(111	)
Total segregated funds net assets		$	58,831		$	59,206
Composition of segregated funds net assets:
Held by Policyholders		$	58,450		$	59,052
Held by the Company			381			154
Total segregated funds net assets		$	58,831		$	59,206

SEGREGATED FUNDS

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

For the years ended December 31
(Canadian $ in millions)	2002			2001
Additions
Deposits from policyholders	$	17,013		$	14,044
Net realized and unrealized investment losses		(10,552	)		(7,868	)
Interest and dividends		1,332			1,505
Net transfers from general fund		656			1,470
Funds assumed and acquired (note 11)		40			287
Currency revaluation		(377	)		2,697
Total additions	$	8,112		$	12,135
Deductions
Payments to policyholders	$	7,617		$	6,993
Management and administrative fees		870			844
Total deductions	$	8,487		$	7,837
Net addition (reduction) to segregated funds for the year	$	(375	)	$	4,298
Segregated funds net assets, January 1		59,206			54,908
Segregated funds net assets, December 31	$	58,831		$	59,206

The accompanying notes to these consolidated financial statements are an integral part of these statements.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Canadian $ in millions unless otherwise stated)

NOTE 1 Nature of Operations and Significant Accounting Policies

Manulife Financial Corporation is a publicly traded stock life insurance company and the holding company of The Manufacturers Life Insurance Company (“Manufacturers Life”), a Canadian life insurance company. Manulife Financial Corporation and its subsidiaries (“Manulife Financial” or the “Company”) provide a wide range of financial products and services, including individual life insurance, group life and health insurance, pension products, annuities and mutual funds, to individual and group customers in Canada, the United States and Asia. The Company also offers reinsurance services, primarily life and accident reinsurance, and provides investment management services with respect to the Company’s general fund assets, segregated fund assets and mutual funds and, in Canada and Asia, to institutional customers.

Manulife Financial Corporation is registered under the Insurance Companies Act (Canada) (“ICA”), which requires that financial statements be prepared in accordance with Canadian generally accepted accounting principles (“GAAP”), including the accounting requirements of the Office of the Superintendent of Financial Institutions (Canada) (“OSFI”). None of the accounting requirements of OSFI is an exception to Canadian GAAP. The preparation of financial statements, in conformity with GAAP, requires that management makes estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimation processes are related to the determination of actuarial liabilities. Although some variability is inherent in these estimates, management believes that the amounts provided are adequate. The significant accounting policies used in the preparation of these consolidated financial statements are summarized below:

a) BASIS OF CONSOLIDATION

Manulife Financial Corporation consolidates the financial statements of all subsidiary companies and eliminates on consolidation all significant inter-company balances and transactions. The equity method is used to account for investments over which the Company exerts significant influence. Gains and losses on sales of these investments are included in income when realized, while expected losses on other than temporary impairments are recognized immediately.

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b) INVESTED ASSETS

Under GAAP for life insurance companies, the invested assets held by the Company are accounted for through a variety of methods. These methods are summarized as follows:

		Recognition of realized
		gains and losses on
	Carrying value	normal business activities	Recognition of impairment
Bonds	At amortized cost less an allowance for specific losses. No recognition of unrealized gains and losses unless there is impairment.	Deferred and brought into income over the lesser of 20 years or the remaining term to maturity of the bond sold.	Impairment is recognized on a specific bond when there is no longer reasonable assurance as to the timely collection of the full amount of principal and interest. In such cases, the bond is written down to its net realizable value and the charge is recorded in income in the period the impairment is recognized.
Mortgages	At amortized cost less repayments and an allowance for specific losses. No recognition of unrealized gains and losses unless there is impairment.	Deferred and brought into income over the lesser of 20 years or the remaining term to maturity of the mortgage sold.	Impairment is recognized on a specific mortgage when there is no longer reasonable assurance as to the timely collection of the full amount of principal and interest. Such impaired mortgages are carried at their estimated realizable value, determined for each asset by discounting the expected future cash flows at the original interest rate inherent in the asset. When the amounts and timing of future cash flows cannot be estimated with reasonable reliability, estimated realizable amounts are measured at either the fair value of any security underlying the mortgage, net of expected costs of realization and any amounts legally required to be paid to borrowers, or at observable market prices for the mortgages.
			Mortgages are classified as impaired whenever payments are three months or more in arrears or if there is a provision against the mortgage.
			At the time of foreclosure, mortgages are written down to net realizable value. Declines in the net realizable value of foreclosed properties are charged to income immediately.
Stocks	Recognition of unrealized gains and losses is on a moving average market basis whereby carrying values are adjusted towards market value at 5% per quarter.	Deferred and brought into income at the rate of 5% of unamortized deferred realized gains and losses each quarter.	Specific stocks are written down to market value if an impairment in the value of the entire stock portfolio (determined net of deferred realized gains) is considered to be other than temporary.
Real estate	Recognition of unrealized gains and losses is on a moving average market basis whereby carrying values are adjusted towards market value at 3% per quarter.	Deferred and brought into income at the rate of 3% of unamortized deferred realized gains and losses each quarter.	Specific properties are written down to market value if an impairment in the value of the entire real estate portfolio (determined net of deferred realized gains) is considered to be other than temporary.
Policy loans	At their unpaid balance.	Not applicable. Fully secured by the cash surrender value of the policies on which the loans are made.	Not applicable. Fully secured by the cash surrender value of the policies on which the loans are made.

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Once established, an allowance against impairment of bonds or mortgages is reversed only if the conditions that caused the impairment no longer exist. On disposition of an impaired asset, the allowance is written off against the related asset.

In addition to allowances against the carrying value of impaired assets, the Company provides for potential future impairments by reducing investment yields assumed in the calculation of actuarial liabilities.

Other investments include investments in oil and gas properties, equipment leases, limited partnerships, commercial loans, investments in segregated and mutual funds and derivative assets.

c) GOODWILL

Goodwill represents the excess of the cost of businesses acquired over fair values of the net assets acquired. Goodwill is not amortized but is tested for impairment on at least an annual basis. When goodwill is determined to be impaired, a charge is recorded in income to the extent the carrying value exceeds the estimated fair value.

d) MISCELLANEOUS ASSETS

Included in miscellaneous assets are amounts due from reinsurers and capital assets. The latter are carried at cost less accumulated amortization computed on a straight-line basis over their estimated useful lives, which vary from two to ten years.

e) SEGREGATED FUNDS

The Company manages a number of segregated funds on behalf of policyholders. The investment returns on these funds accrue directly to the policyholders, with the Company assuming no risk. Consequently, these funds are segregated and presented separately from the general fund of the Company. Income earned from fund management fees is included in other revenue in the general fund. Investments held in segregated funds are carried at market value.

The Company also provides minimum guarantees on individual variable life and annuity contracts. These include minimum death benefit guarantees, minimum maturity value guarantees and minimum income benefit guarantees. The liabilities associated with these minimum guarantees are recorded in actuarial liabilities in the general fund of the Company.

f) ACTUARIAL LIABILITIES

Actuarial liabilities represent the amount which, together with estimated future premiums and net investment income, will be sufficient to pay estimated future policy benefits, policyholder dividends, taxes (other than income taxes) and expenses on policies in force. Manulife Financial Corporation’s Appointed Actuary is responsible for determining the amount of actuarial liabilities that must be set aside each year to ensure that sufficient funds will be available in the future to meet these obligations. The valuation methods employed by the Appointed Actuary are based on standards established by the Canadian Institute of Actuaries. In accordance with Canadian generally accepted actuarial practices, liabilities have been determined using the Canadian Asset Liability Method (CALM).

g) INCOME TAXES

The Company provides for income taxes using the liability method of tax allocation. Under this method, the provision for income taxes is calculated based on income tax laws and income tax rates substantively enacted as at the Consolidated Balance Sheet dates. The income tax provision is comprised of two components: current income taxes and future income taxes. Current income taxes are amounts expected to be payable or recoverable as a result of operations in the current year. Future income taxes arise from changes during the year in cumulative temporary differences between the accounting carrying value of assets and liabilities and their respective tax bases. A future income tax asset is recognized to the extent that future realization of the tax benefit is more likely than not, with a valuation allowance for the excess.

h) TRANSLATION OF FOREIGN CURRENCIES

Assets and liabilities denominated in foreign currencies are translated into Canadian dollars at rates in effect at the Consolidated Balance Sheet dates. Revenue and expenses are translated at the average exchange rates prevailing during the year. Unrealized foreign currency translation gains and losses on investments in self-sustaining operations are recorded in equity. Translation gains and losses on disposition of investments in self-sustaining operations are included in income.

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i) STOCK-BASED COMPENSATION

The Company provides compensation to certain employees and directors in the form of stock options and deferred share units. The intrinsic value method of accounting is used and as such, no expense is recognized for stock options as the exercise price thereon is set at the closing market price of Manulife Financial Corporation common shares on the Toronto Stock Exchange on the business day immediately preceding the award grant date. When options are exercised, the proceeds received by the Company are credited to share capital.

j) EMPLOYEE FUTURE BENEFITS

The Company maintains a number of pension plans for its eligible employees and agents. The assets supporting trusteed pension plans are held in separate trusteed pension funds. Other pension plan benefits are included in Other liabilities and are supported by the Company’s general fund assets.

The defined contribution plans were established in 1998 and provide pension benefits based on the accumulated contributions and fund earnings. The cost of defined contribution benefits is the required contribution provided by the Company in exchange for the services of employees rendered during the period.

The defined benefit plans provide pension benefits based on length of service and final average earnings. The cost of defined benefit pension benefits is recognized using the projected benefit method pro-rated on services. Actuarial gains and losses are amortized to income over the estimated average remaining service lives of plan members.

The Company also provides supplementary pension, health, dental and life insurance benefits to qualifying employees upon retirement. The estimated present value of these benefits is charged to earnings over the employees’ years of service to their dates of full entitlement.

k) DERIVATIVES

The Company uses derivatives to manage exposures to foreign currency, interest rate and other market risks arising from its on-balance sheet financial instruments. These derivatives are designated and effective as hedges, as there is a high correlation between changes in market value of the derivative and the underlying hedged item at inception and over the life of the hedge. Realized and unrealized gains and losses on these derivatives are accounted for on the same basis as the underlying assets and liabilities. Realized and unrealized gains and losses on derivative transactions established as hedges but no longer considered hedges are included in income from the date at which they are no longer considered to be hedges. Derivative income and expenses related to invested assets and financial liabilities are included in investment income and interest expense, respectively, in the Consolidated Statements of Operations. Cash flows relating to derivatives associated with invested assets and financial liabilities are included in the Consolidated Statements of Cash Flows on a basis consistent with the cash flows from the underlying invested assets and financial liabilities. Derivative assets and liabilities are included in Other investments and Other liabilities, respectively, and deferred realized net gains are presented as such in the Consolidated Balance Sheets.

l) PREMIUM INCOME AND RELATED EXPENSES

Gross premiums for all types of insurance contracts, and contracts with limited mortality or morbidity risk, are generally recognized as revenue when due.

When premiums are recognized, the related actuarial liabilities are computed, resulting in benefits and expenses being matched with such revenue.

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NOTE 2 Changes in Accounting Policies and Estimates and Newly Issued Accounting Policies

a) EARNINGS PER SHARE

Effective January 1, 2001, the Company adopted retroactively the Canadian Institute of Chartered Accountants (“CICA”) Handbook Section 3500, “Earnings Per Share,” which requires the use of the treasury stock method of computing diluted earnings per share. The impact of this change was not material to the calculation of Manulife Financial Corporation’s earnings per share.

b) BUSINESS COMBINATIONS AND GOODWILL AND OTHER INTANGIBLE ASSETS

Effective January 1, 2002, the Company adopted CICA Handbook Section 1581, “Business Combinations” and Handbook Section 3062, “Goodwill and Other Intangible Assets.” Section 1581 requires that all business combinations be accounted for using the purchase method and provides specific criteria for recognizing intangible assets separately from goodwill. Under Section 3062, goodwill and intangible assets with indefinite useful lives are no longer amortized but are reviewed for impairment annually, or more frequently if impairment indicators arise. The Company completed the transitional and annual impairment tests and determined that goodwill is not impaired.

The following table presents the net income attributed to shareholders and basic and diluted earnings per share in accordance with the transitional provisions of Handbook Section 3062 in effect since January 1, 2002:

For the years ended December 31	2002		2001
Net income attributed to shareholders, as reported	$	1,378	$	1,159
Add back: goodwill amortization, net of tax		–		27
Net income attributed to shareholders, excluding goodwill amortization, net of tax	$	1,378	$	1,186
Basic earnings per share, as reported	$	2.90	$	2.40
Basic earnings per share, excluding goodwill amortization, net of tax	$	2.90	$	2.46
Diluted earnings per share, as reported	$	2.88	$	2.38
Diluted earnings per share, excluding goodwill amortization, net of tax	$	2.88	$	2.44

c) STOCK-BASED COMPENSATION

Effective January 1, 2002, the Company adopted prospectively CICA Handbook Section 3870, “Stock-Based Compensation and Other Stock-Based Payments,” which requires that stock-based compensation awarded to non-employees, direct awards of stock, awards that call for settlement in cash or other assets or stock appreciation rights awarded to employees be recognized at fair value as an expense. Other stock options awarded to employees must either be recognized at fair value as an expense, or require the disclosure of the pro forma net income and pro forma earnings per share amounts as if fair value based accounting had been used. This standard did not materially affect these consolidated financial statements and the calculation of Manulife Financial Corporation’s earnings per share. The Company expects to change its accounting policy for stock options granted to employees from the intrinsic method to the fair value method effective January 1, 2003 for awards granted on or after January 1, 2002.

d) HEDGING RELATIONSHIPS

In November 2001, the CICA issued Accounting Guideline 13, “Hedging Relationships,” effective for fiscal years beginning on or after July 1, 2003, which requires the identification, documentation, designation and determination of effectiveness of a hedging relationship to apply hedge accounting. However, it does not specify hedge accounting methods. The new guideline also outlines conditions whereby hedge accounting for hedging relationships established in prior periods can be continued. The Company is in the process of reviewing its hedging relationships in context with the new guideline and the impact of this guideline is not expected to materially impact these consolidated financial statements.

e) MOVING AVERAGE MARKET METHOD

In the second quarter of 2002, OSFI modified the moving average market method for stocks and real estate portfolios. As such, the rates used to adjust carrying values towards market value have been changed to 5% per quarter from 15% per annum for stocks and to 3% per quarter from 10% per annum for real estate. The Company adopted the change in rates effective for the second quarter.

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NOTE 3 Invested Assets and Income

a) INVESTED ASSETS

											Deferred		Total realized
As at December 31						Unrealized		Unrealized			realized		and unrealized
2002		Carrying value		Fair value		gains		losses			net gains		net gains
Bonds (fixed maturity) Canadian government		$	8,674	$	9,889	$	1,328	$	(113	)	$	277	$	1,492
	Foreign governments		9,958		10,727		824		(55	)		318		1,087
	Corporate		26,953		28,376		1,553		(130	)		860		2,283
	Mortgage-backed securities		1,092		1,163		77		(6	)		35		106
Mortgages			9,294		10,023		735		(6	)		46		775
Stocks			6,898		5,799		566		(1,665	)		1,632		533
Real estate			3,570		3,868		372		(74	)		100		398
Policy loans			4,939		4,939		–		–			–		–
Cash and short-term investments			5,143		5,144		1		–			–		1
Other investments			1,041		1,077		46		(10	)		29		65
Total invested assets		$	77,562	$	81,005	$	5,502	$	(2,059	)	$	3,297	$	6,740
2001
Bonds (fixed maturity) Canadian government		$	8,075	$	8,973	$	918	$	(20	)	$	195	$	1,093
	Foreign governments		10,593		10,811		266		(48	)		256		474
	Corporate		26,158		26,973		1,102		(287	)		630		1,445
	Mortgage-backed securities		1,244		1,283		43		(4	)		30		69
Mortgages			7,902		8,286		405		(21	)		37		421
Stocks			6,964		6,657		420		(727	)		2,298		1,991
Real estate			3,484		3,799		384		(69	)		106		421
Policy loans			4,644		4,644		–		–			–		–
Cash and short-term investments			4,995		4,997		2		–			–		2
Other investments			693		768		95		(20	)		31		106
Total invested assets		$	74,752	$	77,191	$	3,635	$	(1,196	)	$	3,583	$	6,022

Fair values are determined with reference to quoted market prices where available.Fair values of mortgages reflect changes in interest rates, which have occurred since the mortgages were originated, and changes in the creditworthiness of individual borrowers. For fixed-rate mortgages, fair value is determined by discounting the expected future cash flows at market interest rates for mortgages with similar credit risks. Fair values of real estate are determined by a combination of internal and external appraisals utilizing expected net cash flows discounted at market interest rates. Foreclosed properties of $13 are included in real estate as at December 31, 2002 (2001 – $40). Fair values of policy loans, cash and short-term investments and the remaining other investments approximate their carrying values due to their short-term nature. Included in other investments are oil and gas properties, the fair value of which is determined by external appraisals.

The following table presents the carrying value and fair value of bonds, based on period to maturity:

BONDS

As at December 31	2002				2001
	Carrying		Fair		Carrying		Fair
	value		value		value		value
Maturity
Due in one year or less	$	4,066	$	4,103	$	3,711	$	3,733
Due after one year through five years		14,923		15,414		14,732		14,995
Due after five years through ten years		17,080		19,239		10,903		11,318
Due after ten years		9,516		10,236		15,480		16,711
Mortgage-backed securities		1,092		1,163		1,244		1,283
Total	$	46,677	$	50,155	$	46,070	$	48,040

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The following table presents the carrying value and fair value of mortgages, by type of property:

MORTGAGES

As at December 31	2002				2001
	Carrying		Fair		Carrying		Fair
	value		value		value		value
Residential	$	2,020	$	2,125	$	1,761	$	1,817
Office		2,619		2,869		2,015		2,126
Retail		2,196		2,357		1,891		1,995
Industrial		2,160		2,350		1,942		2,038
Other		299		322		293		310
Total	$	9,294	$	10,023	$	7,902	$	8,286

The carrying value of government-insured mortgages was 4% of the total carrying value of the mortgage portfolio as at December 31, 2002 (2001 – 3%) and the value of privately-insured mortgages was 1.1% of the total mortgage portfolio as at December 31, 2002 (2001 – 1.3%).

b) INVESTMENT INCOME

							Amortization of
	Gross			Provision for			net realized and
For the years ended December 31	investment			impairment, net			unrealized
2002	income (loss)			(note 3(e))			gains (losses)			Total			Yield (%)
Bonds	$	2,627		$	(198	)	$	160		$	2,589			5.82
Mortgages		635			(3	)		15			647			7.95
Stocks		101			–			185			286			5.84
Real estate		272			4			50			326			10.64
Policy loans		393			–			–			393			8.23
Cash and short-term investments		77			–			–			77			N/A
Other investments		(86	)		–			4			(82	)		N/A
Currency		–			–			(1	)		(1	)		N/A
Total	$	4,019		$	(197	)	$	413		$	4,235			5.93
2001
Bonds	$	2,490		$	(113	)	$	147		$	2,524			6.40
Mortgages		597			6			16			619			8.63
Stocks		66			–			348			414			13.00
Real estate		279			9			46			334			10.65
Policy loans		373			–			–			373			8.75
Cash and short-term investments		152			–			–			152			N/A
Other investments		5			(1	)		43			47			N/A
Currency		–			–			16			16			N/A
Total	$	3,962		$	(99	)	$	616		$	4,479			6.90

Yields are based on total investment income divided by the aggregate of the average carrying value of assets plus accrued income less deferred realized net gains.

c) SECURITIES LENDING

The Company engages in securities lending to generate additional income. Certain securities from its portfolio are loaned to other institutions for periods of time. Collateral, which exceeds the market value of the loaned securities, is lodged by the borrower with the Company and retained by the Company until the underlying security has been returned to the Company. The market value of the loaned securities is monitored on a daily basis with additional collateral obtained or refunded as the market value fluctuates. As at December 31, 2002, the Company had loaned securities (which are included in invested assets) with a carrying value and market value of approximately $3,347 and $3,387,respectively (2001 – $2,692 and $2,712, respectively).

d) MORTGAGE SECURITIZATION

In prior years, the Company sold commercial mortgages for cash, with limited recourse. The maximum recourse on these mortgages is less than 10% of the proceeds. When the mortgages were sold, they were removed from the Company’s Consolidated Balance Sheets with any resultant gain or loss deferred and amortized into investment income. As at December 31, 2002, outstanding balances of sold mortgages with limited recourse was $313 (2001 – $389).

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e) CREDIT RISK

Credit risk is the risk that a party to a financial instrument, such as a mortgage borrower, will fail to fully honour its financial obligations to the Company. Credit risks are primarily associated with investment, derivative and reinsurance counterparties (see reinsurance risk in note 4(d)).

The Company has provided for credit risks by establishing allowances against the carrying value of impaired assets in the Consolidated Balance Sheets. In addition to these allowances, the Company provides for potential future impairments by reducing investment yields assumed in the calculation of actuarial liabilities (note 4(c)).

The carrying value of impaired assets was as follows:

	Gross				Carrying
As at December 31, 2002	amount		Allowance		value
Mortgages	$	36	$	20	$	16
Other impaired assets		377		270		107
Total	$	413	$	290	$	123
2001
Mortgages	$	64	$	25	$	39
Other impaired assets		330		183		147
Total	$	394	$	208	$	186

The changes during the year in respect of the allowance for impairment were as follows:

ALLOWANCE FOR IMPAIRMENT	2002			2001
Balance, January 1	$	208		$	162
Provisions during the year		197			99
Write-offs, net of recoveries		(115	)		(53	)
Balance, December 31	$	290		$	208

Concentrations of credit risk

The Company’s exposure to credit risk is managed through risk management policies and procedures with emphasis on the quality of the investment portfolio together with maintenance of issuer, industry and geographic diversification standards.

As at December 31, 2002, 96% of bonds (2001 – 97%) were rated at investment grade “BBB” or higher, and 81% (2001 – 78%) were rated “A” or higher. Government bonds represented 40% (2001 – 41%) of the bond portfolio. The Company’s highest exposure to a single non-government issuer was $436 (2001 – $585). Mortgages and real estate are diversified geographically and by property type. The Company’s largest concentration of mortgages and real estate was in Ontario, Canada, with $4,222 (2001 – $3,660) of the total portfolio. Income-producing commercial office properties were the largest concentration in the real estate portfolio with $2,530 (2001 – $2,508). As at December 31, 2002, 95% (2001 – 96%) of the stock portfolio was comprised of publicly listed corporations. The largest single issuer represented 6% (2001 – 4%) of the portfolio.

The Company’s exposure to loss on derivatives is limited to the extent that default by counterparties to these contracts results in the loss of any gains that may have accrued. All contracts are held with counterparties rated “A” or higher. As at December 31,2002,52% (2001 – 85%) of the exposed amount was with counterparties rated “AA” or higher. The largest single counterparty exposure as at December 31, 2002 was $32 (2001 – $23).

NOTE 4 Actuarial Liabilities

a) COMPOSITION

Actuarial liabilities represent the amount which, together with estimated future premiums and net investment income, will be sufficient to pay estimated future benefits, policyholder dividends, taxes (other than income taxes) and expenses on policies in force. Under Canadian GAAP, the determination of actuarial liabilities is based on an explicit projection of cash flows using best estimate assumptions for each material cash flow item and contingency. Investment returns are based on projected investment income using the current asset portfolios and projected reinvestment strategies. Each assumption is adjusted by a margin for adverse deviation.

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For minimum guarantees on segregated funds, the Company determines actuarial liabilities using stochastic models as defined by the Canadian Institute of Actuaries. The models are based on the nature of the segregated fund guarantees. Investment performance, mortality and termination assumptions are the key variables that are modeled.

The composition of actuarial liabilities by line of business and geographic territory was as follows:

	Individual life insurance
					Annuities		Other insurance
As at December 31, 2002	Participating		Non-participating		and pensions		liabilities		Total
United States	$	11,294	$	3,735	$	7,000	$	1,360	$	23,389
Canada		2,914		2,840		10,892		1,953		18,599
International		11,070		1,827		1,423		89		14,409
Total	$	25,278	$	8,402	$	19,315	$	3,402	$	56,397
2001
United States	$	11,634	$	3,424	$	6,471	$	1,238	$	22,767
Canada		2,603		2,595		10,693		1,834		17,725
International		11,426		1,245		1,424		103		14,198
Total	$	25,663	$	7,264	$	18,588	$	3,175	$	54,690

For participating policies in force as at demutualization, separate sub-accounts were established within the participating account. These sub-accounts permit this participating business to be operated as separate “closed blocks” of business. As at December 31, 2002, $15,983 (2001 – $15,123) of both assets and actuarial liabilities related to the participating policy-holders’ account were included in the closed blocks.

b) ASSETS BACKING LIABILITIES AND EQUITY

The Company has established target invested asset portfolio mixes, which take into account the risk attributes of the liabilities supported by the assets, expectations of market performance, and a generally conservative investment philosophy. Assets are segmented and matched to liabilities with similar underlying characteristics by product line and major currency. Liabilities with rate and term guarantees, such as annuities and pensions, are predominantly backed by fixed-rate instruments such as bonds and commercial and mortgage loans. Insurance products, such as participating whole life insurance, are backed by a broader range of asset classes. The Company’s equity is primarily invested in North American and international securities and North American real estate.

Changes in the fair value of assets backing actuarial liabilities would have a limited impact on the Company’s equity, as it would be substantially offset by a corresponding change in the fair value of the liabilities. The fair value of assets backing actuarial liabilities as at December 31, 2002 was estimated at $59,087 (2001 – $56,405).

A change in the fair value of assets supporting capital and other liabilities results in a corresponding change in equity when recognized, offset by changes in related liabilities when recognized. The fair value of assets backing capital and other liabilities as at December 31, 2002 was estimated at $25,551 (2001 – $24,647).

The carrying value of total assets backing actuarial liabilities, other liabilities and capital was as follows:

	Individual life insurance
					Annuities
As at December 31, 2002	Participating		Non-participating		and pensions		Other(1)		Capital(2)		Total
Assets
Bonds	$	13,809	$	5,197	$	12,412	$	9,507	$	5,752	$	46,677
Mortgages		1,583		880		3,886		2,393		552		9,294
Stocks		2,317		311		307		1,157		2,806		6,898
Real estate		1,772		483		61		915		339		3,570
Other		5,797		1,531		2,649		2,250		2,529		14,756
Total	$	25,278	$	8,402	$	19,315	$	16,222	$	11,978	$	81,195

(1)	Other includes group insurance, reinsurance and non-insurance liabilities and non-controlling interest in subsidiaries.
(2)	Capital represents total equity, subordinated debt, non-controlling interest in Manulife Financial Capital Trust and trust preferred securities issued by subsidiaries.

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	Individual life insurance
					Annuities
As at December 31, 2001	Participating		Non-participating		and pensions		Other(1)		Capital(2)		Total
Assets
Bonds	$	14,532	$	4,087	$	12,741	$	9,843	$	4,867	$	46,070
Mortgages		1,471		711		3,416		1,807		497		7,902
Stocks		2,321		277		240		1,151		2,975		6,964
Real estate		1,691		370		58		818		547		3,484
Other		5,648		1,819		2,133		1,966		2,627		14,193
Total	$	25,663	$	7,264	$	18,588	$	15,585	$	11,513	$	78,613

(1)	Other includes group insurance, reinsurance and non-insurance liabilities and non-controlling interest in subsidiaries.
(2)	Capital represents total equity, subordinated debt, non-controlling interest in Manulife Financial Capital Trust and trust preferred securities issued by subsidiaries.

The deferred realized net gains taken into account in the computation of actuarial liabilities as at December 31,2002 were $1,859 (2001 – $2,025).

c) SIGNIFICANT RESERVE ASSUMPTIONS

The preparation of financial statements involves the use of estimates and assumptions; however, actual results may differ from those estimates. The most significant estimation processes for insurance companies relate to the determination of actuarial liabilities.

Actuarial liabilities have two major components: a best estimate reserve and a provision for adverse deviation. In conjunction with prudent business practices to manage both business and investment risks, the selection and monitoring of appropriate assumptions are designed to minimize the extent to which the Company is financially exposed to measurement uncertainty.

Best estimate reserve assumptions

In the computation of actuarial liabilities, best estimate reserve assumptions are made. Assumptions are made for the lifetime of the policies and include assumptions with respect to mortality and morbidity, investment returns, rates of policy termination, operating expenses and certain taxes. Actuarial assumptions may be subject to change in the future. Actual experience is monitored regularly to ensure that the assumptions remain appropriate. Assumptions are discussed in more detail in the following table:

	Nature of factor and assumption methodology	Risk management
Mortality and Morbidity	Mortality relates to the occurrence of death. Mortality assumptions are based on past and emerging Company and industry experience. Assumptions are differentiated by sex, underwriting class and policy type. Morbidity relates to the occurrence of accidents and sickness. Morbidity assumptions are based on Company and industry experience.	The Company establishes appropriate underwriting standards to determine the insurability of applicants. Claim trends are monitored on an ongoing basis. Exposure to large claims is managed by establishing policy retention limits, which vary by market and geographic location. Policies in excess of the limits are reinsured with other companies. Mortality is monitored monthly and 2002 experience was consistent with the Company’s assumptions. Morbidity is also monitored monthly and 2002 experience was favourable when compared with the Company’s assumptions.
Investment return	The Company matches assets and liabilities by business segment, using investment objectives that are appropriate for each line of business. The projected cash flows from these assets are combined with future reinvestment rates derived from the current economic outlook and the Company’s investment policy in order to determine expected rates of return on these assets for all future years. Investment return assumptions include expected future asset defaults. Asset defaults are projected based on both past Company and industry experience and specific reviews of the current investment portfolio.	The Company’s policy of closely matching cash flows of the assets with those of the corresponding liabilities reduces the Company’s exposure to future changes in interest rates. The interest rate risk positions in business segments are monitored on an ongoing basis. Under the Canadian Asset Liability Method (CALM), the reinvestment rate is quantified by using interest rate scenario testing. The exposure to asset default is managed by policies and procedures, which limit concentrations by issuer, connections, rating, sector and geographic region. On certain policies, such as for participating insurance and universal life, asset default experience is passed back to policyholders through the investment return crediting formula. The Company holds explicit provisions in actuarial liabilities for asset credit risk, which including provisions for adverse deviation, totaled $1,699 as at December 31, 2002 (2001 – $1,525).

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	Nature of factor and assumption methodology	Risk management
Investment return, continued		In 2002, mortgage default experience continued to be favourable when compared to the Company’s assumptions. Bond default experience for 2002 was favourable when compared with the Company’s assumptions, with the exception of the telecommunications sector, which was unfavourable.
		Stocks and real estate are used primarily to support liabilities where investment return experience is passed back to policyholders through dividends or credited investment return adjustments. A limited amount of stocks are also used to support long-dated obligations in the Company’s U.S. annuity and pension businesses, and for insurance liabilities in Japan.
Policy terminations	Lapse relates to the termination of policies due to non- payment of premiums. Surrenders relate to the voluntary termination of policies by policyholders. Policy termination assumptions are based on the Company’s experience adjusted for expected future conditions. Assumptions reflect differences in geographic markets and lapse patterns for different types of contracts.	The Company designs its products in order to minimize financial exposure to lapse and surrender risk. In addition, the Company monitors lapse and surrender experience monthly. In aggregate, 2002 lapse experience on insurance products was slightly unfavourable when compared to assumptions used in the computation of actuarial liabilities.
Expenses and taxes	Operating expense assumptions reflect the projected costs of maintaining and servicing in force policies and associated overhead expenses. These expenses are derived from the Company’s internal cost studies projected into the future with an allowance for inflation. Taxes reflect assumptions for future premium taxes and other non-income related taxes. The impact of income taxes, projected on the basis of the valuation assumptions (expected plus margin for adverse deviation), is also included.	The Company prices its products to cover the expected costs of servicing and maintaining them. In addition, the Company monitors expenses monthly, including comparisons of actual expenses to expense levels allowed for in pricing and valuation. Maintenance expenses for 2002 were favourable when compared with the assumptions used in the computation of actuarial liabilities.
		The Company prices its products to cover the expected cost of taxes.

Provision for adverse deviation assumptions

The basic assumptions made in establishing actuarial liabilities are best estimates for a range of possible outcomes. To recognize the uncertainty in establishing these best estimate reserve assumptions, to allow for possible deterioration in experience and to provide greater comfort that the reserves are adequate to pay future benefits, the Appointed Actuary is required to include a margin in each assumption.

The impact of these margins is to increase actuarial liabilities and decrease the income that would be recognized at inception of the policy. Minimum conditions are prescribed by the Canadian Institute of Actuaries for determining margins related to interest rate risk. For other risks, which are not specifically addressed by the Canadian Institute of Actuaries, a range is defined as 5% to 20% of the expected experience assumption, taking into account the risk profiles of the business. The Company uses assumptions at the conservative end of the permissible ranges.

d) RISK MANAGEMENT

In addition to risks related to reserve assumptions, the Company is also exposed to the following risks, which are considered in establishing actuarial liabilities:

Interest rate risk

Interest rate changes may result in losses if asset and liability cash flows are not closely matched with respect to timing and amount. The Company measures and manages interest rate risk exposure using a variety of sophisticated measures, including cash flow gaps, durations, key rate durations, convexity, and economic value at risk based on both stochastic scenarios and predetermined scenarios.

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The Company’s exposure to interest rate movements, expressed as the impact on economic value(1), was as follows:

As at December 31	2002			2001
1% increase	$	(56	)	$	34
1% decrease	$	83		$	(87	)

(1) Impact on economic value represents the potential economic gain (loss) as a result of an immediate and parallel change of 1% in interest rates across all maturities in all markets, with a 0% interest rate floor.

Foreign currency risk

The Company’s strategy of matching the currency of its assets with the currency of the liabilities these assets support results in minimal financial exposure related to foreign currency fluctuations on assets backing actuarial liabilities. The Company also generally matches the currency of its equity with the currency of its liabilities.

As at December 31, 2002, assets exceeded liabilities denominated in foreign currencies by approximately $4,318 (2001 – $3,278), of which $3,360 as at December 31, 2002 (2001 – $2,340) related to the United States dollar. The impact of a 1% strengthening of the Canadian dollar relative to the United States dollar would have resulted in an $8 decrease in net income for the year ended December 31, 2002 (2001 – $3) and a $34 decrease in equity as at December 31, 2002 (2001 – $23).

Liquidity risk

Liquidity risk is the risk that the Company will not have access to sufficient funds to meet its liabilities as they become due. Certain of the Company’s policies have features that allow them to be terminated at short notice, creating a potential liquidity exposure. In the normal course of business, the Company matches the maturity of invested assets to the maturity of actuarial liabilities. The economic impact of dis-intermediation risk is captured as part of the interest rate risk testing in the CALM methodology.

The Company has established minimum levels for both operating and strategic liquidity measures. Operating liquidity is maintained at or above the level of one month’s operating cash outflows. Strategic liquidity is measured using an industry-accepted model under both immediate (within one month) and ongoing (within one year) stress scenarios. Under this model, adjusted liquid assets include cash and short-term investments, and marketable bonds and stocks discounted to reflect their convertibility to cash, net of maturing debt obligations. Under the model, actuarial liabilities are adjusted to reflect their potential for withdrawal. The Company’s policy is to maintain adjusted liquid assets at a level well above adjusted actuarial liabilities.

The Company’s strategic liquidity was as follows:

As at December 31	2002						2001
	Immediate			Ongoing			Immediate			Ongoing
	scenario			scenario			scenario			scenario
Adjusted liquid assets	$	52,463		$	53,231		$	51,263		$	52,101
Adjusted actuarial liabilities	$	9,176		$	12,617		$	9,016		$	12,451
Liquidity ratio		572	%		422	%		569	%		418	%

Reinsurance risk

In the normal course of business, the Company limits the amount of loss on any one policy by reinsuring certain levels of risk with other insurers. In addition, the Company accepts reinsurance from other reinsurers. Reinsurance ceded does not discharge the Company’s liability as the primary insurer. Failure of reinsurers to honour their obligations could result in losses to the Company; consequently, allowances are established for amounts deemed uncollectible. In order to minimize losses from reinsurer insolvency,the Company monitors the concentration of credit risk both geographically and with any one reinsurer. In addition, the Company selects reinsurers with high credit ratings.

As a result of ceded reinsurance, actuarial liabilities have been reduced by $3,306 as at December 31, 2002 (2001 – $2,435).

The effect of reinsurance on premium income was as follows:

For the years ended December 31	2002			2001
Direct premium income	$	10,272		$	9,896
Reinsurance assumed		1,109			821
Reinsurance ceded		(602	)		(470	)
Total premium income	$	10,779		$	10,247

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e) CHANGE IN ACTUARIAL LIABILITIES

Change in actuarial liabilities during the year was a result of the following business activities and changes in actuarial estimates:

For the years ended December 31		2002			2001
Balance, January 1		$	54,690		$	41,384
Normal change
	New policies		1,605			1,932
	In force		(1,307	)		(2,271	)
Changes in methods and assumptions			9			131
Changes due to acquisition and assumption transactions			668			12,150
Currency impact			732			1,364
Balance, December 31		$	56,397		$	54,690

The Company examines the assumptions used in determining actuarial liabilities on an ongoing basis. Actuarial liabilities are increased when expected benefit costs and related risks increase, and vice versa. As a result of continued volatility in world equity markets in 2002, the Company has increased actuarial liabilities on products that are exposed to equity markets, such as variable annuities and segregated funds. There has been a corresponding reduction in margins for investment risks on certain insurance products where investment performance can be passed back to policyholders. Actuarial liabilities on these insurance policies continue to be adequate, appropriate and consistent with the Company’s actuarial policies. In aggregate, these changes decreased pre-tax earnings by $9 (2001— $131).

Policy benefits in the course of settlement are included in Benefits payable and provision for unreported claims on the Consolidated Balance Sheets.

NOTE 5 Income Taxes

The effective income tax rate for the provision for income taxes varies from the income taxes computed at the Canadian statutory tax rate of 38% as at December 31, 2002 (2001 – 41%) for the following reasons:

RECONCILIATION OF INCOME TAX EXPENSE

For the years ended December 31		2002			2001
Income tax at Canadian statutory rates		$	636		$	559
Increase (decrease) in tax due to:
	Tax-exempt investment income		(80	)		(49	)
	Differences in tax rates on income not subject to tax in Canada		(265	)		(207	)
	Recognition of tax benefit from prior years		(15	)		(118	)
	Changes in future tax asset from statutory rate changes		(14	)		18
	Other		42			(7	)
Income taxes		$	304		$	196

Components of income tax expense included in the Consolidated Statements of Operations were as follows:

For the years ended December 31		2002			2001
Canadian income tax expense:
	Current taxes	$	96		$	71
	Future taxes		28			2
		$	124		$	73
Foreign income tax expense:
	Current taxes	$	(105	)	$	–
	Future taxes		285			123
		$	180		$	123
Income tax expense		$	304		$	196

The amount of income taxes paid in cash during the year ended December 31, 2002 was $103 (2001 – $188).

Undistributed earnings of non-Canadian subsidiaries may be taxed upon repatriation to Canada. The Company has recognized a future tax liability on these undistributed earnings to the extent that management expects it will be incurred on earnings repatriated in the foreseeable future.

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The following table presents future income taxes in total, and the principal components:

As at December 31		2002			2001
Future income tax asset:
	Gains on sale of invested assets	$	457		$	502
	Other		1,185			667
		$	1,642		$	1,169
Valuation allowance			(174	)		(114	)
Future income tax asset		$	1,468		$	1,055
Future income tax liability:
	Actuarial liabilities	$	(613	)	$	(3	)
	Real estate		(392	)		(314	)
	Securities		(245	)		(127	)
	Other		(86	)		(94	)
Future income tax liability		$	(1,336	)	$	(538	)
Net future income tax asset		$	132		$	517

As at December 31, 2002, the Company has approximately $2,903 (2001 – $1,790) of tax loss carryforwards available, which expire between the years 2003 and 2016. A benefit has been recognized in the amount of $843 (2001 – $607) in future income taxes. A benefit in the amount of $174 (2001 – $22) has not been recognized.

NOTE 6 Subordinated Debt

As at December 31	2002		2001
7.875% U.S. dollar	$	395	$	398
8.25% U.K. pound		241		220
5.70% Canadian dollar		250		250
6.24% Canadian dollar		550		550
Total	$	1,436	$	1,418
Fair value	$	1,523	$	1,470

The fair value of subordinated debt is determined by reference to current market prices. These issues form part of the Company’s regulatory capital. To reduce exposure to foreign currency fluctuations, derivatives are used to convert the U.K. pound debt into Canadian and U.S. dollar liabilities.

The cash amount of interest paid during the year ended December 31, 2002 was $98 (2001 – $91).

a) 7.875% U.S. DOLLAR SUBORDINATED NOTES

During 1995, the Company issued U.S.$250 ($341) in 7.875% subordinated notes due April 15, 2005. This debt was issued as a private placement under Rule 144A of the Securities Act (United States).

b) 8.25% U.K. POUND SUBORDINATED NOTES

On January 1, 1996, on amalgamation with North American Life Assurance Company, the Company assumed £100 ($202) in 8.25% subordinated notes redeemable on November 17, 2003. Concurrently, £5 ($10) of debt, which was held by the Company, was extinguished.

c) CANADIAN DOLLAR SUBORDINATED DEBT

On February 16, 2001, the Company issued, in two tranches, $800 in unsecured subordinated debentures, redeemable in whole or in part by the Company at any time. Debentures with principal of $250, maturing on February 16, 2011, bear interest at a fixed rate of 5.70% for five years and thereafter at a rate of 1% plus the 90-day Bankers Acceptance Rate (adjusted quarterly). In addition, debentures with principal of $550, maturing on February 16, 2016, bear interest at a fixed rate of 6.24% for 10 years and thereafter at a rate of 1% plus the 90-day Bankers Acceptance Rate (adjusted quarterly). Proceeds to Manufacturers Life, net of issuance costs, were approximately $796. The debt constitutes Tier 2B regulatory capital.

78

NOTE 7 Non-Controlling Interest in Subsidiaries

As at December 31	2002		2001
Non-controlling interest in common equity of subsidiaries	$	59	$	64
Manulife Financial Capital Securities – Series A		60		60
Manulife Financial Capital Securities – Series B		940		940
Total	$	1,059	$	1,064

On December 10, 2001, Manulife Financial Capital Trust (the “Trust”), a wholly-owned open-end trust, issued 60,000 Manulife Financial Capital Securities (“MaCS”) – Series A and 940,000 Manulife Financial Capital Securities – Series B. These securities are exchangeable into newly issued Manufacturers Life Class A Shares Series 2, in the case of MaCS – Series A, or newly issued Manufacturers Life Class A Shares Series 4, in the case of MaCS – Series B, under certain circumstances.

Each MaCS – Series A entitles the holder to receive fixed cash distributions payable semi-annually in the amount of $35.00. Each MaCS – Series B entitles the holder to receive fixed cash distributions payable semi-annually in the amount of $33.50.

The MaCS, with regulatory approval, may be redeemed in whole, upon the occurrence of certain tax or regulatory capital changes, or on or after December 31, 2006, at the option of the Trust.

Under certain circumstances, each MaCS will be automatically exchanged, without the consent of the holders, for Manufacturers Life Class A Shares Series 3, in the case of MaCS – Series A, and Manufacturers Life Class A Shares Series 5, in the case of MaCS – Series B.

The MaCS – Series A and MaCS – Series B constitute Tier 1 regulatory capital.

NOTE 8 Trust Preferred Securities Issued by Subsidiaries

As at December 31	2002		2001
Trust Preferred Securities	$	794	$	802

Capital Trust Pass-through Securities Units of U.S. $500 ($672) were issued by subsidiaries of Manulife Financial Corporation in January 1997, maturing February 1, 2027.

Each unit consists of one 8.25% Trust Preferred Security, issued by the trust subsidiary, and one 0.125% preferred purchase contract, issued by Manufacturers Investment Corporation (“MIC”). The trust subsidiary’s only asset is an investment in notes issued by MIC. Holders of each purchase contract may be required to purchase 20 non-cumulative perpetual preferred shares, Series A of MIC, at U.S. $50 per share. Holders may satisfy this purchase by delivering the Trust Preferred Securities to MIC in exchange for the perpetual preferred shares.

The Securities Units were issued as a private placement under Rule 144A of the Securities Act (United States).

From the Company’s perspective, the issue is equivalent to a combination of 8.25% subordinated debt maturing February 1, 2027, and an option exercisable by the Company, requiring contract holders to purchase an equivalent amount of perpetual preferred stock in MIC. The securities form part of the Company’s regulatory capital.

NOTE 9 Share Capital

The authorized capital of Manulife Financial Corporation consists of:

a) an unlimited number of common shares without nominal or par value; and

b) an unlimited number of Class A and Class B preferred shares without nominal or par value, issuable in series.

On October 14, 2002, the Company announced its intention to make a normal course issuer bid through the facilities of the Toronto Stock Exchange (the “Exchange”). Pursuant to the bid, the Company is authorized to purchase up to 20 million common shares, representing approximately 4.3% of common shares issued and outstanding at the time, in the 12-month period commencing October 17, 2002. Transactions will be executed on the Exchange at the prevailing market price in amounts and at times determined by the Company. Any shares purchased as part of the bid will be cancelled. As at December 31, 2002, two million shares were purchased pursuant to this bid at a cost of $64.

79

A previous normal course issuer bid program terminated on October 16, 2002.

During the year, Manulife Financial Corporation purchased and subsequently cancelled 20 million of its common shares pursuant to the two normal course issuer bids at a total cost of $726. Common shares outstanding were reduced by $26 and retained earnings were reduced by $700.

For the years ended December 31	2002						2001
	Number of						Number of
	shares						shares
	(in millions)			Amount			(in millions)		Amount
Common shares
Balance, January 1		482		$	614			482	$	612
Issued on exercise of stock options and deferred share units (note 10)		1			8			–		2
Normal course issuer bids – purchased for cancellation		(20	)		(26	)		–		–
Balance, December 31		463		$	596			482	$	614

NOTE 10 Stock-Based Compensation

Under the Company’s Executive Stock Option Plan (“ESOP”), stock options are periodically granted to selected individuals. Options provide the holder with the right to purchase common shares at an exercise price equal to the closing market price of Manulife Financial Corporation’s common shares on the Exchange on the business day immediately preceding the date the options were granted. The options vest over a period not exceeding four years and expire not more than 10 years from the grant date. A total of 36,800,000 common shares have been reserved for issuances under the ESOP.

In 2000, the Company also granted deferred share units (“DSUs”) to certain employees under the ESOP. The DSUs vest over a four-year period and each unit entitles the holder to receive one common share on retirement or termination of employment. The DSUs attract dividends in the form of additional DSUs at the same rate as dividends on the common shares. No DSUs were granted during 2002 and 2001. The number of DSUs outstanding was two million as at December 31, 2002 (2001 – three million).

Effective January 1, 2001, the Company established the Global Share Ownership Plan (“GSOP”) for its eligible employees and the Stock Plan for Non-Employee Directors.

Under the Company’s GSOP, qualifying employees can choose to have up to 5% of their annual base earnings applied toward the purchase of common shares of Manulife Financial Corporation. Subject to certain conditions, the Company will match 50% of the employee’s eligible contributions. The Company’s contributions vest immediately. All contributions will be used by the plan’s trustee to purchase common shares in the open market.

Under the Company’s Stock Plan for Non-Employee Directors, each eligible director may elect to receive DSUs or common shares in lieu of cash equal to his or her annual director’s retainer and fees. Upon termination of Board service, the eligible director may elect to receive cash or common shares equal to the value of the DSUs accumulated in his or her account. A total of 500,000 common shares have been reserved for issuance under the Stock Plan for Non-Employee Directors.

The Company also granted stock options to eligible directors under the new Director Equity Incentive Plan (“DEIP”). An option provides the holder the right to purchase one common share at an exercise price equal to the closing market price of Manulife Financial Corporation’s common shares on the Exchange on the business day immediately preceding the date the option was granted. These DEIP options vest immediately and expire not more than 10 years from the grant date. A total of 500,000 common shares have been reserved for issuance under the DEIP.

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For the years ended December 31	2002				2001
			Weighted				Weighted
	Number of		average		Number of		average
	options		exercise		options		exercise
	(in millions)		price		(in millions)		price
Outstanding, January 1		8	$	36.22		5	$	31.60
Granted		3	$	42.76		3	$	41.80
Outstanding, December 31		11	$	38.20		8	$	36.22
Exercisable, as at December 31		4	$	33.91		2	$	31.60

The exercise price of stock options outstanding ranged from $31.60 to $46.95 and had a weighted average contractual remaining life of 8.3 years.

The weighted average fair value of each option granted in the year has been estimated at $13.85 (2001 – $14.12) using the Black-Scholes option pricing model. The pricing model uses the following weighted average assumptions: risk-free interest rate of 5.2% (2001 – 5.3%), dividend yield of 1.4% (2001 – 1.2%), expected volatility of 25% (2001 – 25%) and expected life of seven (2001 – seven) years.

The following table presents the impact on net income and both basic and diluted earnings per share had the fair value method been used for all awards granted in 2002 and prior years:

For the years ended December 31	2002		2001
Reduction in net income	$	48	$	58
Reduction in basic earnings per share	$	0.10	$	0.12
Reduction in diluted earnings per share	$	0.10	$	0.12

NOTE 11 Acquisition and Assumption Transactions

a) MANULIFE LIFE INSURANCE COMPANY

In April 1999, the Company entered the Japanese life insurance market by establishing a new life insurance company, Manulife Life Insurance Company (“Manulife Japan, “formerly Manulife Century Life Insurance Company), with a local company, Daihyaku Mutual Life Insurance Company (“Daihyaku”). Effective May 31, 2000, a business suspension order was issued against Daihyaku by regulatory authorities in Japan and on June 1, 2000, administrators were appointed to manage Daihyaku’s business.

On January 25, 2001, the Company announced the signing of a definitive agreement between Manulife Japan and the administrators of Daihyaku to assume Daihyaku’s existing insurance policies. In addition, on this date, Manulife Financial acquired Daihyaku’s minority interest in Manulife Japan, making Manulife Japan a wholly-owned subsidiary of the Company.

On April 2, 2001, the transfer of approximately 1.3 million active insurance policies from Daihyaku to Manulife Japan was completed. The Company received assets with a fair value of $16,017 (Yen 1.3 trillion) of which $15,860 (Yen 1.3 trillion) was included in its general fund and $157 (Yen 12.7 billion) was included in its segregated funds. Policy liabilities and other liabilities increased by an amount commensurate with the general fund assets. This transaction was accounted for as a purchase of a block of business and accordingly, the assets transferred to Manulife Japan were recorded at their estimated fair values at the closing date. Goodwill was not created as a result of this transaction.

The results of operations for the acquired block of business since April 2, 2001 have been included in the Company’s Consolidated Statements of Operations.

CONDENSED BALANCE SHEET AS AT APRIL 2, 2001

Total general fund assets	$	15,860
Segregated fund assets	$	157
Total general fund liabilities	$	15,860
Segregated fund liabilities	$	157

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b) OTHER

The fair value of assets acquired or assumed for other transactions was as follows:

		Fair value of assets acquired or assumed
Transaction date	Company/business	General fund		Segregated funds
November 25, 2002	CMG Life Insurance Co., Inc. and CMG Plans, Inc.	$	134	$	–
March 25, 2002	Zurich Life Insurance Company of Canada		754		40
April 1, 2001	Commercial Union Life Assurance Company of Canada’s Canadian life insurance operations		1,120		77
April 1, 2001	Zurich Life Insurance Company of Canada’s group life and health employee benefits business		97		–

NOTE 12 Employee Future Benefits

The Company maintains a number of pension and benefit plans for its eligible employees and agents. The Company’s funding policy for all applicable plans is to make at least the minimum annual contributions required by regulations of the countries in which the plans are offered. Information about the Company’s benefit plans, in aggregate, was as follows:

		Pension benefits						Other employee benefits
For the years ended December 31		2002			2001			2002			2001
Change in accrued benefit obligation:
	Balance, January 1	$	727		$	675		$	130		$	118
	Service cost		25			22			6			7
	Interest cost		47			42			8			8
	Plan participants’ contributions		1			1			–			–
	Amendments		4			8			–			–
	Actuarial loss (gain)		52			14			–			(2	)
	Benefits paid		(48	)		(42	)		(3	)		(3	)
	Currency		2			7			–			2
Balance, December 31		$	810		$	727		$	141		$	130
Change in plan assets:
	Fair value of plan assets, January 1	$	632		$	682		$	–		$	–
	Actual return on plan assets		(33	)		(16	)		–			–
	Employer contribution		6			–			3			3
	Plan participants’ contributions		1			1			–			–
	Benefits paid		(48	)		(42	)		(3	)		(3	)
	Currency		–			7			–			–
Fair value of plan assets, December 31		$	558		$	632		$	–		$	–

		Pension benefits						Other employee benefits
As at December 31		2002			2001			2002			2001
Funded status, end of year		$	(252	)	$	(95	)	$	(141	)	$	(130	)
Unrecognized net actuarial loss (gain)			174			46			(56	)		(62	)
Unrecognized initial transition gain			(5	)		(10	)		–			–
Unrecognized prior service cost			20			19			–			–
Accrued benefit liability		$	(63	)	$	(40	)	$	(197	)	$	(192	)
Amounts recognized in the Consolidated Balance Sheets consist of:
	Prepaid benefit – cost	$	120		$	129		$	–		$	–
	Accrued benefit liability		(183	)		(169	)		(197	)		(192	)
Accrued benefit liability		$	(63	)	$	(40	)	$	(197	)	$	(192	)

Included in the above amounts were $505 (2001 – $110) of plan assets and $757 (2001 – $287) of benefit obligations for pension plans that are not fully funded.

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Components of the net benefit expense were as follows:

	Pension benefits						Other employee benefits
For the years ended December 31	2002			2001			2002			2001
Defined benefit service cost	$	25		$	22		$	6		$	7
Defined contribution service cost		15			13			–			–
Interest cost		47			42			8			8
Expected return on plan assets		(47	)		(49	)		–			–
Net amortizations and deferrals		1			1			(4	)		(5	)
Net benefit expense	$	41		$	29		$	10		$	10

		Pension benefits
For the years ended December 31		2002			2001
Weighted-average assumptions:
	Discount rate		6.6	%		6.7	%
	Expected return on plan assets		7.7	%		8.2	%
	Rate of compensation increase		3.6	%		3.6	%

Assumed health care cost trends have a significant effect on the amounts reported for the health care plan. The impact of a 100 basis-point change in assumed health care cost trend rates would have been as follows:

	100 basis-point		100 basis-point
	increase		decrease
Effect on total service and interest costs		3		(3	)
Effect on post-employment benefit obligation		24		(21	)

NOTE 13 Commitments and Contingencies

a) LEGAL PROCEEDINGS

The Company is subject to legal actions arising in the ordinary course of business. These legal actions are not expected to have a material adverse effect on the consolidated financial position of the Company.

b) INVESTMENT COMMITMENTS

In the normal course of business, various investment commitments are outstanding which are not reflected in the consolidated financial statements. There were $706 of outstanding investment commitments as at December 31, 2002, of which $127 mature in 30 days, $383 mature in 31 to 365 days and $196 mature in 2004 or later. There were $519 of outstanding investment commitments as at December 31, 2001, of which $161 matured in 30 days, $324 matured in 31 to 365 days and $34 mature in 2003 or later.

c) LETTERS OF CREDIT

In the normal course of business, Manulife Financial’s banking group, consisting of third party relationship banks, issues letters of credit on the Company’s behalf. As at December 31, 2002, letters of credit in the amount of $2,739 (2001 – $2,275), which included $21 (2001 – $14) against which assets have been pledged, were outstanding.

d) PLEDGED ASSETS

In the normal course of business, certain of Manulife Financial Corporation’s subsidiaries pledge their assets as security for liabilities incurred. The amounts pledged were as follows:

As at December 31		2002				2001
		Bonds		Other		Bonds		Other
In respect of:
	Securities lent	$	2,319	$	246	$	1,569	$	–
	Letters of credit		21		–		14		–
	Derivatives		–		7		–		14
	Regulatory requirements		49		–		54		–
Total		$	2,389	$	253	$	1,637	$	14

83

e) CAPITAL REQUIREMENTS

Dividends and capital distributions are restricted under the Insurance Companies Act (Canada) (“ICA”). The ICA requires Canadian insurance companies to maintain, at all times, minimum levels of capital (which principally includes common shareholders’ equity (including retained earnings), non-cumulative perpetual preferred shares, subordinated debt, other financial instruments that qualify as regulatory capital and the participating account) calculated in accordance with Minimum Continuing Capital and Surplus Requirements. In addition to the requirements under Canadian law, Manulife Financial Corporation must also maintain minimum levels of capital for its foreign subsidiaries. Such amounts of capital are based on the local statutory accounting basis in each jurisdiction. The most significant of these are the Risk Based Capital requirements for Manulife Financial Corporation’s United States insurance subsidiaries. The Company maintains capital well in excess of the minimum required in all foreign jurisdictions in which the Company does business.

There are additional restrictions on distributions in foreign jurisdictions in relation to shareholder dividends. In the United States, Manulife Financial Corporation’s principal insurance subsidiary is domiciled in Michigan. Michigan regulatory approval is required if a shareholder dividend distribution from a Michigan insurance subsidiary to the parent company would exceed that subsidiary’s earned surplus. Regulatory approval is also required if the distribution (together with other distributions during the previous year) exceeds the greater of the subsidiary’s statutory net operating income for the previous year or 10% of its surplus determined at the end of the previous year. The determination must be made in accordance with statutory accounting principles. In 2002, Manulife Financial Corporation’s Michigan insurance subsidiary would have required regulatory approval prior to the payment of dividends to the parent company.

f) PARTICIPATING BUSINESS

In some territories where the Company maintains participating accounts, there are regulatory restrictions on the amounts of profit that can be transferred to shareholders. Where applicable, these restrictions generally take the form of a fixed percentage of the policyholder dividends. For participating business operating as separate “closed blocks,” transfers are governed by the terms of Manufacturers Life’s Plan of Demutualization.

NOTE 14 Fair Value of Financial Instruments

Financial instruments refer to both on- and off-balance sheet instruments and may be assets or liabilities. They are contracts that ultimately give rise to a right for one party to receive an asset and an obligation for another party to deliver an asset. Fair values are management’s best estimates of the amounts at which instruments could be exchanged in a current transaction between willing parties and are generally calculated based on the characteristics of the instrument and the current economic and competitive environment. These calculations are subjective in nature, involve uncertainties and matters of significant judgement and do not include any tax impact.

Both the fair values and the basis for determining the fair value of invested assets, actuarial liabilities, borrowed funds, subordinated debt and derivative financial instruments are disclosed in notes 3, 4, 6 and 15, respectively.

The fair values of accrued investment income, outstanding premiums, miscellaneous assets, policy benefits in the course of settlement, provision for unreported claims, policyholder amounts on deposit and other liabilities approximate their carrying values, due to their short-term nature.

The fair value of banking deposits is estimated at $1,444 as at December 31, 2002 (2001 – $775) compared to a carrying value of $1,437 as at December 31, 2002 (2001 – $769). The fair value of these financial instruments is determined by discounting the contractual cash flows, using market interest rates currently offered for deposits with similar terms and conditions.

NOTE 15 Derivative Financial Instruments

Derivative financial instruments are financial contracts, the values of which are derived from underlying assets or interest or foreign exchange rates. In the ordinary course of business, the Company enters into primarily over-the-counter contracts for asset liability management purposes. Derivatives such as foreign exchange contracts, interest rate and cross currency swaps, forwards and futures agreements and options are used to manage exposures to interest rate, foreign currency and equity fluctuations in order to ensure a consistent stream of earnings.

84

Swaps are contractual agreements between the Company and a third party to exchange a series of cash flows. For interest rate swaps, counterparties generally exchange fixed and floating interest rate payments based on a notional value in a single currency. Cross currency swaps involve the exchange of fixed or floating interest payments in one currency for the receipt of fixed or floating interest payments in another currency.

Notional amount represents the amount to which a rate or price is applied in order to calculate the exchange of cash flows. The notional principal amounts are not included in the Consolidated Balance Sheets.

Forward and futures agreements are contractual obligations to buy or sell a financial instrument on a future date at a specified price. Forward contracts are over-the-counter contracts negotiated between counterparties, and futures agreements are standardized contracts that are transacted on regulated exchanges.

Options are contractual agreements whereby the holder has the right, but not the obligation, to buy or sell a specified amount of the financial instrument at a predetermined price within a specified time.

Credit risk equivalent is the sum of replacement cost and the potential future credit exposure. Replacement cost represents the cost of replacing, at current market rates, all contracts with a positive fair value. The amounts do not take into consideration legal contracts that permit offsetting of positions or any collateral that may be obtained. The potential future credit exposure represents the potential for future changes in value based upon a formula prescribed by OSFI.

Risk-weighted amount represents the credit risk equivalent, weighted according to the creditworthiness of the counter-party, as prescribed by OSFI.

Fair value is summarized by derivative type and represents the unrealized net gain or loss, accrued interest receivable or payable, and premiums paid or received.

Substantially all derivative financial instruments wholly or partially offset the change in fair values of related on-balance sheet assets and liabilities.

The Company had the following amounts outstanding:

		Remaining term to maturity (notional amounts)								Fair value
																				Risk
		Under 1		1 to 5		Over 5												Credit risk		weighted
As at December 31 2002		year		years		years		Total		Positive		Negative			Net			equivalent		amount
Interest rate contracts:
	Swap contracts	$	868	$	1,645	$	1,110	$	3,623	$	111	$	(118	)	$	(7	)	$	136	$	35
	Futures contracts		11		–		–		11		–		–			–			–		–
	Options written		72		34		–		106		–		(3	)		(3	)		–		–
Sub-total		$	951	$	1,679	$	1,110	$	3,740	$	111	$	(121	)	$	(10	)	$	136	$	35
Foreign exchange:
	Swap contracts		1,011		3,010		485		4,506		96		(294	)		(198	)		293		81
	Forward contracts		2,890		274		–		3,164		25		(18	)		7			67		13
Equity contracts			374		68		–		442		12		(3	)		9			34		10
Total		$	5,226	$	5,031	$	1,595	$	11,852	$	244	$	(436	)	$	(192	)	$	530	$	139
2001
Interest rate contracts:
	Swap contracts	$	726	$	1,654	$	1,476	$	3,856	$	104	$	(73	)	$	31		$	122	$	33
	Futures contracts		322		–		–		322		–		–			–			–		–
	Options written		–		–		34		34		–		(2	)		(2	)		–		–
Sub-total		$	1,048	$	1,654	$	1,510	$	4,212	$	104	$	(75	)	$	29		$	122	$	33
Foreign exchange:
	Swap contracts		222		3,036		708		3,966		48		(454	)		(406	)		255		76
	Forward contracts		3,356		–		–		3,356		10		(53	)		(43	)		44		9
Commodity contracts			4		–		–		4		3		–			3			3		2
Equity contracts			381		122		–		503		30		–			30			63		16
Total		$	5,011	$	4,812	$	2,218	$	12,041	$	195	$	(582	)	$	(387	)	$	487	$	136

85

NOTE 16 Segmented Information

The Company provides a wide range of financial products and services, including individual life insurance, group life and health insurance, pension products, annuities and mutual funds, to individual and group customers in the United States, Canada and Asia. The Company also offers reinsurance services, primarily life and accident reinsurance, and provides investment management services with respect to the Company’s general fund assets, segregated fund assets and mutual funds and, in Canada and Asia, to institutional customers.

The Company’s business segments include the U.S., Canadian, Asian, Japan and Reinsurance divisions. Effective January 1, 2002, Japan was established as its own division and was no longer included in the results of Asian Division. Each division has profit and loss responsibility and develops products, services and distribution strategies based on the profile of its business and the needs of its market.

The accounting policies of the segments are the same as those described in note 1, Nature of Operations and Significant Accounting Policies.

The results of the Company’s business segments differ from geographic segmentation primarily as a consequence of segmenting the results of the Company’s Reinsurance Division into the different geographic segments to which its business pertains.

BY SEGMENT

	U.S.			Canadian			Asian			Japan			Reinsurance			Corporate
For the year ended December 31, 2002	Division			Division			Division			Division			Division			& Other			Total
REVENUE
Premium income
Life and health insurance	$	1,939		$	2,465		$	1,424		$	1,451		$	1,063		$	–		$	8,342
Annuities and pensions		1,616			726			95			–			–			–			2,437
Total premium income	$	3,555		$	3,191		$	1,519		$	1,451		$	1,063		$	–		$	10,779
Investment income		1,773			1,629			334			81			226			192			4,235
Other revenue		998			287			114			34			43			42			1,518
Total revenue	$	6,326		$	5,107		$	1,967		$	1,566		$	1,332		$	234		$	16,532
Interest expense	$	20		$	64		$	45		$	3		$	1		$	110		$	243
Income (loss) before income taxes	$	633		$	472		$	265		$	163		$	238		$	(97	)	$	1,674
Income taxes		(162	)		(104	)		(6	)		(52	)		(54	)		74			(304	)
Net income (loss)	$	471		$	368		$	259		$	111		$	184		$	(23	)	$	1,370
Amortization of realized and unrealized net gains (losses)	$	106		$	135		$	13		$	(9	)	$	3		$	165		$	413
Segregated fund deposits	$	14,229		$	1,283		$	1,024		$	477		$	–		$	–		$	17,013
As at December 31, 2002
Actuarial liabilities	$	22,668		$	18,120		$	4,254		$	9,786		$	952		$	617		$	56,397
Funds under management
General fund	$	26,790		$	24,235		$	6,476		$	13,153		$	4,134		$	6,407		$	81,195
Segregated funds		47,189			8,577			2,497			568			–			–			58,831
Mutual funds		–			1,324			843			–			–			–			2,167
Other managed funds		–			–			1,718			–			–			2,264			3,982

BY GEOGRAPHIC LOCATION

For the year ended December 31, 2002	United States		Canada		Asia		Other		Total
REVENUE
Premium income
Life and health insurance	$	2,281	$	2,511	$	2,875	$	675	$	8,342
Annuities and pensions		1,616		726		95		–		2,437
Total premium income	$	3,897	$	3,237	$	2,970	$	675	$	10,779
Investment income		1,880		1,872		415		68		4,235
Other revenue		1,022		309		154		33		1,518
Total revenue	$	6,799	$	5,418	$	3,539	$	776	$	16,532

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BY SEGMENT

	U.S.			Canadian			Asian		Japan			Reinsurance		Corporate
For the year ended December 31, 2001	Division			Division			Division		Division			Division		& Other		Total
REVENUE
Premium income
Life and health insurance	$	1,780		$	2,278		$	1,187	$	1,349		$	791	$	–	$	7,385
Annuities and pensions		2,056			646			160		–			–		–		2,862
Total premium income	$	3,836		$	2,924		$	1,347	$	1,349		$	791	$	–	$	10,247
Investment income		1,942			1,617			333		114			231		242		4,479
Other revenue		939			287			94		25			38		122		1,505
Total revenue	$	6,717		$	4,828		$	1,774	$	1,488		$	1,060	$	364	$	16,231
Interest expense	$	52		$	56		$	47	$	5		$	3	$	94	$	257
Income before income taxes	$	524		$	417		$	196	$	167		$	2	$	57	$	1,363
Income taxes		(151	)		(82	)		1		(47	)		46		37		(196	)
Net income	$	373		$	335		$	197	$	120		$	48	$	94	$	1,167
Amortization of realized and unrealized net gains (losses)	$	179		$	196		$	50	$	(21	)	$	–	$	212	$	616
Segregated fund deposits	$	11,790		$	1,190		$	1,063	$	1		$	–	$	–	$	14,044
As at December 31, 2001
Actuarial liabilities	$	22,019		$	17,567		$	3,804	$	10,122		$	1,033	$	145	$	54,690
Funds under management
General fund	$	26,731		$	23,012		$	5,361	$	13,726		$	3,821	$	5,962	$	78,613
Segregated funds		47,975			9,279			1,865		87			–		–		59,206
Mutual funds		–			1,313			340		–			–		–		1,653
Other managed funds		–			–			637		–			–		2,073		2,710

BY GEOGRAPHIC LOCATION

For the year ended December 31, 2001	United States		Canada		Asia		Other		Total
REVENUE
Premium income
Life and health insurance	$	2,131	$	2,317	$	2,536	$	401	$	7,385
Annuities and pensions		2,056		646		160		–		2,862
Total premium income	$	4,187	$	2,963	$	2,696	$	401	$	10,247
Investment income		2,062		1,895		447		75		4,479
Other revenue		959		394		125		27		1,505
Total revenue	$	7,208	$	5,252	$	3,268	$	503	$	16,231

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NOTE 17 Material Differences Between Canadian and United States Generally Accepted Accounting Principles

The consolidated financial statements of the Company are presented in accordance with Canadian GAAP. Canadian GAAP differs in certain material respects from U.S. GAAP. The following is a summary of such material differences:

a) RECONCILIATION OF CANADIAN GAAP NET INCOME AND EQUITY TO U.S. GAAP NET INCOME, COMPREHENSIVE INCOME AND EQUITY:

		Net income						Equity
For the years ended December 31		2002			2001			2002			2001
Net income and equity determined in accordance with Canadian GAAP		$	1,370		$	1,167		$	8,748		$	8,293
Bonds			338			247			1,507			1,121
Mortgages			85			(5	)		(67	)		(132	)
Stocks			(932	)		(668	)		503			1,619
Real estate			(43	)		(4	)		(829	)		(789	)
Actuarial liabilities			(901	)		(232	)		(6,754	)		(5,889	)
Deferred acquisition costs(1)			1,249			807			7,529			6,283
Deferred revenue			(181	)		(142	)		(610	)		(465	)
Future income taxes(2)			38			2			(274	)		(292	)
Derivative instruments and hedging activities			(12	)		41			29			41
Other reconciling items			(38	)		(132	)		148			80
Net income and equity determined in accordance with U.S. GAAP		$	973		$	1,081		$	9,930		$	9,870
Foreign currency translation(3)			(75	)		277			–			–
Effect of unrealized gains and losses on available-for-sale bonds and stocks:
	Bonds		1,508			679			3,478			1,970
	Stocks		(813	)		(182	)		(19	)		794
	Actuarial liabilities		(91	)		30			(887	)		(796	)
	Deferred acquisition costs		(252	)		(96	)		(418	)		(166	)
	Deferred revenue		30			3			35			5
Other			(59	)		(30	)		(89	)		(30	)
Future income taxes(2) on above			(71	)		(109	)		(531	)		(460	)
SFAS 133 transitional provisions(4)			–			–			–			(14	)
SFAS 133 adjustments(4)			165			(308	)		(157	)		(308	)
Comprehensive income and equity determined in accordance with U.S. GAAP(5)		$	1,315		$	1,345		$	11,342		$	10,865

(1)	Deferred acquisition costs consist of $1,509 (2001 – $1,433) of capitalized expenditures and $260 (2001 – $626) of amortization charged to income.
(2)	U.S. GAAP terminology is deferred income taxes.
(3)	Included a gain of $1 (2001 – loss of $4), net of tax, arising from hedges of foreign currency exposure of a net investment in a foreign operation.
(4)	Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities.” Other comprehensive income related to SFAS 133 is net of $83 in income taxes (2001 – $138).
(5)	Included in comprehensive equity are gross unrealized investment gains and gross unrealized investment losses of $4,238 and $779 (2001 – $3,530 and $766), respectively.

b) VALUATION AND INCOME RECOGNITION DIFFERENCES BETWEEN CANADIAN GAAP AND U.S. GAAP:

	Canadian GAAP	U.S. GAAP
Bonds	Bonds are carried at amortized cost, less an allowance for specific losses. Allowances are provided on a specific bond whenever a decline in the value of the bond is considered to be other than temporary. Realized gains and losses on sale are deferred and brought into income over the lesser of 20 years or the remaining term to maturity of the bond sold	Bonds may be classified as “available-for-sale,” “held to maturity” or “trading” securities. All bonds are classified as “available-for-sale” by the Company and are carried at fair value in the Consolidated Balance Sheets. A decline in the value of a specific bond that is considered to be other than temporary results in a write-down in the cost basis of the bond and a charge to income in the period of recognition. Realized gains and losses on sale are recognized in income immediately. Unrealized gains and losses, other than losses considered to be other than temporary, are excluded from income and reported net of tax in other comprehensive income, a component of equity.

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	Canadian GAAP	U.S. GAAP
Mortgages	Mortgages are carried at amortized cost less repayments and an allowance for specific losses. Realized gains and losses are deferred and brought into income over the lesser of 20 years or the remaining term to maturity of the mortgage sold.	Mortgages are carried at amortized cost less repayments and an allowance for specific losses. Realized gains and losses are recognized in income immediately.
Stocks	Stocks are carried at a moving average market basis whereby carrying values are adjusted towards market value at 5% per quarter. Specific stocks are written down to fair value if an impairment in the value of the entire stock portfolio (determined net of deferred realized gains) is considered to be other than temporary. Realized gains and losses are deferred and brought into income at the rate of 5% of the unamortized deferred realized gains and losses each quarter	Stocks may be classified as “available-for-sale” or “trading” securities. All stocks are classified as “available-for-sale” by the Company and are carried at fair value in the Consolidated Balance Sheets. Other than temporary declines in the value of stocks result in a write-down in the cost basis of the stocks and a charge to income in the period of recognition. Realized gains and losses are recognized in income immediately. Unrealized gains and losses, other than losses considered to be other than temporary, are excluded from income and reported net of tax in other comprehensive income, a component of equity.
Real estate	Real estate is carried at a moving average market basis whereby the carrying values are adjusted towards market value at 3% per quarter. Specific properties are written down to market value if an impairment in the value of the entire real estate portfolio (determined net of deferred realized gains) is considered to be other than temporary. Realized gains and losses are deferred and brought into income at the rate of 3% of the unamortized deferred realized gains and losses each quarter.	Real estate is carried at cost less accumulated depreciation. Specific properties are written down, taking into account discounted cash flows, if an impairment in the value of the property is considered to be other than temporary. Realized gains and losses are recognized in income immediately.
Actuarial liabilities	Actuarial liabilities for all types of policies are calculated using the Canadian Asset Liability Method (CALM) and	There are three main standards for valuing actuarial liabilities as follows:
	represent the amount which, together with estimated future premiums and net investment income, will be sufficient to pay estimated future benefits, policyholder dividends, tax (other than income taxes) and expenses on policies in force. Actuarial liabilities are comprised of a best estimate reserve and provisions for adverse deviation. Best estimate reserve assumptions are made for the term of the liabilities and include assumptions with respect to mortality and morbidity trends, investment returns, rates of policy termination, policyholder dividend payments, operating expenses and certain taxes. To recognize the uncertainty in the assumptions underlying the calculation of best estimate reserves, to allow for possible deterioration in experience and to provide greater comfort that actuarial liabilities are adequate to pay future benefits, the Appointed Actuary is required to add a margin to each assumption. These margins result in the calculation of provisions for adverse deviation, the impact of which is to increase actuarial liabilities and decrease the income that would otherwise be recognized when products are sold. Assumptions are updated regularly and the effects of any changes in assumptions are recognized in income immediately. The provisions for adverse deviations are recognized in income over the term of the liabilities as the risk of deviation from estimates declines.	Statement of Financial Accounting Standards No. 60, “Accounting and Reporting by Insurance Enterprises” (“SFAS 60”) applies to non-participating insurance, including whole life and term insurance, payout annuities, disability insurance and certain reinsurance contracts. Actuarial liabilities are calculated using a net level premium method and represent the present value of future benefits to be paid to, or on behalf of, policyholders and related expenses, less the present value of future net premiums. The assumptions include expected investment yields, mortality, morbidity, terminations and maintenance expenses. A provision for adverse deviation is also included. The assumptions are based on best estimates of long-term experience at the time of policy issue. The assumptions are not changed for future valuations unless it is determined that future income is no longer adequate to recover the existing Deferred Acquisition Cost (“DAC”) asset, in which case the DAC asset is reduced or written off and, to the extent necessary, actuarial liabilities are increased. The actuarial liabilities may not subsequently be reduced if the circumstances causing the strengthening are no longer applicable. Statement of Financial Accounting Standards No. 97, “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments” (“SFAS 97”) applies to universal life type contracts and investment contracts. The actuarial liability for these contracts is equal to the policyholder account value. There is no provision for adverse deviation. If it is determined that future income for universal life type contracts is no longer

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	Canadian GAAP	U.S. GAAP
Actuarial liabilities, continued		adequate to recover the existing DAC, the DAC asset is reduced or written off and, to the extent necessary, actuarial liabilities are increased. The actuarial liabilities may not subsequently be reduced if the circumstances causing the strengthening are no longer applicable. Statement of Financial Accounting Standards No. 120, “Accounting and Reporting by Mutual Life Enterprises and by Insurance Enterprises for Certain Long-Duration Participating Contracts” (“SFAS 120”) applies to participating insurance contracts. The actuarial liability for these contracts is computed using a net level premium method with mortality and interest assumptions consistent with the non-forfeiture assumptions. There is no provision for adverse deviation. The assumptions are not changed unless it is determined that future income is no longer adequate to recover the existing DAC, in which case the DAC asset is reduced or written off and, to the extent necessary, actuarial liabilities increased. The actuarial liabilities may not subsequently be reduced if the circumstances causing the strengthening are no longer applicable. In addition, in accordance with Emerging Issues Task Force Topic No. D-41 (“EITF D-41”), U.S. GAAP requires that actuarial liabilities be adjusted to reflect the changes that would have been necessary if the unrealized gains and losses not already provided for on bonds and stocks had been realized. This adjustment to actuarial liabilities is recognized directly in equity and is not included in income.
Deferred acquisition costs	The cost of acquiring new insurance and annuity business, consisting primarily of commissions and underwriting and issue expenses, is implicitly recognized as a reduction in actuarial liabilities for most policies	Acquisition costs which vary with, and are primarily related to, the production of new business are deferred and recorded as an asset. This DAC asset is amortized into income in proportion to different measures, depending on the policy type. DACs associated with SFAS 60 policies are amortized and charged to income in proportion to premium income recognized. For non-participating limited payment policies, including annuities not classified as investment contracts, the DAC asset is amortized in proportion to the amount of the expected future benefit payments for payout annuities and in proportion to face amount for insurance contracts. DACs associated with SFAS 97 and SFAS 120 policies (i.e. universal life type contracts, investment contracts and participating insurance contracts) are amortized and charged to income in proportion to the estimated gross profit margins expected to be realized over the life of the contracts. Under SFAS 97 and SFAS 120, the assumptions used to estimate future gross profits change as experience emerges. In addition, EITF D-41 requires that DACs related to SFAS 97 and SFAS 120 contracts should be adjusted to reflect the changes that would have been necessary if the unrealized gains and losses on available-for-sale bonds and stocks had actually been realized. This adjustment to the DAC asset is recognized directly in equity and is not included in income.
Deferred revenue	All premium income is recorded as revenue. The anticipated costs of future services are included within the actuarial liabilities	Under SFAS 97, fees assessed to policyholders relating to services that are to be provided in future years are recorded as deferred revenue. Deferred revenue is amortized to income in the same pattern as the amortization of the DAC asset.

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	Canadian GAAP	U.S. GAAP
Derivatives	Derivatives are designated and effective as hedges if there is a high correlation between changes in market value of the derivative and the underlying hedged item at inception and over the life of the hedge. Realized and unrealized gains and losses on derivatives designated and effective as hedges are accounted for on the same basis as the underlying assets and liabilities. Realized and unrealized gains and losses on derivatives no longer considered hedges are included in income from the date they are no longer considered hedges.	All derivatives are reported in the Consolidated Balance Sheets at their fair values, with changes in fair values recorded in income or equity, depending on the nature and effectiveness of the hedge. Changes in the fair value of derivatives not designated as hedges will be recognized in current period earnings. Specific guidance is provided relating to the types of hedges, the measurement of hedge ineffectiveness, and hedging strategies.

c) PRESENTATION DIFFERENCES BETWEEN CANADIAN GAAP AND U.S. GAAP:

	Canadian GAAP	U.S. GAAP
Premiums	All premium income is reported as revenue when due. A partially offsetting increase in actuarial liabilities for the related policies is recorded in the Consolidated Statements of Operations	Under SFAS 60 and SFAS 120, gross premiums are reported as revenue when due. A partially offsetting increase in actuarial liabilities for the related policies is recorded in the Consolidated Statements of Operations. Premiums collected on SFAS 97 contracts are not reported as revenue in the Consolidated Statements of Operations but are recorded as deposits to policyholders’ account balances. Fees assessed against policyholders’ account balances relating to mortality charges, policy administration and surrender charges are recognized as revenue.
Death, maturity and surrender benefits	All death, maturity and surrender benefits are reported in the Consolidated Statements of Operations when incurred. Additionally, to the extent these amounts have previously been provided for in actuarial liabilities, a corresponding release of actuarial liabilities is recorded in the Consolidated Statements of Operations.	For SFAS 60 and SFAS 120 contracts, all death, maturity and surrender benefits are reported in the Consolidated Statements of Operations when incurred. Additionally, to the extent these amounts have previously been provided for in actuarial liabilities, a corresponding release of actuarial liabilities is recorded in the Consolidated Statements of Operations.
		For universal life type contracts and investment contracts accounted for under SFAS 97, benefits incurred in the period in excess of related policyholders’ account balances are recorded in the Consolidated Statements of Operations.
Change in actuarial liabilities	Interest credited on policyholders’ account balances is included in change in actuarial liabilities in the Consolidated Statements of Operations.	Interest required to support SFAS 97 contracts is included in actuarial liabilities in the Consolidated Balance Sheets and is classified in general expenses in the Consolidated Statements of Operations.
Segregated fund assets and liabilities	Investments held in segregated funds are carried at market value. Segregated funds are managed separately from those of the general fund of the Company and are, therefore, presented in a separate schedule and are not included in the general fund Consolidated Balance Sheets or Consolidated Statements of Operations.	Assets and liabilities are called separate accounts and are presented in summary lines in the Consolidated Balance Sheets. Assets and liabilities are carried at market values and contract values, respectively.
Consolidated statements of cash flows	The cash flows from investment contracts, including deferred annuities and group pensions, are disclosed as an operating activity in the Consolidated Statements of Cash Flows.	The cash flows from investment contracts accounted for under SFAS 97 are disclosed as a financing activity in the Consolidated Statements of Cash Flows.

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	Canadian GAAP	U.S. GAAP
Reinsurance	Reinsurance recoverables relating to ceded life insurance risks and ceded annuity contract risks are recorded as an offset to actuarial liabilities.	Where transfer of risk has occurred, life insurance actuarial liabilities are presented as a gross liability with the reinsured portion included as reinsurance recoverable. Actuarial liabilities related to annuities are also presented on a gross basis with the reinsured portions accounted for as deposits with reinsurers.
Equity	Shares issued to policyholders are recorded at nominal value and shares issued in a treasury offering are recorded at proceeds received net of share issuance costs in the Consolidated Balance Sheets.	Surplus is reclassified to share capital net of share issuance costs. Shares issued in a treasury offering are recorded at proceeds received net of share issuance costs.

d) CONDENSED CONSOLIDATED BALANCE SHEETS

The significant valuation, income recognition and presentation differences between Canadian and U.S. GAAP outlined in note 17 (b) and (c) would impact the Consolidated Balance Sheets as follows:

As at December 31	2002				2001
	Canadian		U.S.		Canadian		U.S.
	GAAP		GAAP		GAAP		GAAP
Assets
Bonds	$	46,677	$	50,155	$	46,070	$	48,040
Mortgages		9,294		9,182		7,902		7,732
Stocks		6,898		5,799		6,964		6,657
Real estate		3,570		2,641		3,484		2,589
Policy loans		4,939		4,939		4,644		4,644
Cash and short-term investments		5,143		5,143		4,995		4,995
Other investments		1,041		864		693		619
Total invested assets	$	77,562	$	78,723	$	74,752	$	75,276
Other assets
Accrued investment income	$	1,010	$	1,010	$	1,041	$	1,012
Outstanding premiums		558		558		482		482
Deferred acquisition costs		–		7,110		–		6,117
Future income taxes(1)		132		–		517		–
Reinsurance deposits and amounts recoverable		–		1,760		–		1,344
Miscellaneous		1,933		2,153		1,821		2,119
Total other assets	$	3,633	$	12,591	$	3,861	$	11,074
	$	81,195	$	91,314	$	78,613	$	86,350
Segregated funds net assets(2)		–		58,831		–		59,206
Total assets	$	81,195	$	150,145	$	78,613	$	145,556
Segregated funds net assets(2)	$	58,831			$	59,206
Liabilities and equity
Actuarial liabilities	$	56,397	$	65,450	$	54,690	$	62,294
Other policy-related benefits		5,528		5,996		5,113		5,553
Future income taxes(1)		–		592		–		97
Deferred realized net gains		3,297		–		3,583		–
Banking deposits		1,437		1,437		769		769
Other liabilities		2,499		3,192		2,881		3,472
	$	69,158	$	76,667	$	67,036	$	72,185
Subordinated debt		1,436		1,436		1,418		1,418
Non-controlling interest in subsidiaries		1,059		1,075		1,064		1,080
Trust preferred securities issued by subsidiaries		794		794		802		802
Segregated funds net liabilities(2)		–		58,831		–		59,206
Common shares and retained earnings		8,748		9,930		8,293		9,870
Accumulated effect of comprehensive income on equity		–		1,412		–		995
Total liabilities and equity	$	81,195	$	150,145	$	78,613	$	145,556
Segregated funds net liabilities(2)	$	58,831			$	59,206

(1)	U.S. GAAP terminology is deferred income taxes.
(2)	U.S. GAAP terminology is separate accounts.

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e) CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

The significant valuation, income recognition and presentation differences between Canadian and U.S. GAAP outlined in note 17 (b) and (c) would impact the Consolidated Statements of Operations as follows:

For the years ended December 31	2002						2001
	Canadian			U.S.			Canadian			U.S.
	GAAP			GAAP			GAAP			GAAP
Revenue
Premium income	$	10,779		$	6,533		$	10,247		$	6,086
Fee income		–			1,829			–			1,519
Investment income		4,235			4,005			4,479			3,964
Realized investment gains (losses)		–			(350	)		–			132
Other revenue		1,518			237			1,505			583
Total revenue	$	16,532		$	12,254		$	16,231		$	12,284
Policy benefits and expenses
Policyholder payments	$	10,363		$	7,154		$	11,034		$	7,378
Change in actuarial liabilities		307			694			(208	)		(40	)
General expenses		4,051			3,030			3,973			3,599
Non-controlling interest in subsidiaries		72			72			4			7
Trust preferred securities issued by subsidiaries		65			65			65			65
Total policy benefits and expenses	$	14,858		$	11,015		$	14,868		$	11,009
Income before income taxes	$	1,674		$	1,239		$	1,363		$	1,275
Income taxes		(304	)		(266	)		(196	)		(194	)
Net income	$	1,370		$	973		$	1,167		$	1,081
Weighted average number of common shares outstanding (in millions)		476			476			482			482
Weighted average number of diluted common shares outstanding (in millions)		479			479			486			486
Basic earnings per share	$	2.90		$	2.05		$	2.40		$	2.24
Diluted earnings per share	$	2.88		$	2.03		$	2.38		$	2.22

f) ADDITIONAL INFORMATION REQUIRED TO BE REPORTED UNDER U.S. GAAP

(i) Fair value of actuarial liabilities of investment contracts

The fair value of actuarial liabilities of investment contracts as at December 31, 2002 was estimated at $16,931 (2001 – $16,678).

(ii) Stock-based compensation

The Company uses the intrinsic value method of accounting for stock-based compensation.

The fair value of the deferred share units (“DSUs”) is measured as the intrinsic value of the DSUs at the grant date and recognized over the vesting period.

Had the fair value method been used for all awards granted, net income for the year ended December 31, 2002 would have been reduced by $33 (2001 – $23), and both basic and diluted earnings per share reduced by $0.07 (2001 – $0.05).

(iii)	Derivative instruments and hedging activities
	The Company adopted Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by Statement of Financial Accounting Standards No. 138, on January 1, 2001.

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For fair value hedges, the Company is hedging changes in the fair value of assets, liabilities or firm commitments with changes in fair values of the derivative instruments recorded in income. For cash flow hedges, the Company is hedging the variability of cash flows related to variable rate assets, liabilities or forecasted transactions. The effective portion of changes in fair values of derivative instruments is recorded in other comprehensive income and reclassified into income in the same period or periods during which the hedged transaction affects earnings. The Company estimates that deferred net losses of $37, included in other comprehensive income as at December 31, 2002 (2001 – $53), will be reclassified into earnings within the next twelve months. Cash flow hedges include hedges of certain forecasted transactions up to a maximum of 40 years. For a hedge of its net investment in a foreign operation, the Company is hedging the foreign currency exposure of a net investment in a foreign subsidiary with changes in fair values of derivative instruments recorded in the cumulative translation account.

g) NEWLY ISSUED ACCOUNTING STATEMENTS

The U.S. Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 141, “Business Combinations,” (“SFAS 141”) and Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). Both Statements were adopted by the Company effective for fiscal periods commencing January 1, 2002. SFAS 141 requires that all business combinations be accounted for using the purchase method and provides specific criteria for recognizing intangible assets separately from goodwill. Under SFAS 142, goodwill and intangible assets with an indefinite useful life are no longer amortized but are reviewed for impairment annually, or more frequently if impairment indicators arise. The Statements are consistent with the recently issued Canadian GAAP standards and therefore, there is no impact to the Company’s reconciliation of Canadian GAAP financial statements to U.S. GAAP. The Company has reviewed the new standards and determined that goodwill is not impaired.

The FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities,” which addresses consolidation of certain variable interest entities by their primary beneficiary. This interpretation is effective for the fiscal or interim period beginning after June 15, 2003 for variable interest entities acquired before February 1, 2003, and immediately for variable interest entities created after January 31, 2003. This interpretation is not expected to have a material impact.

NOTE 18 Comparatives

Certain comparative amounts have been reclassified to conform with the current year’s presentation.

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