Manulife Financial (MFC) 40-F 2010 FY Annual report (Canada)

Exhibit 99.1

Manulife Financial Corporation

Consolidated Financial Statements

For the year ended December 31, 2010

Exhibit 99.1

Consolidated Financial Statements

Table of Contents

3	Responsibility for Financial Reporting
4	Appointed Actuary’s Report to the Shareholders
5	Independent Auditors’ Report of Registered Public Accounting Firm
6	Independent Auditors’ Report on Internal Controls under Standards of the Public Company Accounting Oversight Board (United States)
7	Consolidated Balance Sheets
8	Consolidated Statements of Operations
9	Consolidated Statements of Changes in Equity
10	Consolidated Statements of Comprehensive Loss
11	Consolidated Statements of Cash Flows
12	Segregated Funds Consolidated Statements of Net Assets
12	Segregated Funds Consolidated Statements of Changes in Net Assets
13	Notes to Consolidated Financial Statements

2 2010 Annual Report

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 Office 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 judgment 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 to ensure that financial information is both relevant and reliable. The systems of internal control are assessed on an ongoing basis by management and 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 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 Committee of unrelated and independent directors appointed by the Board of Directors.

The Audit 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 Committee reviews the consolidated financial statements prepared by management, and then recommends them to the Board of Directors for approval. The Audit 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 and the standards of the Public Company Accounting Oversight Board (United States). Ernst & Young LLP has full and free access to management and the Audit Committee.

Donald A. Guloien President and Chief Executive Officer Michael W. Bell Senior Executive Vice President and Chief Financial Officer

Toronto, Canada

March 18, 2011

2010 Annual Report 3

Appointed Actuary’s Report to the Shareholders

I have valued the policy liabilities of Manulife Financial Corporation for its Consolidated Balance Sheets as at December 31, 2010 and 2009 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.

Cindy Forbes, F.C.I.A.

Executive Vice President and Appointed Actuary

Toronto, Canada

March 18, 2011

4 2010 Annual Report

Independent Auditors’ Report of Registered Public Accounting Firm

To the Shareholders of Manulife Financial Corporation

We have audited the accompanying consolidated financial statements of Manulife Financial Corporation, which comprise the Consolidated Balance Sheets of the Company and the Consolidated Statements of Net Assets of its Segregated Funds as at December 31, 2010 and 2009, and the Consolidated Statements of Operations, Changes in Equity, Comprehensive Loss and Cash Flows of the Company and the Consolidated Statements of Changes in Net Assets of its Segregated Funds for the years then ended, and a summary of significant accounting policies and other explanatory information.

Management’s responsibility for the consolidated financial statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Canadian generally accepted accounting principles, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ responsibility

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 and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Manulife Financial Corporation and its Segregated Funds as at December 31, 2010 and 2009, and the results of its operations and its cash flows and the changes in the net assets of its Segregated Funds for years then ended in accordance with Canadian generally accepted accounting principles.

Other matter

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Manulife Financial Corporation’s internal control over financial reporting as of December 31, 2010, based on the criteria established inInternal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 18, 2011 expressed an unqualified opinion on Manulife Financial Corporation’s internal control over financial reporting.

Ernst & Young LLP

Chartered Accountants

Licensed Public Accountants

Toronto, Canada

March 18, 2011

2010 Annual Report 5

Independent Auditors’ Report on Internal Controls under Standards of the Public Company Accounting Oversight Board (United States)

We have audited Manulife Financial Corporation’s internal control over financial reporting as at December 31, 2010, based on criteria established inInternal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in Management’s Report on Internal Control over Financial Reporting contained in Management’s Discussion and Analysis. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Manulife Financial Corporation maintained, in all material respects, effective internal control over financial reporting as at December 31, 2010, based on the COSO criteria.

We also have audited, in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States), the Consolidated Balance Sheets of the Company and the Consolidated Statements of Net Assets of its Segregated Funds as at December 31, 2010 and 2009 and the Consolidated Statements of Operations, Equity, Comprehensive Loss and Cash Flows of the Company and the Consolidated Statements of Changes in Net Assets of its Segregated Funds for the years then ended and our report dated March 18, 2011 expressed an unqualified opinion thereon.

Ernst & Young LLP

Chartered Accountants

Licensed Public Accountants

Toronto, Canada

March 18, 2011

6 2010 Annual Report

Consolidated Balance Sheets

As at December 31,

(Canadian $ in millions)	2010			2009
Assets
Invested assets (note 3)
Cash and short-term securities	$	11,791		$	18,780
Securities
Bonds		101,560			85,107
Stocks		10,475			9,688
Loans
Mortgages		31,816			30,699
Private placements		22,343			22,912
Policy loans		6,486			6,609
Bank loans		2,355			2,457
Real estate		6,358			5,897
Other investments		6,264			5,321
Total invested assets	$	199,448		$	187,470
Other assets
Accrued investment income	$	1,621		$	1,540
Outstanding premiums		671			812
Goodwill and intangible assets (note 4)		7,857			9,127
Derivatives (note 5)		3,909			2,680
Miscellaneous		4,166			4,216
Total other assets	$	18,224		$	18,375
Total assets	$	217,672		$	205,845
Segregated funds net assets	$	200,057		$	191,741
Liabilities and Equity
Policy liabilities (note 6)	$	151,944		$	141,687
Deferred realized net gains		128			108
Bank deposits		16,300			14,735
Consumer notes (note 9)		978			1,291
Long-term debt (note 10)		5,443			3,308
Future income tax liability (note 11)		1,393			1,883
Derivatives (note 5)		3,404			2,656
Other liabilities		6,543			6,487
	$	186,133		$	172,155
Liabilities for preferred shares and capital instruments(note 12)		4,412			4,581
Non-controlling interest in subsidiaries		254			202
Equity
Participating policyholders’ equity		159			80
Shareholders’ equity
Preferred shares (note 13)		1,422			1,422
Common shares (note 13)		19,254			18,937
Contributed surplus		207			182
Retained earnings		11,473			12,870
Accumulated other comprehensive income (loss) on available-for-sale securities		251			612
on cash flow hedges		(99	)		(48	)
on translation of self-sustaining foreign operations		(5,794	)		(5,148	)
Total equity	$	26,873		$	28,907
Total liabilities and equity	$	217,672		$	205,845
Segregated funds net liabilities	$	200,057		$	191,741

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

Donald A. Guloien	Gail Cook-Bennett
President and Chief Executive Officer	Chair of the Board of Directors

2010 Annual Report 7

Consolidated Statements of Operations

For the years ended December 31,

(Canadian $ in millions except per share amounts)	2010			2009
Revenue
Premium income (note 19)	$	18,351		$	22,946
Investment income (note 3)
Investment income		9,476			8,041
Realized and unrealized gains on assets supporting policy liabilities and consumer notes		3,546			3,262
Other revenue		6,260			5,858
Total revenue	$	37,633		$	40,107
Policy benefits and expenses
To policyholders and beneficiaries
Death, disability and other claims	$	4,314		$	5,029
Maturity and surrender benefits		5,608			7,247
Annuity payments		3,026			3,207
Policyholder dividends and experience rating refunds		1,127			1,418
Net transfers to segregated funds		76			1,789
Change in actuarial liabilities		13,777			11,391
General expenses		3,732			3,682
Investment expenses (note 3)		971			947
Commissions		3,756			3,980
Interest expense (note 3)		1,077			1,301
Premium taxes		262			284
Goodwill impairment (note 4)		1,039			–
Non-controlling interest in subsidiaries		40			(16	)
Total policy benefits and expenses	$	38,805		$	40,259
Loss before income taxes	$	(1,172	)	$	(152	)
Income tax recovery (note 11)		860			1,572
Net income (loss)	$	(312	)	$	1,420
Net income attributed to participating policyholders	$	79		$	18
Net income (loss) attributed to shareholders	$	(391	)	$	1,402
Preferred share dividends		(79	)		(64	)
Net income (loss) available to common shareholders	$	(470	)	$	1,338
Weighted average number of common shares outstanding(in millions) (note 15)		1,765			1,626
Weighted average number of diluted common shares outstanding(in millions) (note 15)		1,765			1,631
Basic earnings (loss) per common share	$	(0.27	)	$	0.82
Diluted earnings (loss) per common share(note 15)	$	(0.27	)	$	0.82
Dividends per common share	$	0.52		$	0.78

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

8 2010 Annual Report

Consolidated Statements of Changes in Equity

For the years ended December 31,

(Canadian $ in millions)	2010			2009
Participating policyholders’ equity
Balance, January 1	$	80		$	62
Net income for the year		79			18
Balance, December 31	$	159		$	80
Preferred shares
Balance, January 1	$	1,422		$	638
Issued (note 13)		–			800
Issuance costs, net of tax		–			(16	)
Balance, December 31	$	1,422		$	1,422
Common shares
Balance, January 1	$	18,937		$	16,157
Issued on exercise of stock options and deferred share units and acquisition of subsidiary (note 13)		3			166
Issued by public offering, net (note 13)		–			2,435
Issued under dividend reinvestment and share purchase plans (note 13)		314			179
Balance, December 31	$	19,254		$	18,937
Contributed surplus
Balance, January 1	$	182		$	160
Exercise of stock options		–			(1	)
Stock option expense (note 15)		25			24
Taxes on stock options exercised		–			(1	)
Balance, December 31	$	207		$	182
Shareholders’ retained earnings
Balance, January 1	$	12,870		$	12,796
Net income (loss) attributed to shareholders		(391	)		1,402
Preferred share dividends		(79	)		(64	)
Common share dividends		(927	)		(1,264	)
Balance, December 31	$	11,473		$	12,870
Accumulated other comprehensive (loss) income (“AOCI”)
On available-for-sale securities
Balance, January 1	$	612		$	(521	)
Change in unrealized gains/losses, net of taxes		(361	)		1,133
Balance, December 31	$	251		$	612
On cash flow hedges
Balance, January 1	$	(48	)	$	(325	)
Change in unrealized gains/losses, net of taxes		(51	)		277
Balance, December 31	$	(99	)	$	(48	)
On translation of self-sustaining foreign operations
Balance, January 1	$	(5,148	)	$	(1,770	)
Change in unrealized currency translation gains/losses, net of taxes		(646	)		(3,378	)
Balance, December 31	$	(5,794	)	$	(5,148	)
Total of shareholders’ retained earnings and AOCI, December 31	$	5,831		$	8,286
Total equity, December 31	$	26,873		$	28,907

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

2010 Annual Report 9

Consolidated Statements of Comprehensive Loss

For the years ended December 31,

(Canadian $ in millions)	2010			2009
Net income (loss) attributed to shareholders	$	(391	)	$	1,402
Other comprehensive income (loss), net of taxes
Change in unrealized gains/losses on available-for-sale financial securities Unrealized gains arising during the year	$	336		$	925
Reclassification of realized (gains) losses and impairments to net income		(697	)		208
	$	(361	)	$	1,133
Change in unrealized gains/losses on derivative investments designated as cash flow hedges Unrealized gains (losses) arising during the year	$	(60	)	$	284
Reclassification of realized (gains) losses to net income		9			(7	)
	$	(51	)	$	277
Change in unrealized currency translation losses of self-sustaining foreign operations
On translation of financial statements	$	(761	)	$	(3,940	)
On hedges		115			562
	$	(646	)	$	(3,378	)
Total other comprehensive loss	$	(1,058	)	$	(1,968	)
Comprehensive loss attributed to shareholders	$	(1,449	)	$	(566	)

Income taxes included in components of Other Comprehensive Loss

For the years ended December 31, (Canadian $ in millions)	2010			2009
Income tax expense (recovery)
Change in unrealized gains/losses on available-for-sale financial securities Income tax expense (recovery) from unrealized gains/losses arising during the year	$	75		$	402
Income tax (expense) recovery related to reclassification of realized gains/losses and impairments/recoveries to net income		(251	)		123
	$	(176	)	$	525
Change in unrealized gains/losses on derivative investments designated as cash flow hedges Income tax expense (recovery) from unrealized gains/losses arising during the year	$	(32	)	$	154
Income tax (expense) recovery related to reclassification of realized gains/losses to net income		5			(4	)
	$	(27	)	$	150
Change in unrealized currency translation gains/losses of self-sustaining operations Income tax (recovery) on translation	$	(4	)	$	(11	)
Income tax expense on hedges		56			260
	$	52		$	249
Total income tax expense (recovery)	$	(151	)	$	924

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

10 2010 Annual Report

Consolidated Statements of Cash Flows

For the years ended December 31,

(Canadian $ in millions)	2010			2009
Operating activities
Net income (loss)	$	(312	)	$	1,420
Adjustments for non-cash items in net income:
Increase in actuarial liabilities, excluding John Hancock Fixed Products institutional annuity contracts		14,732			13,861
Amortization of deferred net realized gains and move to market adjustments on real estate investments		(53	)		(112	)
Accretion of discount on invested assets		(355	)		(350	)
Other amortization		280			304
Net realized and unrealized gains including impairments		(4,246	)		(2,074	)
Changes in fair value of consumer notes		(13	)		106
Future income tax recovery		(456	)		(1,275	)
Stock option expense		25			24
Goodwill impairment		1,039			–
Non-controlling interest in subsidiaries		35			(16	)
Net income adjusted for non-cash items	$	10,676		$	11,888
Changes in policy related and operating receivables and payables		886			134
Cash provided by operating activities	$	11,562		$	12,022
Investing activities
Purchases and mortgage advances	$	(76,097	)	$	(48,429	)
Disposals and repayments		55,056			38,184
Amortization of premiums on invested assets		476			511
Changes in investment broker net receivables and payables		137			(59	)
Net cash decrease from purchase of subsidiaries		(28	)		(13	)
Cash used in investing activities	$	(20,456	)	$	(9,806	)
Financing activities
Increase (decrease) in repurchase agreements and securities sold but not yet purchased	$	536		$	(1,123	)
Issue of long-term debt, net proceeds		2,174			1,593
Repayment of long-term debt		(1	)		(2,000	)
Net redemptions in John Hancock Fixed Products institutional annuity contracts		(955	)		(2,470	)
Consumer notes matured		(293	)		(527	)
Changes in bank deposits, net		1,574			2,595
Shareholder dividends paid in cash		(691	)		(1,149	)
Funds borrowed (repaid), net		5			(10	)
Issue of debenture		–			1,000
Redemption of subordinated note payable		(150	)		–
Capital from joint venture partner		40			35
Preferred shares issued, net		–			784
Common shares issued, net		3			2,455
Cash provided by financing activities	$	2,242		$	1,183
Cash and short-term securities
(Decrease) increase during the year	$	(6,652	)	$	3,399
Effect of exchange rate changes on cash and short-term securities		(339	)		(1,934	)
Balance, January 1		18,255			16,790
Balance, December 31	$	11,264		$	18,255
Cash and short-term securities
Beginning of year
Gross cash and short-term securities	$	18,780		$	17,269
Net payments in transit, included in other liabilities		(525	)		(479	)
Net cash and short-term securities, January 1	$	18,255		$	16,790
End of year
Gross cash and short-term securities	$	11,791		$	18,780
Net payments in transit, included in other liabilities		(527	)		(525	)
Net cash and short-term securities, December 31	$	11,264		$	18,255

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

2010 Annual Report 11

Segregated Funds Consolidated Statements of Net Assets

As at December 31, (Canadian $ in millions)	2010			2009
Investments, at market value
Cash and short-term securities	$	2,944		$	3,447
Bonds		7,510			7,340
Stocks and mutual funds		186,412			177,504
Other investments		5,149			5,267
Accrued investment income		75			76
Other liabilities, net		(2,033	)		(1,893	)
Total segregated funds net assets	$	200,057		$	191,741
Composition of segregated funds net assets:
Held by policyholders	$	198,972		$	190,665
Held by the Company		148			118
Held by other contract holders (note 1(e))		937			958
Total segregated funds net assets	$	200,057		$	191,741

Segregated Funds Consolidated Statements of Changes in Net Assets

For the years ended December 31,

(Canadian $ in millions)	2010			2009
Net policyholder cash flow
Deposits from policyholders	$	24,544		$	29,084
Net transfers from general fund		76			1,789
Payments to policyholders		(21,612	)		(18,531	)
	$	3,008		$	12,342
Investment related
Interest and dividends	$	5,022		$	5,123
Net realized and unrealized investment gains		16,230			33,692
	$	21,252		$	38,815
Other
Management and administrative fees	$	(3,415	)	$	(3,204	)
Transfer to mutual funds resulting from restructuring of Hong Kong pension business		(6,614	)		–
Other contracts consolidated with segregated funds (note 1(e))		–			868
Effect of currency exchange rate changes		(5,915	)		(22,460	)
	$	(15,944	)	$	(24,796	)
Net additions	$	8,316		$	26,361
Segregated funds net assets, January 1		191,741			165,380
Segregated funds net assets, December 31	$	200,057		$	191,741

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

12 2010 Annual Report

Notes to Consolidated Financial Statements

Page Reference	Note
14	Note 1	– Nature of Operations and Significant Accounting Policies
18	Note 2	– Future Accounting and Reporting Changes
26	Note 3	– Invested Assets and Investment Income
32	Note 4	– Goodwill and Intangible Assets
33	Note 5	– Derivative and Hedging Instruments
37	Note 6	– Policy Liabilities
43	Note 7	– Risk Management
54	Note 8	– Fair Value of Financial Instruments
57	Note 9	– Consumer Notes
58	Note 10	– Long-Term Debt
59	Note 11	– Income Taxes
61	Note 12	– Liabilities for Preferred Shares and Capital Instruments
63	Note 13	– Share Capital
64	Note 14	– Capital Management
64	Note 15	– Stock-Based Compensation
66	Note 16	– Employee Future Benefits
71	Note 17	– Variable Interest Entities
74	Note 18	– Commitments and Contingencies
77	Note 19	– Segmented Information
79	Note 20	– Related Parties
80	Note 21	– Significant Subsidiaries
82	Note 22	– Material Differences Between Canadian and United States Generally Accepted Accounting  Principles
98	Note 23	– Subsequent Events
98	Note 24	– Comparatives

2010 Annual Report 13

Notes to Consolidated Financial Statements

(Canadian $ in millions except per share amounts or unless otherwise stated)

Note 1    ^    Nature of Operations and Significant Accounting Policies

Manulife Financial Corporation (“MFC”) is a publicly traded life insurance company and the holding company of The Manufacturers Life Insurance Company (“MLI”), a Canadian life insurance company, and John Hancock Reassurance Company, Ltd., a Bermuda reinsurance company. MFC and its subsidiaries (collectively, “Manulife Financial” or the “Company”) provide a wide range of financial products and services, including individual life insurance, group life and health insurance, long-term care insurance, pension products, annuities and mutual funds, to individual and group customers in Asia, Canada and the United States. The Company also offers reinsurance services, primarily life and property and casualty retrocession, and provides investment management services with respect to the Company’s general fund and segregated fund assets and to mutual funds and institutional customers.

MFC is incorporated under the Insurance Companies Act (Canada) (“ICA”), which requires that financial statements be prepared in accordance with Canadian generally accepted accounting principles (“Canadian GAAP”) and the accounting requirements of the Office of the Superintendent of Financial Institutions, Canada (“OSFI”). None of the accounting requirements of OSFI are exceptions to Canadian GAAP. The preparation of financial statements, in conformity with Canadian GAAP, requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and 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 periods. Actual results could differ from those estimates. The most significant estimation processes relate to the determination of policy liabilities, provisioning for asset impairment, determination of pension and other post-employment benefit obligations and expenses, income taxes, impairment testing of goodwill and intangible assets, fair value of certain financial instruments and assessment of variable interest entities (“VIEs”). Although some variability is inherent in these estimates, management believes that the amounts recorded are appropriate. The significant accounting policies used in the preparation of these consolidated financial statements are summarized below:

a) Basis of consolidation

MFC consolidates the financial statements of all subsidiary companies and any VIEs where MFC is considered to be the primary beneficiary. As outlined in note 17, certain VIEs are consolidated into the general fund and certain VIEs are consolidated on the Segregated Funds Statements of Net Assets. General fund inter-company balances and transactions are eliminated and non-controlling interests in subsidiaries are included as a separate line item on the Consolidated Balance Sheets and the Consolidated Statements of Operations. The results of operations of subsidiaries are included in the consolidated financial statements from their date of acquisition.

The equity method of accounting is used to account for investments over which the Company has significant influence, whereby the Company records its share of the investee’s net assets and financial results. Gains and losses on sale of these investments are included in income when realized, while expected losses on other than temporary impairments (“OTTI”) are recognized immediately. These investments are included in other investments in the Company’s Consolidated Balance Sheets.

b) Invested assets

The invested assets held by the Company are accounted for using the methods described below.

Cash and short-term securities comprise cash, current operating accounts, overnight bank and term deposits, and fixed-income securities held for the purpose of meeting short-term cash commitments. Short-term securities are carried at their fair values. Net payments in transit and overdraft bank balances are included in other liabilities.

Bonds are designated as trading under the fair value option or as available-for-sale (“AFS”). Bonds are carried at fair value. Unrealized gains and losses on bonds designated as trading are recognized in income immediately. Unrealized gains and losses on AFS bonds are recorded in other comprehensive income (“OCI”). Realized gains and losses on sale of bonds are recognized in income immediately. Impairment losses on AFS bonds are recognized in income on an individual security basis when the bond is considered to be other than temporarily impaired. Impairment is considered other than temporary when it is deemed probable that the Company will not be able to collect all amounts due according to contractual terms of the bond.

Stocks are designated as trading or as AFS. Stock securities traded in an active market are carried at fair value. Stock securities designated as AFS, not traded in an active market are carried at cost. Realized gains and losses on sale of stocks and unrealized gains and losses on stocks designated as trading are recognized in income immediately. Unrealized gains and losses on AFS stocks are recorded in OCI. Impairment losses on AFS stocks are recognized in income on an individual security basis when the stock is considered to be other than temporarily impaired. Other than temporary impairment occurs when fair value has declined significantly below cost or for a prolonged period of time and there is not objective evidence to support recovery in value.

Mortgages are classified as loans and are carried at amortized cost less provisions for impairment losses, if any. Realized gains and losses are recorded in income immediately. When mortgages are impaired or when contractual payments are more than 90 days in arrears, interest is no longer accrued. Interest accruals are resumed once the contractual payments are no longer in arrears and are considered current. Impairment losses are recorded on individual mortgages when there is no longer reasonable assurance as to the timely collection of the full amount of principal and interest. Impairment is measured based on the discounted value of expected

14 2010 Annual Report

future cash flows at the effective interest rates inherent in the mortgages; the fair value of collateral security underlying the mortgages, net of expected costs of realization and any amounts legally required to be paid to the borrowers; or observable market prices for the mortgages, if any.

The Company accounts for insured mortgage securitizations as sales when the mortgages are transferred to a special purpose entity under terms that transfer control to third parties and consideration other than beneficial interest in the mortgages is received. The mortgages are removed from the consolidated balance sheet and a gain or loss is recorded in investment income at the time of sale. The amount of the gain or loss recognized depends on the previous carrying values of the mortgages transferred, allocated between the mortgages sold and retained interests based on their relative fair values at the date of transfer. As market prices are not available for interest only strips where retained in the transferred mortgages, fair value is determined by estimating the present value of the future expected cash flows using management’s best estimates of key assumptions, including prepayment rates, forward yield curves and discount rates commensurate with the risks involved. The retained interests are designated as trading under the fair value option or as AFS. They are carried at fair value and classified within level 3 of the fair value hierarchy as described in note 8. Unrealized gains or losses for retained interests designated as trading are recorded in income immediately and unrealized gains or losses for retained interests designated as AFS are recorded in OCI. When the Company retains the servicing rights to the transferred mortgages, a servicing asset is recognized when the benefits of servicing are more than adequate compensation and a servicing liability is recognized when the benefits of servicing are not expected to be adequate.

Private placements include corporate loans for which there is no active market. These are classified as loans and are carried at amortized cost less provision for impairments. Realized gains and losses are recorded in income immediately. When private placement investments are considered impaired, interest is no longer accrued. Interest accruals are resumed once the investment is no longer considered to be impaired. Impairment losses are recorded on individual private placements when there is no longer assurance as to the timely collection of the full amount of principal and interest. Impairment is measured by discounting the expected future cash flows at the effective interest rates inherent in the loans; the fair value of security underlying the loans, net of expected costs of realization and any amounts legally required to be paid to the borrowers; or observable market prices for the loans, if any.

Private placements also include investments in leveraged leases. The carrying value of leveraged leases is calculated by accruing income at the lease’s expected internal rate of return in accordance with the Emerging Issues Committee (“EIC”) of the Canadian Institute of Chartered Accountants (“CICA”), EIC 46 “Leveraged Leases”.

Policy loans are classified as loans with a carrying value equal to their unpaid balance. Policy loans are fully collateralized by the cash surrender value of the underlying policies.

Bank loans are carried at unpaid principal minus provision for credit losses, if any. When bank loans are impaired or when contractual payments are more than 90 days in arrears, interest is no longer accrued. Interest accruals are resumed once the contractual payments are no longer in arrears and are considered current.

Once established, provisions for impairment of mortgages, private placements and bank loans are reversed only if the conditions that caused the impairment no longer exist. Reversals of impairment charges on AFS debt securities are only recognized to the extent that increases in fair value can be attributed to events subsequent to the impairment loss being recorded. On disposition of an impaired asset, any allowance for impairment is released.

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.

Interest income is recognized on bonds and loans using the accrual basis. Premiums and discounts are amortized over the life of the underlying investment using the effective yield method.

The Company records purchases and sales of invested assets on a trade date basis.

Real estate investments are carried on a “move to market” basis with carrying values adjusted towards fair value at three per cent per quarter. Realized gains and losses are also deferred and brought into investment income at three per cent per quarter. Specific properties are immediately written down to market value, if impairment in the value of the entire real estate portfolio (determined net of deferred realized gains and losses) is considered to be other than temporary.

Other investments include private equity and fixed income investments held primarily in power and infrastructure, oil and gas, and timber and agriculture sectors. Other investments are accounted for using the equity method when the Company has the ability to exercise significant influence or the cost method when significant influence does not exist.

c) Goodwill and other intangible assets

Goodwill represents the excess of the cost over the fair value of the identifiable net assets acquired in a business combination. Intangible assets include indefinite life and finite life intangible assets. Goodwill and intangible assets with indefinite lives are tested at least annually for impairment at the reporting unit level. A reporting unit comprises business operations with similar economic characteristics and strategies, and is either a business segment or one level below. Any potential impairment of goodwill is identified by comparing the estimated fair value of a reporting unit to its carrying value. Any potential impairment of intangible assets with indefinite lives is identified by comparing the estimated fair value of the asset to its carrying value on the balance sheet. Finite life intangible assets are amortized over their estimated useful lives and tested for impairment whenever changing circumstances suggest impairment may have occurred.

2010 Annual Report 15

d) Miscellaneous assets

Miscellaneous assets include prepaid pension benefit costs, amounts due from reinsurers and capital assets. Capital assets are carried at cost less accumulated amortization computed on a straight-line basis over their estimated useful lives, which vary from two to 10 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. The funds are presented separately from the general fund of the Company. Investments held in segregated funds are carried at market value. Income earned from segregated fund management fees is included in other revenue.

Where the Company’s general and segregated funds share a controlling financial interest in a VIE, the VIE is consolidated into the accounts of the segregated funds if the segregated funds own a greater interest than the general fund. Otherwise the VIE is consolidated into the general fund. Non-controlling interests in VIEs consolidated into segregated funds are reported as net assets held by other contract holders in the Segregated Funds Consolidated Statements of Net Assets.

The Company provides minimum guarantees on certain individual variable life and annuity contracts. These include minimum death benefit guarantees, minimum withdrawal guarantees, minimum accumulation guarantees and minimum income benefit guarantees. The liabilities associated with these minimum guarantees are recorded in policy liabilities in the general fund.

f) Policy liabilities

Policy 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. The Company’s Appointed Actuary is responsible for determining the amount of policy liabilities in accordance with standards established by the Canadian Institute of Actuaries. In accordance with Canadian accepted actuarial practices, liabilities have been determined using the Canadian Asset Liability Method (“CALM”). See note 6.

g) Financial instruments accounted for as liabilities

The Company issues a variety of financial instruments classified as liabilities, including consumer notes, notes payable, term notes, senior notes, senior debentures, subordinate notes, surplus notes and preferred shares all of which are subject to CICA Handbook Section 3855 “Financial Instruments – Recognition and Measurement”. The Company has elected Section 3855’s fair value option for consumer notes, which are carried at fair value with changes in fair value recorded in interest expense. Consumer notes’ issuance costs are expensed on issuance. The Company has elected to record other financial instruments classified as liabilities at their amortized cost, with issuance costs deferred and amortized over the lives of the liabilities.

h) 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 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 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. A valuation allowance is established, if necessary, to reduce the future income tax asset to an amount that is more likely than not to be realized.

i) 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 from net investments in self-sustaining foreign operations and the results of hedging these positions, net of applicable taxes, are recorded in OCI.

j) Stock-based compensation

The Company provides stock-based compensation to certain employees and directors as described in note 15. The Company uses the fair value method for stock option awards granted on or after January 1, 2002. The intrinsic value method is used to account for stock option awards granted prior to January 1, 2002.

Stock options are expensed with a corresponding increase in contributed surplus. Restricted share units, special restricted share units and deferred share units are expensed with a corresponding liability accrued based on the market value of MFC’s common shares. Performance share units are expensed with a corresponding liability accrued based on specific performance conditions and the market value of MFC’s common shares. The change in the value of units resulting from changes in the Company’s market value or changes in the specific performance conditions and changes in the Company’s market value and credited dividends is recognized in the Consolidated Statements of Operations, offset by the impact of total return swaps used to manage the variability of the related liability.

16 2010 Annual Report

Stock-based compensation is recognized as compensation expense over the applicable vesting period, except if the employee is eligible to retire at the time of grant or will be eligible to retire during the vesting period. Compensation cost, attributable to stock options and restricted share units granted to employees who are eligible to retire on the grant date or who will become eligible to retire during the vesting period, is recognized over the period from the grant date to the date of retirement eligibility.

Contributions to the Global Share Ownership Plan (“GSOP”) are expensed as incurred. Under the GSOP, subject to certain conditions, the Company will match a percentage of the employee’s eligible contributions to certain maximums. All contributions are used by the plan’s trustee to purchase common shares in the open market.

k) Employee future benefits

The Company maintains a number of pension plans, both defined benefit and defined contribution, and post-employment benefit plans for eligible employees and agents. These plans include broad-based pension plans for employees, supplemental pension plans for executives and other post-employment benefit plans.

The defined contribution plans provide pension benefits based on the accumulated contributions and fund earnings. The cost of defined contribution plans is the contribution provided by the Company.

The traditional defined benefit pension plans provide pension benefits based on the length of the employees’ service and the employees’ final average earnings. The other defined benefit pension plans consist of cash balance plans in the United States and Japan that provide benefits based on notional accumulated contributions and interest credits. The cost of all defined benefit pension plans is recognized using the projected benefit method, pro-rated on service, and estimates of expected return on plan assets, and, where applicable, rates of compensation increases and retirement ages of employees. Actuarial gains and losses that exceed 10 per cent of the greater of the benefit obligation or the market-related value of the plan assets are amortized to income on a straight-line basis over the estimated average remaining service life of the plan members. The expected return on plan assets is based on the Company’s best estimate of the long-term expected rate of return and a market-related value of plan assets. The market-related value of plan assets is determined using a methodology where the difference between the actual and expected market value of plan assets is recognized over five years.

The Company also provides health, dental and, in some instances, life insurance benefits to qualifying employees upon retirement. The estimated present value of the cost of these benefits is charged to income over the employees’ years of service to their dates of full entitlement. Actuarial gains and losses that exceed 10 per cent of the accrued benefit obligation are amortized to income on a straight-line basis over the estimated average remaining service life of the plan members.

In Canada and the United States, health and dental benefits are also provided to employees who are absent from work due to disability (or other approved leave). The estimated present value of these benefits is charged to income in the year of disability. In Canada, actuarial gains and losses that exceed 10 per cent of the accrued benefit obligation are amortized to income on a straight-line basis over the estimated average remaining service life of the plan members. In the United States, actuarial gains and losses for these benefits are charged to income in the year of disability.

Accrued benefit assets are included in other assets and accrued benefit liabilities are included in other liabilities.

l) Derivative and hedging instruments

The Company uses derivative financial instruments (“derivatives”) to manage exposures to foreign currency, interest rate and other market risks arising from on-balance sheet financial instruments, selected anticipated transactions and certain guarantee related actuarial liabilities. Derivatives embedded in other financial instruments (“host instruments”) are separately recorded as derivatives when their economic characteristics and risks are not closely related to those of the host instrument, the terms of the embedded derivative are the same as those of a stand-alone derivative and the host instrument is not held for trading or carried at fair value. Derivatives are recorded at fair value. Derivatives with unrealized gains are reported as derivative assets and derivatives with unrealized losses are reported as derivative liabilities.

A determination is made for each relationship as to whether hedge accounting can be applied. Where hedge accounting is not applied, changes in the fair value of derivatives are recorded in investment income. See note 5.

Hedge accounting

Where the Company has elected to use hedge accounting, a hedge relationship is designated and documented at inception. Hedge effectiveness is evaluated at inception and throughout the term of the hedge and hedge accounting is only applied when the Company expects that each hedging instrument will be highly effective in achieving offsetting changes in fair value or changes in cash flows attributable to the risk being hedged. When it is determined that the hedging relationship is no longer effective, or the hedging instrument or the hedged item has been sold or terminated, the Company discontinues hedge accounting prospectively. In such cases, if the derivative hedging instruments are not sold or terminated, any subsequent changes in fair value of the derivative are recognized in investment income.

2010 Annual Report 17

For derivatives that are designated as hedging instruments, changes in fair values are recognized according to the nature of the risks being hedged, as discussed below.

Fair value hedges

In a fair value hedging relationship, changes in the fair value of the hedging derivatives are recorded in investment income, along with changes in fair value attributable to the hedged risk. The carrying value of the hedged item is adjusted for changes in fair value attributable to the hedged risk. To the extent the changes in the fair value of derivatives do not offset the changes in the fair value of the hedged item attributable to the hedged risk in investment income, any ineffectiveness will remain in investment income. When hedge accounting is discontinued, the carrying value of the hedged item is no longer adjusted and the cumulative fair value adjustments are amortized to investment income over the remaining term of the hedged item unless the hedged item is sold, at which time the balance is recognized immediately in investment income.

Cash flow hedges

In a cash flow hedging relationship, the effective portion of the changes in the fair value of the hedging instrument is recorded in OCI while the ineffective portion is recognized in investment income. Gains and losses accumulated in Accumulated Other Comprehensive Income (“AOCI”) are recognized in income during the same periods as the variability in the cash flows hedged or the hedged forecasted transactions are recognized. The reclassifications from AOCI are made to investment income, with the exception of total return swaps that hedge restricted share units, which are reclassified to compensation expense.

Gains and losses on cash flow hedges accumulated in AOCI are reclassified immediately to investment income when the hedged item is sold or the forecasted transaction is no longer expected to occur. When a hedge is discontinued, but the hedged forecasted transaction remains highly probable to occur, the amounts accumulated in AOCI are reclassified to investment income in the periods during which variability in the cash flows hedged or the hedged forecasted transaction is recognized in income.

Net investment hedges

In a net investment hedging relationship, the gains and losses relating to the effective portion of the hedge are recorded in OCI. Gains and losses in AOCI are recognized in income during the periods when the hedged net investment in foreign operations is reduced.

m) 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. Premiums are reported net of reinsurance ceded (see note 7(j)).

Expenses are recognized when incurred. Actuarial liabilities are computed at the end of each period, resulting in benefits and expenses being matched with the premium revenue.

Note 2    ^    Future Accounting and Reporting Changes

Transition to International Financial Reporting Standards (“IFRS”)

Most publicly accountable enterprises in Canada are required to adopt IFRS for periods beginning on or after January 1, 2011. The Company will adopt IFRS as a replacement of current Canadian GAAP for fiscal periods beginning the first quarter of 2011, with corresponding comparative financial information provided for 2010.

The Company is required to prepare an opening IFRS Balance Sheet as at January 1, 2010, the date of transition to IFRS, which forms the starting point for its financial reporting in accordance with IFRS. Any differences between the carrying values of assets, liabilities and equity determined in accordance with Canadian GAAP and IFRS, as at January 1, 2010 will be recorded in opening retained earnings. There are two broad categories of IFRS transition adjustments impacting the opening Balance Sheet: (a) recognition and measurement differences where the transition to IFRS policies requires a revaluation of the Company’s assets and liabilities; and (b) presentation differences where balances will be reclassified and/or will be presented on a gross basis under IFRS. The Company’s opening IFRS Balance Sheet as at January 1, 2010 as well as a summary of the expected impacts of the initial adoption of IFRS is outlined below.

The following information is provided to allow users of the financial statements to obtain a better understanding of the expected effects on the consolidated financial statements as a result of the adoption of IFRS. This information reflects the Company’s expected first time adoption transition elections and accounting policy choices under IFRS, outlined below.

The opening shareholders’ equity under IFRS at January 1, 2010 is expected to be $27,323 compared to $28,827 under Canadian GAAP. The decrease of $1,504 is primarily related to the impairment of goodwill at transition to IFRS, adjustments to investments in leveraged leases, and certain income tax accounting differences discussed below. The remaining adjustments to opening shareholders’ equity, in aggregate, are not considered material.

The testing for impairment of goodwill in 2010 under IFRS was performed at the cash generating unit level which is a more granular level of testing than Canadian GAAP requires. This will result in a total impairment charge of $3,064, attributable to the Company’s U.S. Life Insurance ($1,461), U.S. Wealth Management ($1,453) and Canadian Individual Insurance operations ($150). The total IFRS impairment charge of $3,064 will be allocated between the opening IFRS balance sheet at January 1, 2010 ($734) and the Company’s third quarter 2010 comparative IFRS results ($2,330) based on the facts and economic circumstances in the respective periods that gave rise to the impairment. Under Canadian GAAP, in the third quarter of 2010 the Company reported a goodwill impairment of $1,039.

18 2010 Annual Report

Under IFRS, investments in the equity of leveraged lease investments are measured in a similar manner to a capital lease with income recognized on a constant yield basis. Under Canadian GAAP there is a standard specific to leveraged leases and income is recognized on an effective yield basis. The impact on transition will be a decrease of $472 to the carrying value of these investments and a reclassification from private placements to other investments. An associated deferred tax asset of $182 will arise from the decrease in the carrying value of the asset, resulting in a net decrease to shareholders’ equity of $290.

Differences in the accounting for income taxes under IFRS, including the establishment of a $215 deferred tax liability under IFRS arising from prior reorganizations of certain subsidiaries of the Company, will result in a decrease in opening shareholders’ equity of $326. The deferred tax arising from subsidiary reorganizations will only be realized if the subsidiaries are sold to a third party.

In general, an entity is required to apply the principles under IFRS on a retrospective basis. However, optional exemptions from retrospective application exist for certain IFRS principles for which retrospective application would be operationally impractical. A summary of the Company’s significant first time adoption elections under IFRS 1 – “First Time Adoption of IFRS” is presented below:

Topic	Expected impact on the consolidated financial statements
Business combinations	Due to the complexities in obtaining historical valuations the Company elected not to apply IFRS to business combinations that occurred prior to January 1, 2010.
Foreign currency	To facilitate the translation of self-sustaining foreign operations prospectively, the Company elected the one-time option to reset the cumulative translation account to zero as at January 1, 2010, through opening retained earnings under IFRS.
Employee benefits	The Company did not elect prospective application of the IFRS requirements for employee benefits and instead applied the requirements retrospectively.
A summary of the more significant IFRS accounting policy choices selected by the Company is presented below:
Topic	Expected impact on the consolidated financial statements
Investment contracts	n  Products that do not contain insurance risk will be measured as a financial liability at amortized cost or fair value, where elected under IFRS to ensure consistent measurement between assets and liabilities. n  Where such financial liabilities are measured at amortized cost, any public bonds that support these products will be classified as AFS under IFRS to reduce any accounting mismatch with the measurement of the liability. Currently such bonds are measured at fair value under the fair value option under Canadian GAAP.
Designation of financial assets	n  Bonds and stocks held to support policy liabilities will be designated as trading with realized and unrealized changes in fair value recognized in earnings, in order to substantially reduce any accounting mismatch arising from changes in the values of these assets and policy liabilities. n  Bonds and stocks supporting the Company’s corporate and surplus segments and certain investment contracts will be classified as AFS under IFRS, which will be carried at fair value with unrealized gains and losses recorded in OCI.
Real estate, agriculture and private equity investments	n  Investments in real estate assets will be measured at fair value with the exception of owner-occupied properties which will be measured at historical cost less accumulated depreciation. n  Investments in agriculture assets, such as timber, will be measured at fair value with changes in fair value reported in earnings. n  Investments in private equities are currently held at cost under Canadian GAAP but will be measured at fair value under IFRS.
Employee benefits	n  Consistent with Canadian GAAP, the Company has selected a policy of amortizing actuarial gains and losses that exceed ten per cent of the greater of the accrued benefit obligation or the market value of the plan assets and any past service costs into income on a straight-line basis over the estimated average remaining service life of the plan members.

A new IFRS standard that addresses the measurement of insurance contracts is currently being developed and is not expected to be effective until at least 2013. Until this standard is completed and becomes effective, the current Canadian GAAP requirements for the valuation of insurance liabilities (CALM) will be maintained. Under CALM, the measurement of insurance liabilities is based on projected liability cash flows, together with estimated future premiums and net investment income generated from assets held to support those liabilities. Consistent with the results of the adoption of CICA Handbook Section 3855 in 2007, when IFRS is initially adopted any changes in the carrying value of the invested assets that support insurance liabilities will be offset by corresponding changes in insurance liabilities and therefore these changes in value are not expected to have a material impact on net income under IFRS.

2010 Annual Report 19

The opening IFRS balance sheet and related adjustments at January 1, 2010 are presented below:

				OPENING IFRS BALANCE SHEET ADJUSTMENTS
	Canadian GAAP January 1, 2010			Measurement differences												Presentation differences (note E)
				Investment adjustments (note A)			Actuarial adjustments (note B)			Consolidation adjustments (note C)			Corporate adjustments (note D)						IFRS January 1, 2010
Assets
Invested assets
Cash and short-term securities	$	18,780		$	19		$	–		$	6		$	–		$	–		$	18,805
Securities
Bonds		85,107			–			–			–			–			–			85,107
Stocks		9,688			–			–			–			–			–			9,688
Loans
Mortgages		30,699			454			–			4			–			–			31,157
Private placements		22,912			14			–			5			–			(2,951	)		19,980
Policy loans		6,609			–			–			–			–			–			6,609
Bank loans		2,457			–			–			–			–			–			2,457
Real estate		5,897			91			–			–			–			–			5,988
Other investments		5,321			45			–			1,592			(472	)		2,951			9,437
Total invested assets	$	187,470		$	623		$	–		$	1,607		$	(472	)	$	–		$	189,228
Other assets		–			–			–			–			–			–			–
Accrued investment income		1,540			1			–			41			–			–			1,582
Outstanding premiums		812			–			–			–			–			–			812
Derivatives		2,680			(14	)		–			40			–			–			2,706
Reinsurance asset		–			–			–			–			–			8,044			8,044
Deferred tax asset		–			–			–			–			–			1,255			1,255
Goodwill and intangible assets		9,127			–			–			4			(734	)		–			8,397
Miscellaneous		4,216			(25	)		193			(12	)		(57	)		(1,123	)		3,192
Total other assets	$	18,375		$	(38	)	$	193		$	73		$	(791	)	$	8,176		$	25,988
Segregated funds net assets											(957	)					191,741			190,784
Total assets	$	205,845		$	585		$	193		$	723		$	(1,263	)	$	199,917		$	406,000
Segregated funds net assets	$	191,741														$	(191,741	)	$	–
Liabilities and Equity
Policy liabilities	$	141,687		$	157		$	(2,121	)	$	–		$	–		$	8,042		$	147,765
Investment contracts		–			–			3,647			131			–			–			3,778
Deferred realized net gains		108			(108	)		–			–			–			–			–
Bank deposits		14,735			–			–			–			–			–			14,735
Consumer notes		1,291			–			(1,291	)		–			–			–			–
Deferred tax liability		1,883			21			(23	)		9			65			(702	)		1,253
Derivatives		2,656			(18	)		–			(187	)		–			–			2,451
Other liabilities		6,487			510			146			1,617			101			836			9,697
Long-term debt		3,308			–			–			–			–			–			3,308
Liabilities for preferred shares and capital instruments		4,581			–			–			(11	)		–			–			4,570
Segregated funds net liabilities											(957	)					191,741			190,784
Non-controlling interest in subsidiaries		202			–			–			–			–			(202	)		–
Total liabilities	$	176,938		$	562		$	358		$	602		$	166		$	199,715		$	378,341
Equity
Issued share capital
Preferred shares	$	1,422		$	–		$	–		$	–		$	–		$	–		$	1,422
Common shares		18,937			–			–			–			–			–			18,937
Contributed surplus		182			–			–			–			14			–			196
Retained earnings		12,870			(60	)		(137	)		44			(1,447	)		(5,143	)		6,127
Accumulated other comprehensive income (loss)
On available-for-sale securities		612			69			(28	)		–			–			–			653
On cash flow hedges		(48	)		(4	)		–			41			(1	)		–			(12	)
On translation of self-sustaining foreign operations		(5,148	)		–			–			–			5			5,143			–
Total shareholders’ equity	$	28,827		$	5		$	(165	)	$	85		$	(1,429	)	$	–		$	27,323
Participating policyholders’ equity		80			18			–			–			–			–			98
Non-controlling interest in subsidiaries		–			–			–			36			–			202			238
Total equity	$	28,907		$	23		$	(165	)	$	121		$	(1,429	)	$	202		$	27,659
Total liabilities and equity	$	205,845		$	585		$	193		$	723		$	(1,263	)	$	199,917		$	406,000
Segregated funds net liabilities	$	191,741														$	(191,741	)	$	–

Balances in italics are those that exist only under Canadian GAAP financial statement presentation

20 2010 Annual Report

Investment adjustments (note A)

Securitization – The Company and its subsidiaries transferred certain mortgages to third party securitization vehicles and the mortgages were derecognized from the Balance Sheet under Canadian GAAP. Under IFRS, these transactions do not result in full derecognition and instead will be accounted for as secured borrowings. Accordingly, the Company will record the following increase (decrease) in assets and liabilities as a result of the recognition of these transactions on balance sheet under IFRS as follows: cash of $19, mortgages of $445, other investments of ($29), accrued investment income of $1, derivatives of ($14), miscellaneous assets of ($1), derivative liabilities of ($18) and an increase in other liabilities of $463. The net effect on opening retained earnings will be a decrease of $25.

Hedge accounting – The difference in hedge effectiveness standards will result in an increase (decrease) to the carrying value of mortgages and private placements and accumulated other comprehensive income attributable to cash flow hedges in the amount of $9, $14 and ($4), respectively.

Real estate – Under Canadian GAAP, real estate is carried on a move to market measurement, with realized gains and losses deferred and amortized. Under IFRS, the Company has elected to measure real estate at fair value, except owner-occupied real estate which will be carried at amortized cost. The net effect of these policy choices will be an increase in the carrying value of the assets of $91 and the elimination of existing accumulated deferred net realized gains of $108 under IFRS.

Private equities –Under Canadian GAAP, certain private equity investments are held at cost and others are measured using the equity method. Under IFRS, private equity investments will be carried at fair value. This will result in an increase in the carrying amount of $9 included in other investments.

Agriculture assets –Similar to real estate, under Canadian GAAP, these assets are carried on a move to market measurement, with realized gains and losses deferred and amortized. Under IFRS, agriculture assets will be carried at fair value less costs to sell and agricultural produce will be carried at the lower of cost and net realizable value subsequent to initial recognition. The $80 increase in carrying value will be reflected in other investments.

Investments in oil and gas – Under IFRS, the Company will measure its exploration and evaluation costs on a “successful efforts” basis, resulting in a decrease of $15 in other investments. Asset retirement obligations related to consolidated oil and gas properties, and reported in other liabilities, will be calculated using a risk free rate under IFRS as opposed to a credit-adjusted rate under Canadian GAAP. The difference in rate will result in a $47 increase in other liabilities.

Loan origination costs – The capitalization of internal incremental costs attributable to the origination of bank loan assets, the unamortized portion of which is reported in miscellaneous assets for Canadian GAAP, is not permitted under IFRS which will result in a decrease of $25 to miscellaneous assets.

Available-for-sale securities – The Company will record adjustments to unrealized gains and losses on AFS securities relating to additional impairment losses on equity securities of $137 that were considered temporary under Canadian GAAP, partially offset by currency gains of $39 on bonds. Equity impairments under IFRS will be recognized when declines in the carrying value are significant or prolonged, irrespective of expectations of future recoveries. Unrealized gains and losses on bonds classified as AFS are reported through income for IFRS and in AOCI for Canadian GAAP.

The investment changes, net of the corresponding increase in policy liabilities of $157 will result in a decrease to retained earnings of $60 and an increase of $18 attributable to participating policyholders’ equity.

Actuarial adjustments (note B)

The definition of insurance contracts under IFRS includes contracts that have significant insurance risk, while the Canadian GAAP definition is based primarily on the form of the contract.

Consumer notes will be classified as insurance liabilities and certain contracts that do not qualify as insurance contracts will be measured as financial liabilities at amortized cost or fair value under IFRS. The Company has selected accounting policies for the measurement of the financial liability contracts to ensure consistent measurement between assets and liabilities. Where such financial liabilities will be measured at amortized cost, any public bonds that support these products will be classified as AFS under IFRS to reduce any earnings mismatch with the measurement of the liability. Such bonds are measured at fair value under the fair value option under Canadian GAAP. Deferred acquisition costs associated with certain investment contracts will be reported in miscellaneous assets. Deferred acquisition costs of $47 that are not direct and incremental can not be deferred under IFRS and will be eliminated through opening retained earnings.

Certain insurance contract liabilities contain embedded derivatives that will be presented separately in other assets or other liabilities and measured at fair value under IFRS with changes in fair value reported in earnings.

These adjustments will result in a net decrease to retained earnings of $137.

Consolidation adjustments (note C)

IFRS requires consolidation of all entities, including special purpose entities, over which the Company has control. Certain entities under Canadian GAAP that were not consolidated because they are VIEs where the Company is not their primary beneficiary or that were not VIEs where the Company did not control them, or that were consolidated into the Company’s segregated funds, will be consolidated under IFRS into the Company’s general funds or not consolidated at all.

2010 Annual Report 21

The more significant entities the Company expects to consolidate or deconsolidate under IFRS are listed below:

(i) Investment entities to be consolidated

Timber funds

The Company acts as an investment manager of timberland companies (“the Timber funds”) and earns investment advisory fees, and in the majority of cases earns forestry management fees and is eligible for performance advisory fees. Capital for the Timber funds is provided in varying proportions by the Company’s general fund, its segregated funds and other parties. Under IFRS, the Company is deemed to control two of these Timber funds: Taumata Plantations Ltd. (“Taumata”), and Hancock Victoria Plantations Holdings, Pty and therefore will be required to consolidate these entities under IFRS. The following is a summary of the additional assets, liabilities and equity (including non-controlling interests) that will be consolidated under IFRS:

Timber funds As at January 1, 2010
Total assets	$	1,434
Total debt (reported in other liabilities)	$	1,434
Non-controlling interests		37
Retained earnings (deficit)		(37	)
Total liabilities and equity(1)	$	1,434

⁽¹⁾ Includes the Company’s investment in the debt and equity of the Timber funds.

As a result of a modification to the governance features of Taumata during the fourth quarter of 2010, the Company is no longer deemed to control this Timber fund and, therefore, approximately $932 of assets, $1,037 of liabilities, ($105) of non-controlling interest and other equity will be de-consolidated from the IFRS balance sheet as at December 31, 2010.

Mezzanine funds

The Company acts as investment manager to a series of four investment funds which invest in mezzanine financing of private companies (collectively, the “Mezzanine Funds”). In its capacity as investment manager, the Company earns investment advisory fees. Capital for the Mezzanine Funds is provided in varying proportions by the Company’s general fund, its segregated funds and other parties. The Company has determined that it has control over the Mezzanine Funds, by virtue of its non-cancelable management contracts with them and of its exposure to the investment performance through its general fund investments in the Mezzanine Funds. The Company will account for other parties’ interests in the Mezzanine Funds as liabilities under IFRS, because the funds have limited lives. The following is a summary of the additional assets, liabilities and equity that will be consolidated under IFRS:

Mezzanine Funds As at January 1, 2010
Total assets	$	166
Total liabilities	$	171
Total equity (deficit)		(5	)
Total liabilities and equity(1)	$	166

⁽¹⁾ Includes the Company’s investment in the equity of the Mezzanine Funds.

(ii) Financing entities to be consolidated

The Company has determined that it controls each financing entity below under IFRS. The Company has control over these entities because the Company predetermined their financial and operating policies, and obtains benefits from them in the form of advantageous access to capital markets.

Manulife Financial Capital Trust and Manulife Financial Capital Trust II

Manulife Financial Capital Trust (the “Trust”) and Manulife Financial Capital Trust II (“Trust II”), collectively the “Trusts”, are open-end trusts, and issued Manulife Financial Capital Securities (“MaCS”) and Manulife Financial Capital Trust II Notes – Series 1 (“MaCS II – Series 1”), respectively. The Trusts invested the proceeds of the MaCS and MaCS II – Series 1 in debentures issued by MLI to the Trusts, which form part of the Company’s Tier 1 regulatory capital. Upon consolidation of the Trusts, the Company will derecognize the debentures issued to each trust and recognize the MaCS and MaCS II – Series 1 as liabilities of the Company.

Consolidation of the Trust and Trust II will have no material impact on the Company’s financial position.

Manulife Finance (Delaware), L.P.

Manulife Finance (Delaware), L.P. (“MFLP”) was established to issue senior and subordinated debentures. MFLP, a wholly owned partnership, issued $550 of senior debentures which mature December 15, 2026 and $650 of subordinated debentures which mature December 15, 2041. The proceeds of these debentures are invested in loans issued to the Company. Upon consolidation of MFLP, the Company will derecognize the loans issued to MFLP and recognize the senior and subordinate debentures as liabilities of the Company.

Consolidation of MFLP will have no material effect on the Company’s financial position.

22 2010 Annual Report

John Hancock Global Funding II, Ltd.

John Hancock Global Funding II, LTD (“JHGF II”), a Delaware Trust, was organized by John Hancock Life Insurance Company (U.S.A.) (“JHUSA”). JHGF II issued medium term notes to investors worldwide, and used the proceeds to purchase funding agreements issued by JHUSA. The medium term notes were issued through 2005 and mature through 2015. They are not redeemable at the option of the investors. Upon consolidation of JHGF II, the Company will derecognize the funding agreements issued by JHUSA, and recognize the medium term notes. The Company will also derecognize intercompany interest rate and currency swaps which are offset by comparable swaps between JHUSA and external parties.

The following is a summary of the impact of consolidating JHGF II under IFRS:

JHGF II As at January 1, 2010
Total assets	$	41
Total investment contracts	$	131
Total other liabilities		(184	)
Total retained earnings		94
Total liabilities and equity	$	41

(iii) Entities to be deconsolidated from the Company’s segregated funds

Timber funds

As described above, the Company acts as an investment manager of and investor in the Timber funds. The Company is deemed to control or be the primary beneficiary of several timber funds under Canadian GAAP, and consolidates these funds into the segregated funds of the Company given that the majority of the timber funds ownership is held by the segregated funds. Under IFRS, the Company is not deemed to control these funds and, therefore, will not consolidate them, except in the case of Hancock Victoria Plantations Holdings, Pty where the Company does have control but will consolidate into the general fund.

The following is a summary of the effect on segregated fund assets representing other parties’ investments in the Timber funds and offsetting segregated fund liabilities that will result from deconsolidation from the Company’s segregated funds under IFRS:

As at January 1, 2010
Total segregated funds assets	$	957
Total segregated funds liabilities	$	957

Corporate-related adjustments (note D)

These adjustments will result in a decrease to shareholders’ equity of ($1,429) primarily due to the impairment of goodwill and changes to leveraged lease accounting as outlined above. In addition, several other “corporate-related” topics have different accounting treatment under IFRS as follows:

Employee future benefits– differences in the determination of employee future benefit obligations, including assumptions relating to the return on plan assets and treatment of plan settlements, curtailments and past service costs will result in a reduction in the net prepaid benefit cost of ($57). The Company has selected an accounting policy of amortizing actuarial gains and losses that exceed ten per cent of the greater of the accrued benefit obligation or the market value of plan.

Deferred tax liability– will increase due to the tax effect of the pre-tax adjustments within the Corporate adjustments column as well as tax accounting policy changes, including those applicable to intercompany transactions. Under Canadian GAAP, recognition of a deferred tax asset or liability for temporary differences arising from intercompany transactions is prohibited. There is no such exception under IFRS. As a result, a deferred tax liability of $215 will be recognized on certain intercompany transactions.

Stock-based compensation– IFRS requires the use of the graded vesting method to account for awards that vest in installments over the vesting period as opposed to straight-line recognition applied under CGAAP, resulting in accelerated compensation expense for these awards under IFRS. This difference will result in a $14 reclassification to contributed surplus from retained earnings.

Other liabilities –will include an increase of $106 related to an uncertain tax position, partially offset by a decrease in employee benefits liability of $6 and an increase of $1 in contingent consideration on previous business combinations.

Accumulated other comprehensive income – will include a decrease of $1 related to changes in income tax rates applicable to the deferred income tax arising from other comprehensive income and an increase of $5 for tax-related cumulative translation balances.

Presentation adjustments (note E)

The balance sheet presentation and classification of certain balances will differ under IFRS as follows:

Investments in leveraged leases– will be reclassified from private placements to capital lease investments within other investments. In addition, certain tax balances will be reclassified in connection with the leveraged lease investments between deferred tax liabilities, other liabilities and other investments.

2010 Annual Report 23

Reinsurance ceded assets – are netted against policy liabilities for Canadian GAAP. Under IFRS, insurance contract liabilities will be presented gross of reinsurance.

Deferred tax assets– are included in miscellaneous assets for Canadian GAAP but will be required to be reported separately on the balance sheet under IFRS. Additionally, certain miscellaneous tax assets will be reclassified from deferred tax liabilities to miscellaneous assets.

Segregated Funds Net Assets and Liabilities– will be included with general fund assets and liabilities, but will remain separately classified under IFRS.

Non-controlling interest in subsidiaries– will be classified as a component of equity under IFRS.

Translation of self-sustaining foreign operations– The Company elected to reset, upon adoption of IFRS, the Cumulative Translation Account (“CTA”) balance to zero by reclassifying the Canadian GAAP existing balance of $5,148 to retained earnings.

Goodwill impairment

Under IFRS, the carrying value of goodwill is reviewed for impairment upon transition, then again annually and whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable.

Goodwill is allocated to cash generating units (“CGUs”) or groups of CGUs for the purpose of impairment testing based on the level at which management monitors it, which cannot be at a higher level than an operating segment. The allocation is made to those CGUs or groups of CGUs that are expected to benefit from the business combination in which the goodwill arose.

The goodwill impairment test is performed by comparing the recoverable amount of the CGU or group of CGUs to which goodwill has been allocated, with the carrying value of the same group, with any deficiency recognized as an impairment of goodwill. If the deficiency exceeds the carrying amount of goodwill, the carrying values of the remaining assets in the CGU or group of CGUs are reduced by the excess on a pro-rata basis. The recoverable amount of a CGU or group of CGUs is defined as the higher of the estimated fair value less costs to sell or value-in-use of the group.

The Company has determined that at transition to IFRS, the estimated value-in-use for the U.S. Insurance CGU, a lower level of testing than under Canadian GAAP, will be below its initial carrying value. As a result, a goodwill impairment charge of $734 will be recorded in the opening IFRS balance sheet. In the third quarter of 2010, as a result of the Company’s revised financial outlook for the U.S. and the decisions made by the Company to reposition U.S. business as well as the lower level of goodwill testing compared to Canadian GAAP, the Company determined that an additional goodwill impairment charge of $2,330 will be recorded in the third quarter 2010 comparative IFRS results attributable to the U.S. Insurance, U.S. Variable Annuities and Fixed Products and Canadian Individual Insurance CGUs. The total goodwill impairment charge under IFRS of $3,064 will be $2,025 in excess of the goodwill impairment charge already recorded in the third quarter of 2010 under Canadian GAAP.

The Company has 14 CGUs or groups of CGUs to which goodwill has been allocated and tested. The expected future carrying value of goodwill for significant CGUs under IFRS is identified separately in the table below.

CGU or Group of CGUs	Beginning goodwill at January 1, 2010		Expected IFRS goodwill impairment			Effect of foreign exchange rates changes			Expected goodwill under IFRS at December 31, 2010
Hong Kong Individual Life and Wealth	$	–	$	–		$	–		$	–
Other Asia		143		–			(12	)		131
Japan Insurance, Variable Annuities and Wealth		394		–			36			430
Canadian Individual Life		505		(150	)		–			355
Canadian Affinity Markets		83		–			–			83
Canadian Wealth (excluding Manulife Bank)		752		–			(2	)		750
Manulife Bank		–		–			–			–
Canadian Group Benefits and Savings		826		–			–			826
U.S. Life Insurance		2,145		(1,461	)		(38	)		646
U.S. Long-Term Care		282		–			(15	)		267
U.S. Variable Annuities and Fixed Products		1,464		(1,453	)		(11	)		–
U.S. Mutual Funds and Retirement Plan Services		379		–			(19	)		360
Reinsurance		70		–			(3	)		67
Corporate and Other		79		–			(4	)		75
Total	$	7,122	$	(3,064	)	$	(68	)	$	3,990

24 2010 Annual Report

The valuation techniques, significant assumptions and sensitivities applied in the goodwill impairment testing are described below:

Valuation techniques

The Company used the same valuation methods for its transition goodwill impairment testing and additional goodwill impairment testing performed for the 2010 comparative third quarter results under IFRS. The recoverable value of each CGU or group of CGUs was based on value-in-use for all of the U.S. based CGUs or groups of CGUs and the Canadian Individual Insurance CGU and fair value less costs to sell for all other CGUs or groups of CGUs, as follows:

(i) Income approach (value-in-use)

The Company has used an actuarial appraisal method for the purposes of goodwill testing. Under this approach, an appraisal value is determined from a projection of future distributable earnings derived from both the in-force business and new business expected to be sold in the future, and therefore, reflects the economic value for each CGU or group of CGUs profit potential under a set of assumptions. This approach requires assumptions including sales and revenue growth rates, capital requirements, interest rates, equity returns, mortality, morbidity, policyholder behaviour, tax rates and discount rates.

Significant assumptions

Growth

The assumptions used were based on the Company’s internal plan and Canadian actuarial valuation basis. To calculate the embedded value, the Company discounted projected earnings from each in-force contract and valued ten years of new business growing at expected Plan levels. For goodwill impairment testing purposes, in determining new business cash flows, the Company did not add a growth factor for those product lines not currently targeted for growth. The target surplus used in the projections was at the level required to achieve its strategic business plans. In arriving at its projections, the Company considered past experience, economic trends such as interest rates, equity returns, and product mix as well as industry and market trends. Where growth rate assumptions for new business cash flows were used in the embedded value calculations, they ranged from four per cent to 12 per cent (January 1, 2010 – seven per cent).

Interest rate

The Company uses a similar methodology for measuring insurance contracts in determining projected expected interest rates based on prevailing market rates at the valuation date.

Tax rate

The tax rates applied to the projections reflected intercompany transfer pricing agreements currently in effect which were assumed to be transferable to another market participant and ranged from 26 per cent to 35 per cent for both the opening balance sheet at January 1, 2010 and the impairment testing performed in the 2010 comparative third quarter results under IFRS. Tax assumptions are sensitive to changes in tax laws as well as assumptions about the jurisdictions in which profits are earned. It is possible that actual tax rates could differ from those assumed.

Discount rates

The discount rate assumed in determining the value-in-use, for applicable CGUs or groups of CGUs was 10 per cent on an after-tax basis (12 per cent and 14 per cent on a pre-tax basis for the Canadian and U.S. jurisdictions, respectively) for both the opening balance sheet at January 1, 2010 and the impairment testing performed in the 2010 comparative third quarter results under IFRS.

(ii) Fair value

Where applicable, the Company determined the fair value of the cash generating unit or group of cash generating units using an earnings-based approach which incorporated the forecasted earnings, excluding interest and equity-market impacts and normalized new business expenses multiplied by an earnings multiple derived from the observable price to earnings multiples of comparable financial institutions. The price to earnings multiples used by the Company ranged from 10 to 18 for testing performed at the opening balance sheet date of January 1, 2010 and from 10 to 16 for the impairment testing performed in the 2010 comparative third quarter results under IFRS.

The key assumptions described above may change as economic and market conditions change. Given the more granular level of goodwill impairment testing performed under IFRS than under Canadian GAAP, more frequent impairment charges could occur going forward.

2010 Annual Report 25

Note 3    ^    Invested Assets and Investment Income

a) Carrying values and fair values of invested assets

As at December 31, 2010	Fair value option		Available- for-sale		Other		Total carrying value		Total fair value
Cash and short-term securities(1)	$	668	$	8,811	$	2,312	$	11,791	$	11,791
Bonds(2)
Canadian government & agency		10,075		5,146		–		15,221		15,221
U.S. government & agency(3)		13,247		5,449		–		18,696		18,696
Other government & agency		7,591		1,417		–		9,008		9,008
Corporate		48,051		3,964		–		52,015		52,015
Mortgage/asset-backed securities		6,076		544		–		6,620		6,620
Stocks(4)		8,297		2,178		–		10,475		10,475
Loans
Mortgages(5)		–		–		31,816		31,816		33,337
Private placements(6)		–		–		22,343		22,343		23,568
Policy loans(7)		–		–		6,486		6,486		6,486
Bank loans(5)		–		–		2,355		2,355		2,364
Real estate(8)		–		–		6,358		6,358		6,738
Other investments(9)		–		–		6,264		6,264		6,942
Total invested assets	$	94,005	$	27,509	$	77,934	$	199,448	$	203,261

As at December 31, 2009	Fair value option		Available- for-sale		Other		Total carrying value		Total fair value
Cash and short-term securities(1)	$	651	$	16,118	$	2,011	$	18,780	$	18,780
Bonds(2)
Canadian government & agency		8,143		4,325		–		12,468		12,468
U.S. government & agency(3)		5,395		2,200		–		7,595		7,595
Other government & agency		5,105		1,022		–		6,127		6,127
Corporate		46,163		5,307		–		51,470		51,470
Mortgage/asset-backed securities		6,738		709		–		7,447		7,447
Stocks(4)		7,276		2,412		–		9,688		9,688
Loans
Mortgages(5)		–		–		30,699		30,699		31,646
Private placements(6)		–		–		22,912		22,912		23,544
Policy loans(7)		–		–		6,609		6,609		6,609
Bank loans(5)		–		–		2,457		2,457		2,468
Real estate(8)		–		–		5,897		5,897		6,343
Other investments(9)		–		–		5,321		5,321		5,853
Total invested assets	$	79,471	$	32,093	$	75,906	$	187,470	$	190,038

⁽¹⁾ Fair values of short-term securities are determined using appropriate prevailing interest rates and credit spreads.

⁽²⁾ Fair values for bonds, including corporate, U.S. Treasury and municipal securities are based on quoted market prices when available. When market prices are not available, fair value is generally estimated using discounted cash flow analyses, incorporating current market inputs for similar financial instruments with comparable terms and credit quality (matrix pricing). The significant inputs into these models include, but are not limited to, yield curves, credit risks and spreads, measures of volatility and prepayment rates.

⁽³⁾ U.S. government & agency bonds include $4,304 of state issued securities (2009 – $2,141).

⁽⁴⁾ Fair values for stocks are determined with reference to quoted market prices.

⁽⁵⁾ Fair values of fixed-rate mortgages and bank loans are determined by discounting the expected future cash flows at market interest rates for mortgages with similar remaining terms and credit risks. Fair values for the majority of variable-rate mortgages and bank loans are assumed to equal their carrying values since there are no fixed spreads. Where a variable-rate mortgage has a fixed spread above the benchmark rate, the mortgages are valued using current market spreads for equivalently rated borrowers.

⁽⁶⁾ Fair values of private placements are based on valuation techniques and assumptions which reflect changes in interest rates and changes in the creditworthiness of individual borrowers which have occurred since the investments were originated. The assumptions are based primarily on market observable data. Fair values also reflect any applicable provision for credit loan losses. Leveraged leases are carried at values taking into account the present value of future cash flows from the net investment.

⁽⁷⁾ Policy loans are carried at amortized cost. As policy loans are fully collateralized by their cash surrender values and can be repaid at any time, their carrying values approximate their fair values.

⁽⁸⁾ Fair values of real estate are determined by external appraisals using a variety of techniques including discounted cash flows, income capitalization approaches and comparable sales analysis. Foreclosed properties of $4 are included in real estate as at December 31, 2010 (2009 – $4).

⁽⁹⁾ Other investments include private equity and fixed income investments held primarily in power and infrastructure, oil and gas, and timber and agriculture sectors. Fair values of these investments are estimated based on best available information which is generally not market observable. This may include external appraisals as well as various valuation techniques used by external managers.

b) Bonds and stocks classified as fair value option

The fair value option was elected for securities backing policy liabilities and consumer notes in order to substantially reduce an accounting mismatch arising from changes in the value of these assets and changes in the value recorded for the related policy liabilities and consumer notes. There would otherwise be a mismatch if AFS classification was selected because changes in actuarial liabilities are reflected in net income rather than in OCI.

26 2010 Annual Report

c) Bonds and stocks classified as AFS

The Company’s investments in bonds and stocks classified as AFS are summarized below:

As at December 31, 2010	Cost/amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
Bonds
Canadian government & agency	$	4,914	$	292	$	(60	)	$	5,146
U.S. government & agency		5,560		46		(157	)		5,449
Other government & agency		1,388		33		(4	)		1,417
Corporate		3,815		177		(28	)		3,964
Mortgage/asset-backed securities		579		24		(59	)		544
Total bonds	$	16,256	$	572	$	(308	)	$	16,520
Stocks(1)		2,095		152		(69	)		2,178
Total bonds and stocks	$	18,351	$	724	$	(377	)	$	18,698

As at December 31, 2009	Cost/amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
Bonds
Canadian government & agency	$	3,840	$	549	$	(64	)	$	4,325
U.S. government & agency		2,150		71		(21	)		2,200
Other government & agency		980		48		(6	)		1,022
Corporate		4,949		421		(63	)		5,307
Mortgage/asset-backed securities		821		8		(120	)		709
Total bonds	$	12,740	$	1,097	$	(274	)	$	13,563
Stocks(1)		2,357		175		(120	)		2,412
Total bonds and stocks	$	15,097	$	1,272	$	(394	)	$	15,975

⁽¹⁾ The largest single issuer represented nine per cent (2009 – 26 per cent) of the fair value of stocks classified as AFS.

A tax expense of $96 (2009 – $266) reduces the pre-tax net unrealized gain of $347 (2009 – $878) above to $251 (2009 – $612).

Securities that are designated as AFS are not actively traded but sales do occur as circumstances warrant. Such sales result in a reclassification of any accumulated unrealized gain (loss) in AOCI to income as a realized gain (loss). The table below sets out the movement in unrealized gains (losses) on AFS securities during the year. In determining gains and losses on sale and transfer of AFS assets, cost is determined at the security lot level.

Sales of AFS securities

For the years ended December 31,	2010			2009
Sale of bonds
Sale proceeds	$	13,909		$	920
Gross gains		1,358			60
Gross losses		(489	)		(38	)
Sale of stocks
Sale proceeds		2,343			1,557
Gross gains		315			349
Gross losses		(191	)		(295	)
Sale of short-term securities
Sale proceeds		9,495			8,820
Gross gains		–			–
Gross losses		–			–

2010 Annual Report 27

Unrealized losses on AFS securities

The Company monitors its portfolio of AFS securities on an ongoing basis to identify other-than-temporary impairments. Analysis is conducted at the individual security lot level and includes an assessment of a significant or prolonged decline in the fair value of an individual security lot below its cost. For further discussion regarding the Company’s OTTI policy, see note 1(b). The following table presents the Company’s unrealized loss aging for total bonds and stocks classified as AFS, by investment type and length of time the security was in a continuous unrealized loss position.

	Less than 12 months							12 months or more							Total
As at December 31, 2010	Amortized cost		Fair value		Unrealized losses			Amortized cost		Fair value		Unrealized losses			Amortized cost		Fair value		Unrealized losses
Bonds
Canadian government & agency	$	3,111	$	3,057	$	(54	)	$	103	$	97	$	(6	)	$	3,214	$	3,154	$	(60	)
U.S. government & agency		3,895		3,738		(157	)		–		–		–			3,895		3,738		(157	)
Other government & agency		321		317		(4	)		11		11		–			332		328		(4	)
Corporate		979		959		(20	)		126		118		(8	)		1,105		1,077		(28	)
Mortgage/asset-backed securities		23		21		(2	)		167		110		(57	)		190		131		(59	)
Total bonds	$	8,329	$	8,092	$	(237	)	$	407	$	336	$	(71	)	$	8,736	$	8,428	$	(308	)
Stocks		680		611		(69	)		–		–		–			680		611		(69	)
Total bonds and stocks	$	9,009	$	8,703	$	(306	)	$	407	$	336	$	(71	)	$	9,416	$	9,039	$	(377	)

	Less than 12 months							12 months or more							Total
As at December 31, 2009	Amortized cost		Fair value		Unrealized losses			Amortized cost		Fair value		Unrealized losses			Amortized cost		Fair value		Unrealized losses
Bonds
Canadian government & agency	$	1,832	$	1,788	$	(44	)	$	185	$	165	$	(20	)	$	2,017	$	1,953	$	(64	)
U.S. government & agency		806		786		(20	)		17		16		(1	)		823		802		(21	)
Other government & agency		167		162		(5	)		15		14		(1	)		182		176		(6	)
Corporate		367		360		(7	)		769		713		(56	)		1,136		1,073		(63	)
Mortgage/asset-backed securities		36		34		(2	)		320		202		(118	)		356		236		(120	)
Total bonds	$	3,208	$	3,130	$	(78	)	$	1,306	$	1,110	$	(196	)	$	4,514	$	4,240	$	(274	)
Stocks		1,074		954		(120	)		–		–		–			1,074		954		(120	)
Total bonds and stocks	$	4,282	$	4,084	$	(198	)	$	1,306	$	1,110	$	(196	)	$	5,588	$	5,194	$	(394	)

At December 31, 2010, there were 517 (2009 – 854) AFS bonds with an aggregate gross unrealized loss of $308 (2009 – $274) of which the single largest unrealized loss was $67 (2009 – $27). The decrease in unrealized losses was largely the result of lower market yields across all bond categories. The Company anticipates that these bonds will perform in accordance with their contractual terms and currently has the ability and intent to hold these securities until they recover or mature.

At December 31, 2010, there were 884 (2009 – 575) stocks with an aggregate gross unrealized loss of $69 (2009 – $120) of which the single largest unrealized loss was $8 (2009 – $9). The Company anticipates that these stocks will recover in value in the near term.

As of December 31, 2010, 87 per cent (2009 – 80 per cent) of securities in an unrealized loss position were trading at greater than 80 per cent of amortized cost. Based upon the Company’s current evaluation of these securities in accordance with its impairment policy and the Company’s intent to retain these investments for a period of time sufficient to allow for recovery in value, the Company has determined that these securities are only temporarily impaired and their carrying value is appropriate. For securities listed above as being in an unrealized loss position of 12 months or more, the duration of impairment ranges from 12 to 45 months (2009 – 12 to 33 months).

Contractual maturity of AFS bonds

The amortized cost and estimated fair value of AFS bonds by contractual maturity year are shown below.

As at December 31, 2010	Amortized cost		Fair value
Maturity
One year or less	$	1,172	$	1,177
Over one year through five years		3,094		3,163
Over five years through ten years		2,988		3,077
Over ten years		8,423		8,559
Subtotal	$	15,677	$	15,976
Asset-backed and mortgage-backed securities		579		544
Total	$	16,256	$	16,520

28 2010 Annual Report

Securitized assets, such as asset-backed securities (“ABS”), mortgage-backed securities (“MBS”) and collateralized mortgage obligations (“CMOs”), are not categorized by contractual maturity because estimated maturities may differ from contractual maturities due to security call or prepayment provisions.

d) Mortgages

The following tables present the carrying value and fair value of mortgages, by region and by property type:

Mortgage loans by region

As at December 31,	2010				2009
	Carrying value		Fair value		Carrying value		Fair value
Canada
Ontario	$	8,172	$	8,405	$	7,786	$	7,848
Western Canada		6,772		6,900		6,437		6,496
Quebec		2,320		2,367		2,060		2,071
Eastern Canada		1,270		1,311		1,215		1,227
United States
East North Central		1,266		1,366		1,194		1,268
East South Central		229		245		416		431
Middle Atlantic		2,285		2,503		2,306		2,462
Mountain		917		986		945		999
New England		1,003		1,099		1,094		1,166
Pacific		3,499		3,768		3,533		3,741
South Atlantic		2,519		2,702		2,281		2,426
West North Central		497		536		358		372
West South Central		906		966		901		947
Other		13		14		14		15
Other		148		169		159		177
Total	$	31,816	$	33,337	$	30,699	$	31,646

Mortgage loans by property type

As at December 31,	2010				2009
	Carrying value		Fair value		Carrying value		Fair value
Residential	$	12,684	$	12,914	$	11,751	$	11,902
Office		5,482		5,854		4,819		5,067
Retail		5,883		6,314		5,993		6,221
Industrial		3,183		3,410		3,442		3,608
Other		4,584		4,845		4,694		4,848
Total	$	31,816	$	33,337	$	30,699	$	31,646

The carrying value of government-insured mortgages was 32 per cent of the total mortgage portfolio as at December 31, 2010 (2009 – 29 per cent) and the carrying value of privately-insured mortgages was 0.3 per cent of the total mortgage portfolio as at December 31, 2010 (2009 – 0.1 per cent).

2010 Annual Report 29

e) Investment income

For the year ended December 31, 2010	Fair value option			Available- for-sale			Other(2)			Total			Yields(3)
Cash and short-term securities														0.1%
Interest income	$	14		$	62		$	–		$	76
(Losses) gains(1)		(70	)		11			–			(59	)
Bonds														8.4%
Interest income		3,773			700			–			4,473			4.7%
Gains(1)		2,543			869			–			3,412			3.6%
Impairment loss, net		(52	)		(23	)		–			(75	)
Stock securities														13.8%
Dividend income		189			54			–			243
Gains(1)		945			124			–			1,069
Impairment loss		–			(22	)		–			(22	)
Loans
Mortgages														5.2%
Interest income		–			–			1,585			1,585
Gains(1)		–			–			51			51
Provision for loan losses, net		–			–			(34	)		(34	)
Private placements														5.5%
Interest income		–			–			1,202			1,202
Gains(1)		–			–			59			59
Provision for loan losses, net		–			–			(37	)		(37	)
Policy loans		–			–			422			422			6.3%
Bank loans														3.9%
Interest income		–			–			93			93
Real estate		–			–			418			418			7.3%
Derivatives														n/a
Interest income, net		–			–			19			19
Losses(1)		–			–			(124	)		(124	)
Recovery		–			–			1			1
Other investments														4.5%
Interest income		–			–			113			113
Oil and gas, timber, agriculture and other income		–			–			174			174
Gains(1)		–			–			19			19
Impairment loss		–			–			(56	)		(56	)
Total investment income	$	7,342		$	1,775		$	3,905		$	13,022			6.8%
Interest income	$	3,787		$	762		$	3,434		$	7,983			4.1%
Dividend, rental and other income		189			54			592			835			0.4%
Impairments and provisions for loan losses (note 7)		(52	)		(45	)		(126	)		(223	)		(0.1)%
Realized gains (losses) on assets backing surplus		–			1,004			(123	)		881			0.4%
	$	3,924		$	1,775		$	3,777		$	9,476
Realized and unrealized (losses) gains on assets supporting policy liabilities and consumer notes
Bonds	$	2,543		$	–		$	–		$	2,543			1.3%
Stocks		945			–			–			945			0.5%
Loans		–			–			103			103			0.1%
Other investments		(70	)		–			10			(60	)		0.0%
Derivatives		–			–			15			15			0.0%
	$	3,418		$	–		$	128		$	3,546
Total investment income	$	7,342		$	1,775		$	3,905		$	13,022			6.8%

⁽¹⁾ Gains (losses) include realized and unrealized gains (losses) for securities and derivatives designated as trading under the fair value option and realized gains (losses) for AFS securities, loans and other invested assets.

⁽²⁾ Other includes interest income, real estate rental income and real estate move to market adjustments, derivative income as outlined in note 5 and earnings on other investments.

⁽³⁾ Yields are based on total investment income divided by the average carrying value plus accrued income less deferred realized net gains (on real estate holdings).

30 2010 Annual Report

For the year ended December 31, 2009	Fair value option			Available- for-sale			Other(2)			Total			Yields(3)
Cash and short-term securities														0.6%
Interest income	$	15		$	91		$	–		$	106
Bonds														10.7%
Interest income		3,735			625			–			4,360			5.3%
Gains(1)		4,541			22			–			4,563			5.6%
Impairment loss, net		(292	)		(78	)		–			(370	)
Stock securities														20.8%
Dividend income		172			103			–			275
Gains(1)		1,731			54			–			1,785
Impairment loss		–			(329	)		–			(329	)
Loans
Mortgages														5.2%
Interest income		–			–			1,612			1,612
Gains(1)		–			–			15			15
Provision for loan losses, net		–			–			(50	)		(50	)
Private placements														6.0%
Interest income		–			–			1,429			1,429
Gains(1)		–			–			26			26
Provision for loan losses, net		–			–			(18	)		(18	)
Policy loans		–			–			472			472			6.7%
Bank loans														3.7%
Interest income		–			–			90			90
Real estate		–			–			482			482			8.3%
Derivatives														n/a
Interest expense, net		–			–			(176	)		(176	)
Losses(1)		–			–			(3,146	)		(3,146	)
Other investments														3.2%
Interest income		–			–			147			147
Oil and gas, timber, agriculture and other income		–			–			138			138
Gains(1)		–			–			38			38
Impairment loss		–			–			(146	)		(146	)
Total investment income	$	9,902		$	488		$	913		$	11,303			6.2%
Interest income	$	3,750		$	716		$	3,574		$	8,040			4.4%
Dividend, rental and other income		172			103			620			895			0.5%
Impairments and provisions for loan losses (note 7)		(292	)		(407	)		(214	)		(913	)		(0.5)%
Realized gains (losses) on assets backing surplus		–			76			(57	)		19			0.0%
	$	3,630		$	488		$	3,923		$	8,041
Realized and unrealized (losses) gains on assets supporting policy liabilities and consumer notes
Bonds	$	4,541		$	–		$	–		$	4,541			2.4%
Stocks		1,731			–			–			1,731			0.9%
Loans		–			–			27			27			0.0%
Other investments		–			–			62			62			0.0%
Derivatives		–			–			(3,099	)		(3,099	)		(1.6)%
	$	6,272		$	–		$	(3,010	)	$	3,262
Total investment income	$	9,902		$	488		$	913		$	11,303			6.2%

⁽¹⁾ Gains (losses) include realized and unrealized gains (losses) for securities and derivatives designated as trading under the fair value option and realized gains (losses) for AFS securities, loans and other invested assets.

⁽²⁾ Other includes interest income, real estate rental income and real estate move to market adjustments, derivative income as outlined in note 5 and earnings on other investments.

⁽³⁾ Yields are based on total investment income divided by the average carrying value plus accrued income less deferred realized net gains (on real estate holdings).

2010 Annual Report 31

f) Investment and interest expense

Investment expenses

For the years ended December 31,	2010		2009
Related to invested assets	$	381	$	397
Related to segregated, mutual and other funds		590		550
Total investment expenses	$	971	$	947

Interest expense

For the years ended December 31,	2010			2009
Interest expense on consumer notes	$	49		$	58
Increase (decrease) in fair value of consumer notes		(13	)		106
Other interest expense		1,041			1,137
Total interest expense	$	1,077		$	1,301

Note 4    ^    Goodwill and Intangible Assets

Intangible assets include the John Hancock brand name, distribution networks, fund management contracts, capitalized software and other contractual rights. Software intangible assets are amortized on a straight-line basis over their estimated useful lives of three to five years. Distribution networks and other finite life intangible assets are amortized over their estimated useful lives in relation to the associated gross margins from the related businesses.

As at December 31, 2010	Gross carrying amount		Accumulated amortization		Net carrying amount
Goodwill (note 19)	$	5,941	$	–	$	5,941
Indefinite life intangible assets
Brand	$	597	$	–	$	597
Fund management contracts and other		457		–		457
	$	1,054	$	–	$	1,054
Finite life intangible assets
Distribution networks	$	611	$	72	$	539
Software		808		576		232
Other intangible assets		169		78		91
	$	1,588	$	726	$	862
Total intangible assets	$	2,642	$	726	$	1,916
Total goodwill and intangible assets	$	8,583	$	726	$	7,857

As at December 31, 2009	Gross carrying amount		Accumulated amortization		Net carrying amount
Goodwill (note 19)	$	7,122	$	–	$	7,122
Indefinite life intangible assets
Brand	$	628	$	–	$	628
Fund management contracts and other		467		–		467
	$	1,095	$	–	$	1,095
Finite life intangible assets
Distribution networks	$	631	$	55	$	576
Software		719		487		232
Other intangible assets		172		70		102
	$	1,522	$	612	$	910
Total intangible assets	$	2,617	$	612	$	2,005
Total goodwill and intangible assets	$	9,739	$	612	$	9,127

The Company’s annual impairment test for goodwill involves a two-step test to determine whether the carrying value of goodwill is impaired. The results of the first step, which involved comparing the fair value of a reporting unit to its carrying value, including goodwill, indicated that the fair value of the U.S. Insurance reporting unit was below its carrying value, suggesting that the US$2,319 of goodwill assigned to this reporting unit might be impaired. The fair value was determined primarily using an earnings-based approach which incorporated the reporting unit’s in-force and new business embedded value using internal forecasts of revenues and expenses. Under the second step of the goodwill impairment test, the implied fair value of goodwill is determined by valuing a report-

32 2010 Annual Report

ing unit’s tangible and intangible assets and liabilities in a manner similar to that applied in allocating a purchase price in a business combination. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, goodwill is deemed impaired and is written down by the difference. The Company completed this step of the testing and determined that the goodwill of its U.S. Insurance reporting unit was impaired by $1,039 (US$1,000). The $1,039 impairment charge has been recorded in the Corporate and Other segment; see note 19.

The estimated useful life of the finite life intangible assets ranges from three to 68 years. Amortization expense was $114 for the year ended December 31, 2010 (2009 – $118). Amortization expense for existing finite life intangible assets is estimated to range from $30 to $150 in each of the next five years.

Note 5    ^    Derivative and Hedging Instruments

Derivatives are financial contracts, the value of which is derived from underlying interest rates, foreign exchange rates, other financial instruments, commodity prices or indices. The Company uses derivatives including swaps, forwards and futures agreements, and options to manage current and anticipated exposures to changes in interest rates, foreign exchange rates, commodity prices and equity market prices, and to replicate permissible investments.

Swaps are over-the-counter (“OTC”) contractual agreements between the Company and a third party to exchange a series of cash flows based upon rates applied to a notional amount. For interest rate swaps, counterparties generally exchange fixed or floating interest rate payments based on a notional value in a single currency. Cross currency swaps involve the exchange of principal amounts between parties as well as the exchange of interest payments in one currency for the receipt of interest payments in another currency. Total return swaps are contracts that involve the exchange of payments based on changes in the values of a reference asset, including any returns such as interest earned on these assets, in return for amounts based on reference rates specified in the contract.

Forward and futures agreements are contractual obligations to buy or sell a financial instrument, foreign currency or other underlying commodity on a predetermined future date at a specified price. Forward contracts are OTC contracts negotiated between counterparties, whereas futures agreements are contracts with standard amounts and settlement dates that are traded on regulated exchanges.

Options are contractual agreements whereby the holder has the right, but not the obligation, to buy (call option) or sell (put option) a security, exchange rate, interest rate, or other financial instrument at a predetermined price/rate within a specified time.

See note 7(a) for an explanation of the Company’s hedging program for its variable annuity product guarantees.

Hedging relationships

The Company uses derivatives for economic hedging purposes. In certain circumstances, these hedges also meet the requirements for hedge accounting. Hedging relationships eligible for hedge accounting are designated as either fair value hedges, cash flow hedges or as net investment hedges, as described below.

Fair value hedges

The Company uses interest rate swaps to manage its exposure to changes in the fair value of fixed rate financial instruments caused by changes in interest rates. The Company also uses cross currency swaps to manage its exposure to foreign exchange rate fluctuations, interest rate fluctuations, or both.

The Company recognizes gains and losses on derivatives and the related hedged items in fair value hedges in investment income. These investment gains (losses) are shown in the table below.

Derivatives in fair value hedging relationships For the year ended December 31, 2010	Hedged items in fair value hedging relationships		Gains (losses) recognized on derivatives			Gains (losses) recognized for hedged items			Ineffectiveness recognized in investment income
Interest rate swaps		Fixed rate assets	$	(226	)	$	207		$	(19	)
		Fixed rate liabilities		1			(1	)		–
Foreign currency swaps		Fixed rate assets		(33	)		56			23
		Floating rate liabilities		–			(7	)		(7	)
Total			$	(258	)	$	255		$	(3	)
For the year ended December 31, 2009
Interest rate swaps		Fixed rate assets	$	400		$	(434	)	$	(34	)
		Fixed rate liabilities		(14	)		14			–
Foreign currency swaps		Fixed rate assets		104			(97	)		7
		Floating rate liabilities		(12	)		12			–
Total			$	478		$	(505	)	$	(27	)

2010 Annual Report 33

Cash flow hedges

The Company uses interest rate swaps to hedge the variability in cash flows from variable rate financial instruments and forecasted transactions. The Company also uses cross currency swaps and foreign currency forward contracts to hedge the variability from foreign currency financial instruments and foreign currency expenses.

The effects of derivatives in cash flow hedging relationships on the Consolidated Statements of Operations and the Consolidated Statements of Changes in Equity are shown in the following table.

Derivatives in cash flow hedging relationships For the year ended December 31, 2010	Hedged items in cash flow hedging relationships		Gains (losses) deferred in AOCI on derivatives			Gains (losses) reclassified from AOCI into investment income			Ineffectiveness recognized in investment income
Interest rate swaps		Forecasted liabilities	$	(31	)	$	(14	)	$	–
Foreign currency swaps		Fixed rate assets		4			–			–
		Floating rate liabilities		(1	)		–			–
Foreign currency forwards		Forecasted expenses		(16	)		–			–
Total return swaps		Stock-based compensation		(12	)		–			–
Total			$	(56	)	$	(14	)	$	–
For the year ended December 31, 2009
Interest rate swaps		Forecasted liabilities	$	123		$	(10	)	$	2
Foreign currency swaps		Fixed rate assets		(4	)		–			–
		Floating rate liabilities		343			–			–
Foreign currency forwards		Forecasted expenses		45			–			–
Total return swaps		Stock-based compensation		12			–			–
Total			$	519		$	(10	)	$	2

The Company anticipates that net losses of approximately $30 will be reclassified from AOCI to earnings within the next 12 months. The maximum time frame for which variable cash flows are hedged is 27 years.

Hedges of net investments in self-sustaining foreign operations

The Company primarily uses forward currency contracts, cross-currency swaps and non-functional currency denominated debt to manage its foreign currency exposures to net investments in self-sustaining foreign operations.

The effects of derivatives in net investment hedging relationships on the Consolidated Statements of Operations and the Consolidated Statements of Equity are shown in the following table.

Derivatives in net investment hedging relationships For the year ended December 31, 2010	Gains (losses) deferred in AOCI on hedge instruments			Gains (losses) reclassified from AOCI into investment income		Ineffectiveness recognized in investment income
Currency swaps	$	(34	)	$	–	$	–
Foreign currency forwards		119			–		–
Non-functional currency denominated debt		39			–		–
Total	$	124		$	–	$	–
For the year ended December 31, 2009
Currency swaps	$	53		$	–	$	–
Foreign currency forwards		815			–		–
Total	$	868		$	–	$	–

Derivatives not designated as hedging instruments

Derivatives used in portfolios supporting policy liabilities are generally not designated as hedging instruments because the change in the value of the policy liability hedged item in these portfolios is recorded through net income. Given the changes in fair value of these derivatives are recognized in investment income as they occur, they generally offset with the change in hedged risk to the extent the hedges are effective. Interest rate and cross currency swaps are used in the portfolios supporting policy liabilities to manage duration and currency risks.

34 2010 Annual Report

The effects of derivatives in non-hedging relationships on the Consolidated Statements of Operations are shown in the following table.

For the years ended December 31,	2010			2009
Non-hedging relationships
Investment income (loss)
Interest rate swaps	$	652		$	(2,746	)
Stock futures		(987	)		(386	)
Currency futures		67			(6	)
Interest rate futures		(100	)		8
Interest rate options		(1	)		2
Total return swaps		13			(50	)
Foreign currency swaps		180			35
Foreign currency forwards		52			25
Total investment loss from derivatives in non-hedging relationships	$	(124	)	$	(3,118	)

Fair value of derivatives

The pricing models used to value OTC derivatives are based on market standard valuation methodologies and the inputs to these models are consistent with what a market participant would use when pricing the instruments. Derivative valuations can be affected by changes in interest rates, currency exchange rates, financial indices, credit spreads, default risk (including the counterparties to the contract), and volatility. The significant inputs to the pricing models for most OTC derivatives are inputs that are observable or can be corroborated by observable market data. Inputs that are observable generally include: interest rates, foreign currency exchange rates and interest rate curves. However, certain OTC derivatives may rely on inputs that are significant to the fair value that are not observable in the market or cannot be derived principally from or corroborated by observable market data. Inputs that are unobservable generally include: broker quotes, volatilities and inputs that are outside of the observable portion of the interest rate curve or other relevant market measures. These unobservable inputs may involve significant management judgment or estimation. Even though unobservable, these inputs are based on assumptions deemed appropriate given the circumstances and consistent with what market participants would use when pricing such instruments. The Company’s use of unobservable inputs is limited and the impact on derivative fair values does not represent a material amount as evidenced by the limited amount of Level 3 derivatives in note 8. The credit risk of both the counterparty and the Company are considered in determining the fair value for all OTC derivatives after taking into account the effects of netting agreements and collateral arrangements.

The fair value of derivative instruments is summarized by term to maturity in the following tables. Fair values shown do not incorporate the impact of master netting agreements (see note 7(g)).

Term to maturity As at December 31, 2010	Less than 1 year		1 to 5 years		Over 5 years		Total
Derivative assets	$	153	$	378	$	3,378	$	3,909
Derivative liabilities	$	144	$	738	$	2,522	$	3,404

As at December 31, 2009
Derivative assets	$	271	$	362	$	2,047	$	2,680
Derivative liabilities	$	214	$	818	$	1,624	$	2,656

2010 Annual Report 35

	Remaining term to maturity (notional amounts)								Fair value
As at December 31, 2010	Under 1 year		1 to 5 years		Over 5 years		Total		Positive		Negative			Net			Credit risk equivalent(1)		Risk-weighted amount(2)
Interest rate contracts
Swap contracts	$	5,846	$	18,287	$	61,119	$	85,252	$	3,453	$	(2,995	)	$	458		$	1,565	$	165
Futures		2,596		–		–		2,596		–		–			–			–		–
Options purchased		–		180		–		180		–		–			–			1		–
Subtotal	$	8,442	$	18,467	$	61,119	$	88,028	$	3,453	$	(2,995	)	$	458		$	1,566	$	165
Foreign exchange
Swap contracts		1,459		1,700		5,689		8,848		595		(631	)		(36	)		569		59
Futures		3,643		–		–		3,643		–		–			–			–		–
Forward contracts		1,069		–		–		1,069		39		(8	)		31			21		2
Equity contracts
OTC contracts		201		48		13		262		14		(3	)		11			34		3
Futures		9,714		–		–		9,714		–		–			–			–		–
Subtotal including accrued interest	$	24,528	$	20,215	$	66,821	$	111,564	$	4,101	$	(3,637	)	$	464		$	2,190	$	229
Less accrued interest		–		–		–		–		192		(233	)		(41	)		–		–
Total	$	24,528	$	20,215	$	66,821	$	111,564	$	3,909	$	(3,404	)	$	505		$	2,190	$	229

	Remaining term to maturity (notional amounts)								Fair value
As at December 31, 2009	Under 1 year		1 to 5 years		Over 5 years		Total		Positive		Negative			Net			Credit risk equivalent(1)		Risk-weighted amount(2)
Interest rate contracts
Swap contracts	$	4,158	$	14,827	$	45,465	$	64,450	$	2,185	$	(1,900	)	$	285		$	1,001	$	106
Futures		885		–		–		885		–		–			–			–		–
Options purchased		111		189		–		300		1		–			1			1		–
Subtotal	$	5,154	$	15,016	$	45,465	$	65,635	$	2,186	$	(1,900	)	$	286		$	1,002	$	106
Foreign exchange
Swap contracts		1,812		2,436		6,230		10,478		440		(931	)		(491	)		573		59
Futures		757		–		–		757		–		–			–			–		–
Forward contracts		6,039		141		–		6,180		155		(14	)		141			75		7
Equity contracts
OTC contracts		154		81		40		275		18		(1	)		17			22		2
Futures		2,078		–		–		2,078		–		–			–			–		–
Subtotal including accrued interest	$	15,994	$	17,674	$	51,735	$	85,403	$	2,799	$	(2,846	)	$	(47	)	$	1,672	$	174
Less accrued interest		–		–		–		–		119		(190	)		(71	)		–		–
Total	$	15,994	$	17,674	$	51,735	$	85,403	$	2,680	$	(2,656	)	$	24		$	1,672	$	174

⁽¹⁾ Credit risk equivalent is the sum of replacement cost and the potential future credit exposure. Replacement cost represents the current cost of replacing all contracts with a positive fair value. The amounts take into consideration legal contracts that permit offsetting of positions. The potential future credit exposure is calculated based on a formula prescribed by OSFI.

⁽²⁾ Risk-weighted amount represents the credit risk equivalent, weighted according to the creditworthiness of the counterparty, as prescribed by OSFI.

36 2010 Annual Report

The gross notional amount and the fair value of derivatives contracts by the underlying risk exposure for all derivatives in hedging and non-hedging relationships are summarized in the table below.

As at December 31,		2010						2009
Type of hedge					Fair value						Fair value
	Instrument type	Notional amount		Assets		Liabilities		Notional amount		Assets		Liabilities
Qualifying hedging relationships
Fair value hedges	Interest rate swaps	$	2,353	$	13	$	223	$	1,951	$	14	$	73
	Foreign currency swaps		472		53		19		1,064		47		79
	Forward contracts		148		–		–		–		–		–
Cash flow hedges	Interest rate swaps		352		3		–		1,108		39		–
	Foreign currency swaps		663		20		–		717		20		4
	Forward contracts		139		29		–		278		45		–
	Equity contracts		116		5		3		91		10		–
Net investment hedges	Foreign currency swaps		322		–		76		322		–		43
	Forward contracts		202		3		4		5,377		110		13
Total derivatives in hedging relationships		$	4,767	$	126	$	325	$	10,908	$	285	$	212
Non-hedging relationships
	Interest rate swaps	$	82,547	$	3,250	$	2,554	$	61,391	$	2,020	$	1,659
	Interest rate futures		2,596		–		–		885		–		–
	Interest rate options		180		–		–		300		1		–
	Foreign currency swaps		7,391		516		519		8,375		371		781
	Currency rate futures		3,643		–		–		757		–		–
	Forward contracts		580		7		4		525		–		2
	Equity contracts		146		10		2		184		3		–
	Equity futures		9,714		–		–		2,078		–		–
	Embedded derivatives		–		–		–		–		–		2
Total derivatives in non-hedging relationships		$	106,797	$	3,783	$	3,079	$	74,495	$	2,395	$	2,444
Total derivatives		$	111,564	$	3,909	$	3,404	$	85,403	$	2,680	$	2,656

Embedded derivatives

Certain reinsurance contracts related to guaranteed minimum income benefits are classified as financial instruments and are measured at fair value. At December 31, 2010, these specific reinsurance ceded contracts had a fair value of $1,111 (2009 – $1,093) and specific reinsurance assumed contracts had a fair value of $85 (2009 – $85). These contracts are included in policy liabilities. Claims recovered under reinsurance ceded contracts offset the claim expense and claims paid on the reinsurance assumed contracts are reported as policy benefits.

Note 6    ^    Policy Liabilities

a) Policy liabilities

Policy liabilities are reported net of reinsurance ceded. Policy liabilities, before and after reinsurance ceded, are shown below.

As at December 31,	2010			2009
Gross policy liabilities	$	159,704		$	148,712
Impact of reinsurance ceded		(7,760	)		(7,025	)
Policy liabilities	$	151,944		$	141,687

Policy liabilities include actuarial liabilities as well as benefits payable, provision for unreported claims and policyholder amounts on deposit. The components of policy liabilities are shown below.

As at December 31,	2010		2009
Actuarial liabilities	$	143,910	$	134,305
Benefits payable and provision for unreported claims		1,874		1,975
Policyholder amounts on deposit		6,160		5,407
Policy liabilities	$	151,944	$	141,687

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

2010 Annual Report 37

returns, this margin is established by scenario testing that is generally done on a deterministic basis, testing a range of prescribed and company-developed scenarios. For minimum guarantees on segregated fund products, the margin for adverse deviation for investment returns is done stochastically. For other assumptions, this margin is established by directly adjusting the best estimate assumption.

Cash flows used in the actuarial valuation adjust the gross policy cash flows to reflect the projected cash flows from ceded reinsurance. The cash flow impact of ceded reinsurance varies depending upon the amount of reinsurance, the structure of the reinsurance treaties, the expected economic benefit from the treaty cash flows and the impact of margins for adverse deviation.

The period used for the projection of cash flows is the policy lifetime for most individual insurance contracts. For other types of contracts a shorter projection period may be used, limiting the period to the term of the liability over which the Company is exposed to material insurance risk without the ability to adjust premiums or policy charges. Where the projection period is less than the policy lifetime, actuarial liabilities may be reduced by an allowance for acquisition expenses expected to be recovered from policy cash flows beyond the projection period used for the liabilities. Such allowances are tested for recoverability using assumptions that are consistent with other components of the actuarial valuation.

b) Composition

The composition of policy liabilities by line of business and reporting segment is shown, before and after reinsurance ceded, in the table below.

As at December 31, 2010	Individual insurance				Annuities and pensions		Other policy liabilities(1)			Total, net of reinsurance ceded			Total before reinsurance ceded
	Participating		Non- participating
Asia Division	$	14,264	$	4,037	$	2,786	$	913		$	22,000		$	22,260
Canadian Division		8,014		13,133		14,338		6,861			42,346			44,584
U.S. Insurance		19,392		21,113		23		17,368			57,896			61,481
U.S. Wealth Management		–		–		28,358		53			28,411			29,823
Reinsurance Division		–		1,267		–		271			1,538			1,688
Corporate and Other		–		–		–		(247	)		(247	)		(132	)
Total, net of reinsurance ceded	$	41,670	$	39,550	$	45,505	$	25,219		$	151,944		$	159,704
Total before reinsurance ceded	$	42,198	$	44,001	$	46,968	$	26,537		$	159,704

⁽¹⁾ Other policy liabilities include group insurance, and individual and group health including long-term care insurance.

	Individual insurance				Annuities and pensions		Other  policy liabilities(1)			Total, net of reinsurance ceded			Total before reinsurance ceded
As at December 31, 2009	Participating		Non- participating
Asia Division	$	13,202	$	2,563	$	1,737	$	375		$	17,877		$	17,959
Canadian Division		7,326		11,456		13,549		6,545			38,876			41,308
U.S. Insurance		20,524		19,149		24		14,307			54,004			57,479
U.S. Wealth Management		–		–		29,328		56			29,384			30,149
Reinsurance Division		–		1,282		–		411			1,693			1,828
Corporate and Other		–		–		–		(147	)		(147	)		(11	)
Total, net of reinsurance ceded	$	41,052	$	34,450	$	44,638	$	21,547		$	141,687		$	148,712
Total before reinsurance ceded	$	41,535	$	39,010	$	45,452	$	22,715		$	148,712

⁽¹⁾ Other policy liabilities include group insurance, and individual and group health including long-term care insurance.

Separate sub-accounts were established for participating policies in-force at the demutualization of MLI and the former John Hancock Life Insurance Company. These sub-accounts permit this participating business to be operated as separate “closed blocks” of business. As at December 31, 2010, $26,189 (2009 – $26,647) of both assets and policy liabilities related to these closed blocks of participating policies.

In addition to the participating policies related to the in-force “closed blocks”, there are other participating insurance blocks. For these other participating blocks, transfers to shareholders are governed by local regulations and the best estimate projections of policyholder dividends are provided for in the policy liabilities. Actual dividend scales are managed consistent with the Company’s participating policyholder dividend policy and are approved annually by each subsidiary’s Board of Directors. Total policyholder dividends were $1,354 in 2010 (2009 – $1,519).

c) Assets backing policy liabilities, other liabilities and capital

Assets are segmented and matched to liabilities with similar underlying characteristics by product line and major currency. The Company has established target investment strategies and asset mixes for each asset segment supporting policy liabilities, which take into account the risk attributes of the liabilities supported by the assets and expectations of market performance. Liabilities with rate and term guarantees are predominantly backed by fixed-rate instruments on a cash flow matching basis for a targeted duration horizon.

38 2010 Annual Report

Longer duration cash flows on these liabilities as well as on adjustable products such as participating life insurance are backed by a broader range of asset classes, including equity and other non-fixed income investments. The Company’s equity is invested in a range of debt and equity investments, both public and private.

Changes in the fair value of fixed income assets backing policy liabilities that are not judged by the Company to be other than temporary would have a limited impact on the Company’s earnings wherever there is an effective matching of the assets and liabilities, as these changes would be substantially offset by corresponding changes in the value of the actuarial liabilities. The fair value of assets backing policy liabilities as at December 31, 2010 was estimated at $154,790 (2009 – $143,628).

The fair value of assets backing capital and other liabilities as at December 31, 2010 was estimated at $66,695 (2009 – $64,081).

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

	Individual insurance				Annuities and pensions		Other policy liabilities(1)		Other liabilities(2)		Capital(3)		Total
As at December 31, 2010	Participating		Non- participating
Assets
Bonds	$	21,822	$	21,231	$	24,082	$	12,581	$	8,102	$	13,742	$	101,560
Stocks		4,665		2,763		190		431		630		1,796		10,475
Mortgages		4,437		4,193		7,572		3,868		11,525		221		31,816
Private placements		2,747		4,769		8,040		3,200		845		2,742		22,343
Real estate		1,909		2,395		735		1,204		97		18		6,358
Other		6,090		4,199		4,886		3,935		13,292		12,718		45,120
Total	$	41,670	$	39,550	$	45,505	$	25,219	$	34,491	$	31,237	$	217,672
	Individual insurance				Annuities and pensions		Other  policy liabilities(1)		Other liabilities(2)		Capital(3)		Total
As at December 31, 2009	Participating		Non- participating
Assets
Bonds	$	20,982	$	16,243	$	21,584	$	8,106	$	6,007	$	12,185	$	85,107
Stocks		4,218		2,443		110		400		442		2,075		9,688
Mortgages		4,525		4,056		7,853		3,825		10,201		239		30,699
Private placements		2,743		4,342		8,970		2,955		631		3,271		22,912
Real estate		2,052		2,234		752		747		93		19		5,897
Other		6,532		5,132		5,369		5,514		13,590		15,405		51,542
Total	$	41,052	$	34,450	$	44,638	$	21,547	$	30,964	$	33,194	$	205,845

⁽¹⁾ Other policy liabilities include group insurance, and individual and group health including long-term care insurance.

⁽²⁾ Other liabilities include non-insurance liabilities.

⁽³⁾ Capital is defined in note 14.

d) Significant policy liability valuation assumptions

The determination of policy liabilities involves the use of estimates and assumptions.

Policy liabilities have two major components: a best estimate amount 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 Company’s exposure to measurement uncertainty.

2010 Annual Report 39

Best estimate assumptions

Best estimate assumptions are made with respect to mortality and morbidity, investment returns, policyholder behaviour, operating expenses and certain taxes. Actual experience is monitored to assess whether the assumptions remain appropriate. Best estimate assumptions are reviewed annually and are changed as warranted. 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 is a key assumption for life insurance and certain forms of annuities. Mortality assumptions are based on the Company’s internal experience as well as industry past and emerging experience. Assumptions are differentiated by sex, underwriting class, policy type and geographic market. Morbidity relates to the occurrence of accidents and sickness for insured risks. Morbidity is a key assumption for long-term care insurance, disability insurance, critical illness and other forms of individual and group health benefits. Morbidity assumptions are based on the Company’s internal experience as well as industry past and emerging experience and are established for each type of morbidity risk and geographic market.	The Company maintains 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 the overall 2010 experience was favourable when compared to the Company’s assumptions. Morbidity is also monitored monthly and the overall 2010 experience was unfavourable when compared to the Company’s assumptions, primarily related to long-term care experience in the United States.
Investment returns	The Company segments assets to support liabilities by business segment and geographic market and establishes investment strategies for each liability segment. The projected cash flows from these assets are combined with projected cash flows from future asset purchases/sales to determine expected rates of return on these assets for future years. The investment strategies are based on the target investment policies for each segment and the re-investment returns are derived from current and projected market rates for fixed interest investments and a projected outlook for non-fixed interest assets. Investment return assumptions include expected future asset credit losses on fixed income investments. Credit losses are projected based on past Company and industry experience as well as specific reviews of the current investment portfolio. Investment return assumptions for each asset class also incorporate expected investment management expenses that are derived from internal cost studies. The costs are attributed to each asset class to develop unitized assumptions per dollar of asset for each asset class.	The Company’s policy of closely matching the cash flows of assets with those of the corresponding liabilities is designed to mitigate 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 CALM, the re-investment rate is developed using interest rate scenario testing and reflects the interest rate risk positions. In 2010, the movement in interest rates adversely impacted the Company’s net income. The exposure to credit losses is managed against policies that limit concentrations by issuer, corporate connections, ratings, sectors and geographic regions. On participating policies and some non-participating policies credit loss experience is passed back to policyholders through the investment return crediting formula. For other policies, the premiums and benefits reflect the Company’s assumed level of future credit losses at contract inception or most recent contract adjustment date. The Company holds explicit provisions in actuarial liabilities for credit risk including provisions for adverse deviation. In 2010, credit loss experience on both bonds and mortgages was favourable when compared to the Company’s assumptions. Stocks, real estate and other non-fixed income assets are used to support liabilities where investment return experience is passed back to policyholders through dividends or credited investment return adjustments. Stocks, real estate, oil and gas and other non-fixed income assets are also used to support long-dated obligations in the Company’s annuity and pensions businesses and for long-dated insurance obligations on contracts where the investment return risk is borne by the Company. In 2010, actual investment experience on common stocks backing policyholder liabilities was favourable while the net experience on other non-fixed income assets was unfavourable when compared to the Company’s assumptions. In 2010, actual investment experience for segregated fund business from changes in the market value of funds under management was unfavourable. In 2010, investment expense experience was favourable when compared to the Company’s assumptions.

40 2010 Annual Report

Nature of factor and assumption methodology		Risk management
Policyholder behaviour	Policies are terminated through lapses and surrenders, where lapses represent the termination of policies due to non-payment of premiums and surrenders represent the voluntary termination of policies by policyholders. Premium persistency represents the level of ongoing deposits on contracts where there is policyholder discretion as to the amount and timing of deposits. Policy termination and premium persistency assumptions are primarily based on the Company’s recent experience adjusted for expected future conditions. Assumptions reflect differences by type of contract within each geographic market.	The Company seeks to design products that minimize financial exposure to lapse, surrender and other policyholder behaviour risk. The Company monitors lapse, surrender and other policyholder behaviour experience. In aggregate, 2010 policyholder behaviour experience was unfavourable when compared to the Company’s 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, including associated overhead expenses. The expenses are derived from internal cost studies projected into the future with an allowance for inflation. For some developing businesses, there is an expectation that unit costs will decline as these businesses grow. Taxes reflect assumptions for future premium taxes and other non-income related taxes. For income taxes, policy liabilities are adjusted only for temporary tax timing and permanent tax rate differences on the cash flows available to satisfy policy obligations.	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 2010 were favourable when compared to the Company’s assumptions used in the computation of actuarial liabilities. The Company prices its products to cover the expected cost of taxes.
Policyholder dividends, experience rating refunds, and other adjustable policy elements	The best estimate projections for policyholder dividends and experience rating refunds, and other adjustable elements of policy benefits are determined to be consistent with management’s expectation of how these elements will be managed should experience emerge consistently with the best estimate assumptions used for mortality and morbidity, investment returns, rates of policy termination, operating expenses and taxes.	The Company monitors policy experience and adjusts policy benefits and other adjustable elements to reflect this experience. Policyholder dividends are reviewed annually for all businesses under a framework of Board approved policyholder dividend policies.
Foreign currency	Foreign currency risk results from a mismatch of the currency of liabilities and the currency of the assets designated to support these obligations. Where a currency mismatch exists, the assumed rate of return on the assets supporting the liabilities is reduced to reflect the potential for adverse movements in exchange rates.	The Company generally matches the currency of its assets with the currency of the liabilities they support, with the objective of mitigating the risk of loss arising from currency exchange rates.

The Company’s practice is to review actuarial assumptions on an annual basis as part of its review of methods and assumptions (note 6(f)).

The sensitivity of after-tax income to changes in non-economic assumptions underlying policy liabilities is shown below, assuming that there is a simultaneous change in the assumption across all business units.

In practice, experience for each assumption will frequently vary by geographic market and business and assumption updates are made on a business/geographic specific basis. Actual results can differ materially from these estimates for a variety of reasons including the interaction among these factors when more than one changes, changes in actuarial and investment return and future investment activity assumptions, changes in business mix, effective tax rates and other market factors, and the general limitations of our internal models.

Most participating business is excluded from this analysis because of the ability to pass both favourable and adverse experience to the policyholders through the participating dividend adjustment.

Sensitivity of policy liabilities to changes in non-economic assumptions

	Decrease in after-tax income
For the years ended December 31,	2010			2009
Policy related assumptions
2% adverse change in future mortality rates(1)
Products where an increase in rates increases policy liabilities	$	(300	)	$	(200	)
Products where a decrease in rates increases policy liabilities		(300	)		(300	)
5% increase in future morbidity rates(2), (3)		(1,100	)		(1,100	)
10% adverse change in future termination rates		(1,000	)		(1,000	)
5% increase in future expense levels		(300	)		(300	)

⁽¹⁾ An increase in mortality rates will generally increase policy liabilities for life insurance contracts whereas a decrease in mortality rates will generally increase policy   liabilities for policies with longevity risk such as payout annuities.

⁽²⁾ No amounts related to morbidity risk are included for policies where the policy liability provides only for claims costs expected over a short period, generally less than one   year, such as Group Life and Health.

⁽³⁾ The impacts of the sensitivities on long-term care for morbidity, mortality and lapse are assumed to be moderated by partial offsets from the Company’s ability to   contractually raise premium rates in such events, subject to state regulatory approval.

2010 Annual Report 41

Provision for adverse deviation assumptions

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

These margins increase policy 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. Specific guidance is also provided for other risks such as market, credit, expense and mortality risks. For other risks which are not specifically addressed by the Canadian Institute of Actuaries, a range is provided of five per cent to 20 per cent of the expected experience assumption, taking into account the risk profiles of the business. The Company uses assumptions within the permissible ranges, taking into account the risk profile of the business.

e) Change in policy liabilities

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

For the year ended December 31, 2010	Actuarial liabilities			Other policy liabilities(1)			Policy liabilities
Balance, January 1	$	134,305		$	7,382		$	141,687
New policies		3,489			–			3,489
Normal in-force movement		7,393			887			8,280
Changes in methods and assumptions		2,880			(9	)		2,871
Currency impact		(4,157	)		(226	)		(4,383	)
Balance, December 31	$	143,910		$	8,034		$	151,944
For the year ended December 31, 2009
Balance, January 1	$	138,408		$	7,936		$	146,344
New policies		6,587			–			6,587
Normal in-force movement		3,357			405			3,762
Changes in methods and assumptions		1,576			31			1,607
Currency impact		(15,623	)		(990	)		(16,613	)
Balance, December 31	$	134,305		$	7,382		$	141,687

⁽¹⁾ Other policy liabilities is comprised of benefits payable and provision for unreported claims and policyholder amounts on deposit.

f) Changes in actuarial methods and assumptions

The Company examines the assumptions used in determining policy liabilities on an ongoing basis to ensure they appropriately reflect emerging experience and changes in risk profile. Annually, the Company conducts a comprehensive review of all actuarial methods and assumptions. Changes to methods and assumptions used in determining policy liabilities will result in a change to projected value of policy cash flows and, therefore, to policy liabilities. The net impact of changes in valuation methods and assumptions was an increase in policy liabilities of $2,871 (2009 – $1,607). This is composed of a decrease of $76 (2009 – $37) to participating policyholders’ policy liabilities, a decrease of $2 (2009 – increase of $18) to policy liabilities impacting non-controlling interest in subsidiaries, and an increase of $2,949 (2009 – $1,626) to policy liabilities that impact the shareholders’ account. As a result of these changes, shareholders’ pre-tax income decreased by $2,949 (2009 – $1,626). These pre-tax amounts were reported in the Corporate and Other segment.

In 2010, the $2,871 impact on policy liabilities for changes in assumptions and model enhancements included increases for mortality/morbidity, policyholder behaviour, investment returns and refinements in modeling of liability cash flows, with decreases in policy liabilities for expenses. Policy liabilities increased by $903 for changes to mortality/morbidity assumptions, driven by morbidity increases in the Long-Term Care business that were partially offset by mortality updates in Canadian Individual Insurance. Policy liabilities increased $650 for updates to policyholder behaviour assumptions, most significantly for policyholder behaviour assumptions on variable annuity and segregated fund guarantee products, and in Canadian Individual Insurance for renewable term business. Policy liabilities increased $1,454 for updating volatility and mean return assumptions for variable annuity business and from reductions in the ultimate re-investment rates and for spread assumptions on corporate bonds. Policy liabilities were reduced by $153 from updates to investment and policy maintenance expenses. A number of business specific modeling refinements were made to improve the projection of the future cash flows on in-force business, resulting in a net increase in policy liabilities of $17. Included in these were refinements to modeling of liability cash flows offset by model refinements for the calculation of future tax provisions for asset timing differences in the U.S.

The $1,878 impact on policy liabilities for changes in methods and assumptions in 2009 included increases for mortality/morbidity, surrender and other policyholder behaviour assumptions and modeling refinements, partially offset by releases related to expenses and investment returns. Policy liabilities increased by $485 for changes to mortality/morbidity assumptions, driven by increases in long-term care claims cost assumptions offset by reductions due to updated life insurance mortality assumptions in several business units. Policy liabilities increased by $1,505 for changes in surrender and other policyholder behaviour assumptions, primarily related to surrender assumptions for variable annuity and other segregated fund guarantee policies, termination assumptions for life insurance

42 2010 Annual Report

businesses, and lapse assumptions for group long-term care business. Model refinements, including data refinements and changes in modeling methodology increased policy liabilities by a net $346 (including prior year adjustments of $271). Policy liabilities decreased by $138 for expense assumptions driven by reductions in projected investment expenses, and decreased by $320 related to investment returns due to updated investment strategies being reflected in the valuation.

Note 7    ^    Risk Management

Manulife Financial is a financial institution offering insurance, wealth and asset management products and services, which subjects the Company to a broad range of risks. The Company manages these risks within an enterprise-wide risk management framework. The Company’s goal in managing risk is to strategically optimize risk taking and risk management to support long-term revenue, earnings and capital growth. The Company seeks to achieve this by capitalizing on business opportunities that are aligned with the Company’s risk taking philosophy, risk appetite and return expectations; by identifying, measuring and monitoring key risks taken; and by executing risk control and mitigation programs.

a) Market risk

Market risk management strategy overview

The Company’s overall strategy to manage its market risks incorporates several component strategies, each targeted to manage one or more of the market risks arising from the Company’s businesses. The following table outlines the Company’s key market risks and identifies the risk management strategies which contribute to managing these risks.

	Publicly traded equity performance risk		Interest rate risk		Alternative non-fixed income asset performance risk		Foreign exchange risk
Product design and pricing		X		X		X		X
Variable annuity guarantee dynamic hedging		X		X				X
Macro equity risk hedging		X						X
Asset liability management		X		X		X		X
Foreign exchange management								X

Key risk factors

Publicly traded equity performance risk

Publicly traded equity performance risk arises from a variety of sources, including guarantees associated with off-balance sheet products, asset based fees, investments in publicly traded equities supporting general fund products and surplus investments in publicly traded equities.

For off-balance sheet segregated funds or variable annuities, a sustained decline in public equity markets would likely increase the cost of guarantees and reduce asset based fee revenues. A sustained increase in equity market volatility would likely increase the costs of hedging the guarantees provided.

Where publicly traded equity investments are used to support policy liabilities, the policy valuation incorporates projected investment returns on these assets. If actual returns are lower than the expected returns, the Company’s policy liabilities will increase, reducing net income attributed to shareholders and regulatory capital ratios. Further, for products where the investment strategy applied to future cash flows in the policy valuation includes investing a specified portion of future cash flows in publicly traded equities, a decline in the value of publicly traded equities relative to other assets could require the Company to change the investment mix assumed for future cash flows, increasing policy liabilities and reducing net income attributed to shareholders. In addition, to the extent publicly traded equities are held as AFS, other than temporary impairments that arise will reduce income.

Interest rate risk

Interest rate and spread risk arises from general fund guaranteed benefit products, general fund adjustable benefit products with minimum rate guarantees, general fund products with guaranteed surrender values, off-balance sheet products with minimum benefit guarantees and from surplus fixed income investments.

Interest rate and spread risk arises within the general fund primarily due to the uncertainty of future returns on investments to be made as assets mature and as recurring premiums are received and must be reinvested to support longer dated liabilities. Interest rate risk also arises due to minimum rate guarantees and guaranteed surrender values on products where investment returns are generally passed through to policyholders.

A general decline in interest rates, without a change in corporate bond spreads and swap spreads, will reduce the assumed yield on future investments used in the valuation of policy liabilities, resulting in an increase in policy liabilities and a reduction in net income. A general increase in interest rates, without a change in corporate bond spreads and swap spreads, will result in a decrease in policy liabilities and an increase in net income. In addition, decreases in corporate bond spreads and increases in swap spreads will result in an increase in policy liabilities and a reduction in net income. An increase in corporate bond spreads and a decrease in swap spreads will have the opposite impact. The impact of changes in interest rates and in spreads may be partially offset by changes to credited rates on adjustable products that pass through investment returns to policyholders.

2010 Annual Report 43

For off-balance sheet segregated funds or variable annuities, a sustained increase in interest rate volatility or a decline in interest rates would also likely increase the costs of hedging the benefit guarantees provided.

Alternative non-fixed income asset performance risk

Alternative non-fixed income asset performance risk arises from general fund investments in commercial real estate, timber properties, agricultural properties, oil and gas properties, and private equities.

Where these assets are used to support policy liabilities, the policy valuation incorporates projected investment returns on these assets. If actual returns are lower than the expected returns, the Company’s policy liabilities will increase, reducing net income attributed to shareholders and regulatory capital ratios. Further, for products where the investment strategy applied to future cash flows in the policy valuation includes investing a specified portion of future policy cash flows in alternative non-fixed income assets, a decline in the value of these assets relative to other assets could require the Company to change the investment mix assumed for future cash flows, increasing policy liabilities.

Foreign exchange risk

The Company’s financial results are reported in Canadian dollars. A substantial portion of its business is transacted in currencies other than Canadian dollars, mainly U.S. dollars, Hong Kong dollars and Japanese yen. If the Canadian dollar strengthens, reported earnings would decline and the Company’s reported shareholders’ equity would decline. Further, to the extent that the resultant change in available capital is not offset by a change in required capital, the Company’s regulatory capital ratios would be reduced. A weakening of the Canadian dollar against the foreign currencies in which the Company does business would have the opposite effect, and would increase reported Canadian dollar earnings and shareholders’ equity, and would potentially increase its regulatory capital ratios.

Market risk management strategies

Product design and pricing

The Company’s product design and pricing standards and guidelines are designed to help ensure its product offerings align with its risk taking philosophy and tolerances, and in particular, that incremental risk generated from new sales aligns with its strategic risk objectives and risk targets. The specific design features of the Company’s product offerings, including level of benefit guarantees, policyholder options, fund offerings and availability restrictions as well as its associated investment strategies help to mitigate the level of underlying risk. Management regularly reviews and modifies key features within its product offerings, including premiums and fee charges, with a goal of meeting both profit and risk targets.

Variable annuity guarantee dynamic hedging strategy

The variable annuity dynamic hedging strategy is designed to hedge the sensitivity of variable annuity guarantee policy liabilities and available capital, to both public equity and bond fund performance and interest rate movements. The objective of the dynamic hedging strategy is to offset as closely as possible, the change in the Company’s internally defined economic value of guarantees, with the profit and loss from its hedge asset portfolio. The internal economic value of guarantees moves in close tandem with, but not exactly as, the Company’s variable annuity guarantee policy liabilities, as it reflects best estimate liabilities and does not include any liability provisions for adverse deviations.

The Company’s current hedging approach is to short exchange-traded equity index and government bond futures and execute currency futures and execute lengthening interest rate swaps to hedge sensitivity of policy liabilities to fund performance (delta) and interest rate movements (rho) arising from variable annuity guarantees. The Company dynamically rebalances these hedge instruments as market conditions change, and the liability delta and rho change, in order to maintain the hedged position within established limits. The Company may consider the use of additional hedge instruments opportunistically in the future.

The Company’s variable annuity guarantee dynamic hedging strategy is not designed to completely offset the sensitivity of policy liabilities to all risks associated with the guarantees embedded in these products. The profit (loss) on the hedge instruments will not completely offset the underlying losses (gains) related to the guarantee liabilities hedged because:

ⁿ Policyholder behaviour and mortality experience is not hedged;

ⁿ Provisions for adverse deviation in the policy liabilities are not hedged;

ⁿ A portion of interest rate risk is not hedged;

ⁿ Fund performance on a small portion of the underlying funds is not hedged due to lack of availability of effective exchange traded hedge instruments;

ⁿ Performance of the underlying funds hedged may differ from the performance of the corresponding hedge instruments;

ⁿ Unfavourable realized equity and interest rate volatilities and their correlations may result in higher than expected rebalancing costs; and

ⁿ Not all other risks are hedged.

The variable annuity guarantee dynamic hedging strategy exposes the Company to additional risks. The strategy relies on the execution of derivative transactions in a timely manner and therefore hedging costs and the effectiveness of the strategy may be negatively impacted if markets for these instruments become illiquid. The Company is also subject to counterparty risks arising from the deriva-

44 2010 Annual Report

tive instruments and to the risk of increased funding and collateral demands which may become significant as markets and interest rates increase. The dynamic hedging strategy is highly dependent on complex systems and mathematical models that are subject to error, which rely on forward looking long-term assumptions that may prove inaccurate, and which rely on sophisticated infrastructure and personnel which may fail or be unavailable at critical times. Due to the complexity of the dynamic hedging strategy there may be additional, unidentified risks that may negatively impact the Company’s business and future financial results.

Macro equity risk hedging

The macro equity risk hedging strategy was initiated in the second half of 2010 and is designed to hedge a portion of the Company’s earnings sensitivity to public equity market movements arising from the following sources in order to maintain its overall earnings sensitivity to public equity market movements below targeted levels:

ⁿ Variable annuity guarantees not dynamically hedged;

ⁿ Unhedged provisions for adverse deviation related to variable annuity guarantees dynamically hedged;

ⁿ General fund equity holdings backing non-participating liabilities;

ⁿ Variable life insurance;

ⁿ Variable annuity fees not associated with guarantees; and

ⁿ Fees on segregated funds without guarantees, mutual funds and institutional assets managed.

The Company currently executes its macro equity risk hedging strategy by shorting equity futures and executing currency futures, and rolling them over at maturity. The use of alternative long maturity instruments may be considered opportunistically in the future. The macro equity risk hedging strategy exposes the Company to risks. The strategy relies on the execution of derivative transactions and the ability to execute may be negatively impacted if markets for these instruments become illiquid. The Company is also subject to the risk of increased funding and collateral demands which may become significant as markets increase.

Asset liability management strategy

The Company’s asset liability management strategy is designed to help ensure that the market risks embedded in its assets and liabilities held in the Company’s general fund are effectively managed and that risk exposures arising from these assets and liabilities are maintained below targeted levels. The embedded market risks include risks related to the level and movement of interest rates and credit spreads, public equity market performance, alternative non-fixed income asset performance and foreign exchange rate movements.

General fund product liabilities are segmented into groups with similar characteristics that are supported by specific asset segments. Each segment is managed to a target investment strategy appropriate for the premium and benefit pattern, policyholder options and guarantees, and crediting rate strategies of the products they support. Similar strategies are established for assets in the Company’s surplus account. The strategies are set using portfolio analysis techniques intended to optimize returns, subject to considerations related to regulatory and economic capital requirements, and risk tolerances. They are designed to achieve broad diversification across asset classes and individual investment risks while being suitably aligned with the liabilities they support. The strategies encompass asset mix, quality rating, term profile, liquidity, currency and industry concentration targets.

Foreign exchange risk management strategy

The Company’s foreign exchange risk management strategy is designed to hedge the sensitivity of its regulatory capital ratios to movements in foreign exchange rates. In particular, the objective of the strategy is to offset within acceptable tolerance levels, changes in required capital with changes in available capital that result from movements in foreign exchange rates. These changes occur when assets and liabilities related to business conducted in currencies other than Canadian dollars is translated to Canadian dollars at period ending exchange rates.

The Company’s policy is to generally match the currency of its assets with the currency of the liabilities they support, and similarly, the Company has a policy of generally matching the currency of the assets in its shareholders’ equity account to the currency of its required capital. Where assets and liabilities are not matched, forward contracts and currency swaps are used to stabilize the Company’s capital ratios and its capital adequacy relative to economic capital, when foreign exchange rates change.

Sensitivities and risk exposure measures

Caution related to sensitivities

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

2010 Annual Report 45

Variable annuity and segregated fund guarantees

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

Variable annuity products with Guaranteed Minimum Death Benefit (“GMDB”) features guarantee the contract holder a minimum payment on death of either, depending on the contract features: (a) the total deposits made to the contract adjusted for any partial withdrawals; (b) the total deposits made to the contract adjusted for any partial withdrawals plus a minimum return; or (c) the highest contract fund value on a prior specified anniversary date adjusted for any withdrawals following that specified anniversary date.

Variable annuity products with Guaranteed Minimum Accumulation Benefit (“GMAB”) features guarantee the contract holder a minimum payment at the end of a specified term of either, depending on the contract features: (a) the total deposits made to the contract adjusted for any partial withdrawals; or (b) the highest contract fund valued on a prior specified anniversary date adjusted for any withdrawals following that specified anniversary date.

Variable annuity products with Guaranteed Minimum Income Benefit (“GMIB”) features provide a guaranteed minimum lifetime annuity, which may be elected by the contract holder after a stipulated waiting period (seven to 15 years). The Company ceased selling products with this guarantee in 2004.

Variable annuity products with Guaranteed Minimum Withdrawal Benefit (“GMWB”) features provide contract holders a minimum annual withdrawal amount over a specified time period or in some cases for as long as they live or as long as either they or their spouse lives, of a specified percentage of a benefit base, equaling total deposits adjusted for prior withdrawals in excess of specified allowed amounts. In some cases, depending on contract features, the benefit base may be increased at specified dates either (a) to the contract fund value if higher, or (b) by specified amounts in the case no withdrawals are made by the contract holder.

The table below shows selected information regarding the Company’s variable annuity and segregated fund investment related guarantees gross and net of reinsurance, and net of the business dynamically hedged.

Variable annuity and segregated fund guarantees

As at December 31,	2010						2009
	Guarantee value		Fund value		Amount at risk(4)		Guarantee value		Fund value		Amount at risk(4)
Guaranteed minimum income benefit(1)	$	8,202	$	6,359	$	1,856	$	9,357	$	6,834	$	2,535
Guaranteed minimum withdrawal benefit		62,382		57,331		6,391		58,077		51,669		7,962
Guaranteed minimum accumulation benefit		23,902		25,152		1,980		24,749		25,190		2,213
Gross living benefits(2)	$	94,486	$	88,842	$	10,227	$	92,183	$	83,693	$	12,710
Gross death benefits(3)		16,279		12,736		2,813		18,455		13,282		4,414
Total gross of reinsurance & hedging	$	110,765	$	101,578	$	13,040	$	110,638	$	96,975	$	17,124
Living benefits reinsured	$	7,108	$	5,506	$	1,611	$	8,012	$	5,818	$	2,200
Death benefits reinsured		4,924		4,070		1,052		5,985		4,639		1,577
Total reinsured	$	12,032	$	9,576	$	2,663	$	13,997	$	10,457	$	3,777
Total, net of reinsurance	$	98,733	$	92,002	$	10,377	$	96,641	$	86,518	$	13,347
Living benefits dynamically hedged	$	44,606	$	44,827	$	2,685	$	24,399	$	24,137	$	1,782
Death benefits dynamically hedged		4,685		3,032		424		481		317		10
Total dynamically hedged	$	49,291	$	47,859	$	3,109	$	24,880	$	24,454	$	1,792
Living benefits retained	$	42,772	$	38,509	$	5,931	$	59,772	$	53,738	$	8,728
Death benefits retained		6,670		5,634		1,337		11,989		8,326		2,827
Total, net of reinsurance & dynamic hedging	$	49,442	$	44,143	$	7,268	$	71,761	$	62,064	$	11,555

⁽¹⁾ Contracts with guaranteed long-term care benefits are included in this category.

⁽²⁾ Where a policy includes both living and death benefits, the guarantee in excess of the living benefit is included in the death benefit category as outlined in footnote (3).

⁽³⁾ Death benefits include standalone guarantees and guarantees in excess of living benefit guarantees where both death and living benefits are provided on a policy.

⁽⁴⁾ Amount at risk (in-the-money amount) is the excess of guarantee values over fund values on all policies where the guarantee value exceeds the fund value. This amount is not currently payable. For guaranteed minimum death benefit, the net amount at risk is defined as the current guaranteed minimum death benefit in excess of the current account balance. For guaranteed minimum income benefit, the net amount at risk is defined as the excess of the current annuitization income base over the current account value. For all guarantees, the net amount at risk is floored at zero at the single contract level.

The policy liability established for these benefits was $3,101 at December 31, 2010 (2009 – $1,671). These policy liabilities include the policy liabilities for both the hedged and the unhedged business. For unhedged business, policy liabilities were $2,083 at December 31, 2010 (2009 – $1,738). The policy liabilities for the hedged business were $1,018 at December 31, 2010 (2009 – $(67)). The increase in the policy liabilities for the hedged business was primarily due to the change in the value of the dedicated hedge asset portfolio and the adverse impact from basis changes. The year over year increase in policy liabilities related to the unhedged business was due primarily to the adverse impacts from basis changes and interest rate movements, offset by the favourable impact of improved public equity markets.

46 2010 Annual Report

Variable life insurance guarantees

Deposits related to variable life insurance contracts are invested in segregated fund accounts, and for certain policies, the Company guarantees a minimum death benefit if certain specified premiums are paid by the policyholder, regardless of segregated fund account performance.

The following table shows selected information regarding the variable life insurance contracts referred to above:

Life insurance contracts with guaranteed benefits

As at December 31,	2010		2009
In the event of death
Account value	$	7,824	$	7,520
Net amount at risk(1)	$	270	$	337
Average attained age of contract holders		51		50

⁽¹⁾ The net amount at risk for these policies is defined as the excess of the sum insured over the current account value, when the account value is zero or where contracts specify guarantees to cover the cost of insurance in the event of insufficient account value.

Variable Contracts with Guarantees

Variable contracts with guarantees are invested, at the policyholder’s discretion subject to contract limitations, in various fund types within the segregated fund accounts and other investments. The account balances by investment category are set out below:

Investment categories for variable contracts with guarantees

Investment category
As at December 31,	2010		2009
Equity funds	$	37,258	$	35,883
Balanced funds		57,376		53,588
Bond funds		10,407		9,810
Money market funds		2,796		3,497
Other fixed interest rate investments		1,565		1,717
Total	$	109,402	$	104,495

Benefits incurred and paid for variable contracts with guarantees

For the year ended December 31, 2010, the Company incurred and paid death benefits of $160 (2009 – $273) and living benefits of $202 (2009 – $294).

Publicly traded equity performance risk – risk exposure measures

The tables below show the potential impact on net income attributed to shareholders resulting from an immediate 10, 20 and 30 per cent change in market values of publicly traded equities followed by a return to the expected level of growth assumed in the valuation of policy liabilities. The potential impact is shown before and after taking into account the impact of the change in markets on the hedge assets. While the Company cannot reliably estimate the amount of the change in dynamically hedged variable annuity policy liabilities that will not be offset by the profit or loss on the dynamic hedge assets, the Company makes certain assumptions for the purposes of estimating the impact on shareholders’ net income. The Company assumes that for a 10, 20 and 30 per cent decrease in the market value of public equities, the profit from the hedge assets offsets 80, 75 and 70 per cent, respectively, of the loss arising from the change in the policy liabilities of the guarantees dynamically hedged. For a 10, 20 and 30 per cent market increase in the market value of public equities the loss on the dynamic hedges is assumed to be 120, 125 and 130 per cent of the gain from the dynamically hedged variable annuity policy liabilities, respectively.

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

As at December 31, 2010	-30%			-20%			-10%			+10%			+20%			+30%
Net impact assuming the change in the value of the hedge assets completely offsets the change in the dynamically hedged variable annuity guarantee liabilities(2)	$	(2,430	)	$	(1,470	)	$	(660)		$	520		$	920		$	1,040
Impact of assuming the change in value of the dynamic hedge assets does not completely offset the change in the dynamically hedged variable annuity guarantee liabilities(3)		(500	)		(240	)		(80	)		(60	)		(110	)		(170	)
Net impact assuming the change in value of the dynamic hedge assets does not completely offset the change in the dynamically hedged variable annuity guarantee liabilities(2),(3)	$	(2,930	)	$	(1,710	)	$	(740	)	$	460		$	810		$	870

⁽¹⁾ See “Caution related to sensitivities” above.

⁽²⁾ The impact for component related to general fund equities is calculated as at a point-in-time and does not include: (i) any potential impact on public equity weightings; (ii) any gains or losses on public equities held in the Corporate and Other segment; or (iii) any gains or losses on public equity investments held in Manulife Bank. The sensitivities assume that the participating policy funds are self supporting and generate no material impact on net income attributed to shareholders as a result of changes in equity markets.

⁽³⁾ For a 10, 20 and 30 per cent market decrease the gain on the dynamic hedge assets is assumed to be 80, 75 and 70 per cent of the loss from the dynamically hedged variable annuity policy liabilities, respectively. For a 10, 20 and 30 per cent market increase the loss on the dynamic hedges is assumed to be 120, 125 and 130 per cent of the gain from the dynamically hedged variable annuity policy liabilities, respectively. For presentation purposes, numbers are rounded.

2010 Annual Report 47

As at December 31, 2009(1)	-30%			-20%			-10%			+10%			+20%			+30%
Net impact assuming the change in value of the hedge assets completely offsets the change in the dynamically hedged variable annuity guarantee liabilities(2)	$	(4,370	)	$	(2,670	)	$	(1,200	)	$	970		$	1,530		$	1,810
Impact of assuming the change in value of the hedge assets does not completely offset the change in the dynamically hedged variable annuity guarantee liabilities(3)		(200	)		(90	)		(40	)		(20	)		(60	)		(110	)
Net impact assuming the change in value of the hedge assets does not completely offset the change in the dynamically hedged variable annuity guarantee liabilities(2),(3)	$	(4,570	)	$	(2,760	)	$	(1,240	)	$	950		$	1,470		$	1,700

^(1),(2),(3) See notes in the table above.

Exposures at December 31, 2010 declined as compared to December 31, 2009 primarily due to improvements in global equity markets, the additional in-force variable annuity business the Company initiated dynamic hedging for, and the implementation of its macro equity risk hedging strategy. The increases in the policy liabilities as a result of its annual review of policy valuation assumptions and impact of currency movements partially offset these changes.

Interest rate risk – risk exposure measures

The following table shows the potential impact on net income attributed to shareholders of a change of one per cent, in current government, swap and corporate rates for all maturities across all markets with no change in credit spreads between government, swap and corporate rates, and with a floor of zero on government rates, relative to the rates assumed in the valuation of policy liabilities. The Company also assumes no change to the ultimate reinvestment rate (“URR”).

Potential impact on annual net income attributed to shareholders of an immediate one per cent parallel change in interest rates relative to rates assumed in the valuation of policy liabilities⁽¹⁾

As at December 31,	2010					2009
	-100bp			+100bp		-100bp			+100bp
General fund products(2)	$	(1,400	)	$	1,200	$	(1,900	)	$	1,500
Variable annuity guarantees(3)		(400	)		300		(300	)		100
Total	$	(1,800	)	$	1,500	$	(2,200	)	$	1,600

⁽¹⁾ See “Caution related to sensitivities” above.

⁽²⁾ The sensitivities assume that the participating policy funds are self supporting and generate no material impact on net income attributed to shareholders as a result of changes in interest rates.

⁽³⁾ For variable annuity liabilities that are dynamically hedged, it is assumed that interest rate hedges are rebalanced at 20 basis point intervals.

The decline in exposures was primarily driven by the actions to extend the duration of the Company’s fixed income investments supporting policyholder liabilities. These impacts were partially offset by generally lower interest rates in the markets where we operate and the impact of increases to policy liabilities as a result of the Company’s annual review of policy valuation assumptions.

The potential impact on annual net income attributed to shareholders provided in the table above does not include any impact arising from the sale of fixed income assets held in the Company’s surplus segment. Changes in the market value of these assets may provide a natural economic offset to the interest rate risk arising from the Company’s product liabilities. In order for there to also be an accounting offset, the Company would need to realize a portion of the AFS fixed income unrealized gains or losses.

Alternative non-fixed income asset performance risk – risk exposure measures

The following table shows the potential impact on net income attributed to shareholders resulting from changes in market values of alternative non-fixed income assets different than the expected levels assumed in the valuation of policy liabilities.

Potential impact on net income attributed to shareholders arising from changes in alternative non-fixed income asset returns^(1),(2)

As at December 31,	2010					2009
	-10%			+10%		-10%			+10%
Real estate, agriculture and timber assets	$	(500	)	$	600	$	(400	)	$	400
Private equities and other alternative non-fixed income assets		(400	)		400		(200	)		200
Alternative non-fixed income assets	$	(900	)	$	1,000	$	(600	)	$	600

⁽¹⁾ See “Caution related to sensitivities” above.

⁽²⁾ This impact is calculated as at a point-in-time impact and does not include: (i) any potential impact on non-fixed income asset weightings; (ii) any gains or losses on non-fixed income investments held in the Corporate and Other segment; or (iii) any gains or losses on non-fixed income investments held in Manulife Bank. The sensitivities assume that the participating policy funds are self supporting and generate no material impact on net income attributed to shareholders as a result of changes in alternative non-fixed income asset returns.

The increased sensitivity from December 31, 2009 to December 31, 2010 is primarily related to the second order impact of the net decline in interest rates as well as the higher future non-fixed income demand in the Long-Term Care business in the U.S. Insurance segment anticipated from future increases in policyholder premiums.

48 2010 Annual Report

b) Foreign currency risk for financial instruments

The Company generally matches the currency of its assets with the currency of the policy liabilities they support, with the objective of mitigating risk of loss arising from currency exchange rate changes. The Company’s unmatched currency exposure was primarily limited to its foreign denominated AFS bonds where the unrealized foreign currency exchange gains and losses are recorded in OCI and realized foreign currency exchange gains and losses on sale of AFS bonds are recognized in income. As at December 31, 2010, the Company did not have a material unmatched currency exposure related to these foreign denominated AFS bonds.

c) Liquidity risk

Liquidity risk is the risk that sufficient funds are available to meet both expected and unexpected cash and/or collateral demands in a timely and cost-effective manner. Under stressed conditions, unexpected cash demands could arise primarily from an increase in the level of policyholders either systemically terminating policies with cash surrender values, or not renewing policies when they mature, deposit withdrawals and from an increase in the level of borrowers renewing or extending their loans when they mature.

The Company’s liquidity risk management strategies are designed to ensure that sufficient funds are readily available to meet its financial obligations as they come due. Liquidity risk is mitigated through the Company’s holdings of cash or cash equivalents, investment grade marketable securities and its broad access to various funding sources. The Company maintains centralized pools of high quality liquid assets and investment grade marketable securities to support its operations and contingent liquidity demands. Funding is obtained through policy premiums, deposits, asset securitization, and bank credit and other funding programs.

The Company mitigates liquidity risk by maintaining operating and strategic liquidity levels above minimum internal requirements. Minimum operating liquidity is set at a level of one month’s operating cash outflows. Strategic liquidity is established based on immediate and longer term liquidity requirements under stress conditions whereby policyholder liabilities and unencumbered liquid assets are risk-adjusted for their potential for withdrawals and convertibility to cash respectively. Pledged assets are not considered as available liquid assets to support obligations in either operating or strategic liquidity measures.

The following table outlines the expected maturity of the Company’s significant financial liabilities. The expected maturity dates are based on estimates made by management.

Maturity of financial liabilities^(1),(2)

As at December 31, 2010	Less than 1 year		1 to 3 years		3 to 5 years		Over 5 years		Total
Long-term debt	$	407	$	350	$	3,047	$	1,639	$	5,443
Capital instruments(3)		550		–		–		3,518		4,068
Derivative liabilities		144		400		338		2,522		3,404
Bank deposits		13,558		1,462		1,157		123		16,300
Consumer notes		147		159		395		277		978

⁽¹⁾ The amounts shown above are net of the related unamortized deferred issue costs.

⁽²⁾ Class A preferred shares, Series 1 are redeemable by the Company by payment of cash or issuance of MFC common shares and are convertible at the option of the holder into MFC common shares on or after December 15, 2015. These shares have not been included in the above table.

⁽³⁾ $550 subordinated debentures that were redeemed on February 16, 2011 are included in “Less than 1 year”.

d) Credit risk

Credit risk is the risk of loss due to the inability or unwillingness of a borrower or counterparty to fulfill its payment obligation to the Company. Worsening or continued poor economic conditions could result in borrower or counterparty defaults or downgrades, and could lead to increased provisions or impairments related to the Company’s general fund invested assets and off-balance sheet derivative financial instruments, and an increase in provisions for future credit impairments to be included in policy liabilities. Counterparty credit exposure arises primarily from derivatives and reinsurance activities. Any of the Company’s reinsurance providers being unable or unwilling to fulfill their contractual obligations related to the liabilities the Company cedes to them could lead to an increase in policy liabilities.

The Company’s exposure to credit risk is managed through risk management policies and procedures which include a defined credit evaluation and adjudication process, delegated credit approval authorities and established exposure limits by borrower, corporate connection, quality rating, industry and geographic region. Reinsurance counterparty exposure is measured as both current exposure and potential future exposures reflecting the level of ceded liabilities. Reinsurance and insurance counterparties must also meet minimum risk rating criteria.

The Company also ensures where warranted that loans, including mortgages, private placement and bank loans, are secured by collateral, the nature of which depends on the credit risk of the counterparty.

An allowance for losses on loans is established when a loan becomes impaired. Provisions for loan losses are calculated to reduce the carrying value of the loans to estimated net realizable value. The establishment of such provisions takes into consideration normal historical credit loss levels and future expectations, with an allowance for adverse deviations. In addition, actuarial liabilities include general provisions for credit losses from future asset impairments. Impairments are identified through regular monitoring of all credit related exposures, considering such information as general market conditions, industry and borrower specific credit events and any other relevant trends or conditions. Allowance for losses on reinsurance contracts is established when a reinsurance counterparty becomes unable or unwilling to fulfill their contractual obligations. The allowance for loss is based on current recoverables and ceded actuarial liabilities.

2010 Annual Report 49

Credit risk associated with derivative counterparties is discussed in note 7(g).

Credit exposure

The following table outlines the gross carrying amount of financial instruments subject to credit exposure, without taking into account any collateral held or other credit enhancements.

As at December 31,	2010		2009
Bonds
Fair value option	$	85,040	$	71,544
Available-for-sale		16,520		13,563
Loans
Mortgages		31,816		30,699
Private placements		22,343		22,912
Policy loans		6,486		6,609
Bank loans		2,355		2,457
Derivative assets		3,909		2,680
Accrued investment income		1,621		1,540
Other financial assets		2,362		2,402
Total	$	172,452	$	154,406

Credit quality

For mortgages and private placements, the Company evaluates credit quality through regular monitoring of credit related exposures, considering both qualitative and quantitative factors in assigning an internal risk rating. These ratings are updated at least annually.

A write-off is recorded, when internal risk ratings indicate that a loss represents the most likely outcome. The assets are designated as non-accrual and an allowance is established based on an analysis of the security and repayment sources.

The following table summarizes the recorded investment by credit quality indicator.

As at December 31, 2010	AAA		AA		A		BBB		BB		B & lower		Total
Loans (excluding Manulife Bank of Canada)
Private placements	$	573	$	4,729	$	5,659	$	9,084	$	1,000	$	1,298	$	22,343
Mortgages		2,039		1,735		3,226		12,743		809		360		20,912
Total	$	2,612	$	6,464	$	8,885	$	21,827	$	1,809	$	1,658	$	43,255

For loans and mortgages held by Manulife Bank of Canada, the Company assigns an internal risk rating ranging from “1 – little or no risk” to “8 – doubtful”. The internal risk ratings are updated at least annually and reflect the credit quality of the lending asset including such factors as original credit score and product characteristics.

Full or partial write-offs of loans are recorded when management believes there is no realistic prospect of full recovery. Write-offs, net of recoveries, are deducted from the allowance for credit losses. All impairments are captured in the allowance for credit losses.

The following table summarizes the recorded investment by credit quality indicator.

As at December 31, 2010	1		2		3		4 & lower		Total
Manulife Bank of Canada
Mortgages	$	–	$	9,038	$	1,866	$	–	$	10,904
Bank loans		1		446		1,883		25		2,355
Total	$	1	$	9,484	$	3,749	$	25	$	13,259

Past due or credit impaired financial assets

The Company provides for credit risk by establishing allowances against the carrying value of impaired loans, recognizing OTTI on AFS securities. In addition, the Company reports as an impairment certain declines in the fair value of bonds designated as fair value which it deems represents an impairment.

50 2010 Annual Report

The following table summarizes the carrying value of the Company’s financial assets that are considered past due or impaired.

	Past due but not impaired
As at December 31, 2010	Less than 90 days		90 days and greater		Total past due but not impaired		Total impaired
Bonds
Fair value option	$	1	$	3	$	4	$	152
Available-for-sale		–		–		–		34
Loans
Private placements		304		–		304		265
Mortgages and bank loans		49		63		112		83
Other financial assets		15		20		35		2
Total	$	369	$	86	$	455	$	536

	Past due but not impaired
As at December 31, 2009	Less than 90 days		90 days and greater		Total past due but not impaired		Total impaired
Bonds
Fair value option	$	50	$	–	$	50	$	139
Available-for-sale		78		3		81		7
Loans
Private placements		152		1		153		361
Mortgages and bank loans		56		49		105		118
Other financial assets		4		32		36		–
Total	$	340	$	85	$	425	$	625

The following table summarizes the Company’s loans that are considered impaired.

Impaired loans as at and for the year ended December 31, 2010	Recorded investment(1)		Unpaid principal balance		Related allowance		Average recorded investment(1)		Interest income recognized
Private placements	$	349	$	421	$	84	$	445	$	–
Mortgages and bank loans		117		124		34		186		–
Total	$	466	$	545	$	118	$	631	$	–

⁽¹⁾ Recorded investment is the carrying amount of the investment after any direct write-offs, but before deducting any related allowances for impairment.

Impaired loans as at and for the year ended December 31, 2009	Recorded investment(1)		Unpaid principal balance		Related allowance		Average recorded investment(1)		Interest income recognized
Private placements	$	489	$	496	$	128	$	467	$	–
Mortgages and bank loans		173		180		55		147		–
Total	$	662	$	676	$	183	$	614	$	–

⁽¹⁾ Recorded investment is the carrying amount of the investment after any direct write-offs, but before deducting any related allowances for impairment.

Allowance for loan losses

For the years ended December 31,	2010									2009
	Mortgages and bank loans			Private placements			Total			Mortgages and bank loans			Private placements			Total
Balance, January 1	$	55		$	128		$	183		$	43		$	165		$	208
Provisions		45			70			115			56			81			137
Recoveries		(11	)		(33	)		(44	)		(6	)		(63	)		(69	)
Write-offs(1)		(55	)		(81	)		(136	)		(38	)		(55	)		(93	)
Balance, December 31	$	34		$	84		$	118		$	55		$	128		$	183

⁽¹⁾ Includes disposals and impact of currency translation.

2010 Annual Report 51

e) Securities lending, repurchase and reverse repurchase transactions

The Company engages in securities lending to generate fee income. Collateral, which exceeds the market value of the loaned securities, is 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 of the underlying loaned securities fluctuates. As at December 31, 2010, the Company had loaned securities (which are included in invested assets) with a market value of $1,650 (2009 – $1,221). The Company holds collateral with a current market value that exceeds the value of securities lent in all cases.

The Company engages in repurchase and reverse repurchase transactions to generate fee income and to take possession of securities to cover short positions in similar instruments. As at December 31, 2010 the Company had engaged in reverse repurchase transactions of $578 (2009 – $2,590) which are recorded as a short-term receivable. There were outstanding repurchase agreements of $461 as at December 31, 2010 (2009 – nil).

f) Mortgage securitization

The Company securitizes insured fixed and variable rate commercial and residential mortgages through creation of mortgage backed securities under the Canadian Mortgage Bond Program and Government of Canada NHA MBS Auction program. The Company also securitizes the Home Equity Lines of Credit (“HELOC”) through transfers of assets to a special purpose entity or trust that issues securities to investors. The Company retains the servicing responsibilities for these mortgages.

The following table summarizes the Company’s securitization and sales activity and its impact on the Consolidated Statement of Operations:

For the year ended December 31, 2010	HELOCs		Commercial mortgages
Securitized and sold	$	500	$	74
Gross cash proceeds		500		74
Retained interests		26		8
Cash flow received on retained interest		–		9
Pre-tax gain on sale, net of issuance costs		16		7
Retained interest assumptions, as at the date of securitization
Weighted average life (years)		n/a		2.6
Excess spread		1.2%		2.2%
Discount rate		3.0%		2.0%

There were no securitization and sales activity relating to residential mortgages in 2010.

During 2009, there were no significant securitization and sales activities.

The following table presents the Company’s key assumptions and sensitivity of the fair value of the retained interest to adverse change in those assumptions. As the sensitivity is hypothetical, it should be viewed with caution.

As at December 31, 2010	HELOCs(1)			Commercial mortgages
Fair value of retained interests	$	26		$	24
Weighted average life (years)		n/a			2.3
Excess spread(2)		1.0%			2.7%
Impact on fair value of a 10% adverse change	$	(2	)		n/a
Impact on fair value of a 20% adverse change	$	(5	)		n/a
Discount rate		3.0%			1.8%
Impact on fair value of a 10% adverse change	$	–		$	(2	)
Impact on fair value of a 20% adverse change	$	–		$	(5	)

⁽¹⁾ Prepayment rate assumptions are not applicable for HELOCs due to the nature of the revolving lines of credit with no fixed payment schedules.

⁽²⁾ Excess spread assumptions are not applicable for commercial mortgages as the rates are fixed. Excess spread is the excess of interest received on the underlying loan and the interest paid on the issued security.

There are no expected credit losses as the loans are government guaranteed.

The following table presents information about loans managed for components of reported and securitized assets.

As at December 31, 2010
Mortgages	$	33,929
Other loans		2,335
Total loans managed(1)	$	36,264
Less: mortgages securitized(2)		(901	)
Less: third party owned mortgages and other loans		(3,547	)
Total mortgages reported on the Consolidated Balance Sheet	$	31,816

⁽¹⁾ Includes $90 of impaired loans, $50 in allowance for credit losses and $0.2 in net write-offs.

⁽²⁾ The maximum exposure to loss is nil as all loans are government guaranteed.

52 2010 Annual Report

g) Derivatives

The Company’s exposure to loss on derivatives is limited to the amount of any net gains that may have accrued with a particular counterparty. Gross derivative counterparty exposure is measured as the total fair value (including accrued interest) of all outstanding contracts in a gain position (excluding any offsetting contracts in negative positions). The Company seeks to limit the risk of credit losses from derivative counterparties by: establishing a minimum acceptable counterparty credit rating of A- from external rating agencies; entering into master netting arrangements; and entering into Credit Support Annex agreements, whereby collateral must be provided when the exposure exceeds a certain threshold. All contracts are held with counterparties rated A- or higher. As at December 31, 2010, the percentage of the Company’s derivative exposure which were with counterparties rated AA- or higher amounted to 31 per cent (2009 – 26 per cent). The largest single counterparty exposure as at December 31, 2010 was $954 (2009 – $561). The Company’s net exposure to credit risk was mitigated by $1,226 fair value of collateral held as security as at December 31, 2010 (2009 – $1,148). In accordance with customary terms of Credit Support Annex agreements, the Company is permitted to sell or repledge collateral held.

As at December 31, 2010, the maximum exposure to credit risk related to derivatives after taking into account netting agreements and without taking into account the fair value of any collateral held, was $465 (2009 – $903). Without master netting agreements, maximum exposure to credit risk would have been $4,101 (2009 – $2,680).

h) Risk concentrations

The Company establishes enterprise-wide investment portfolio level targets and limits with the objective of ensuring that portfolios are diversified across asset classes and individual investment risks. The Company monitors actual investment positions and risk exposures for concentration risk and reports such findings to the Executive Risk Committee and the Risk Committee of the Board of Directors.

As at December 31,	2010		2009
Bonds and private placements rated as investment grade BBB or higher(1)		95%		95%
Government bonds as a per cent of total bonds		42%		31%
Government private placements as a per cent of total private placements		17%		15%
Highest exposure to a single non-government bond and private placement issuer	$	622	$	696
Largest single issuer as a per cent of the total stock portfolio		2%		7%
Income producing commercial office properties (2010 – 82% of total real estate, 2009 – 80%)	$	5,188	$	4,725
Largest concentration of mortgages and real estate(2) – Ontario, Canada (2010 – 26%, 2009 – 26%)	$	9,959	$	9,402

⁽¹⁾ Investment grade bonds and private placements include 29% rated A, 19% rated AA and 27% rated AAA (2009 – 31%, 19% and 20%, respectively) based on external ratings where available.

⁽²⁾ Mortgages and real estate are diversified geographically and by property type.

The following table shows the distribution of the bond and private placement portfolio by sector and industry.

Bonds and private placements

As at December 31,	2010				2009
	Carrying value		% of total		Carrying value		% of total
Government & agency	$	46,598		38	$	29,651		28
Financial		20,724		17		21,647		20
Utilities		17,760		14		17,076		16
Energy		8,478		7		8,271		8
Industrial		6,948		6		6,413		6
Securitized (ABS/MBS)		6,787		5		7,691		7
Consumer (non-cyclical)		5,561		4		5,474		5
Other		11,047		9		11,796		10
Total	$	123,903		100	$	108,019		100

i) Insurance risk

Insurance risk is the risk of loss due to actual experience differing from the experience assumed when a product was designed and priced with respect to claims, policyholder behaviour and expenses. A variety of assumptions are made related to the future level of claims, policyholder behaviour, expenses and sales levels when products are designed and priced as well as in the determination of actuarial liabilities. The development of assumptions for future claims are based on Company and industry experience and predictive models; assumptions for policyholder behaviours are based on Company experience and predictive models. Such assumptions require a significant amount of professional judgment and therefore, actual experience may be materially different than the assumptions made by the Company. Claims may be impacted by the unusual onset of disease or illness, natural disasters, large scale manmade disasters and acts of terrorism. Policyholder premium payment patterns, policy renewal, withdrawal and surrender activity is influenced by many factors including market and general economic conditions, and the availability and price of other products in the marketplace.

2010 Annual Report 53

Manulife Financial manages insurance risk through global product design, pricing standards and guidelines and a global life underwriting manual. Each business unit establishes underwriting policies and procedures, including criteria for approval of risks and claims adjudication policies and procedures. Effective June 29, 2010, the Company increased its global retention limit for individual life insurance from US$20 to US$30 and for survivorship life insurance from US$25 to US$35. Lower limits are applied in some markets and jurisdictions. Manulife Financial further reduces exposure to claims concentrations by applying geographical aggregate retention limits for certain covers.

j) 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.

The effect of reinsurance on premium income was as follows:

For the years ended December 31,	2010			2009
Direct premium income	$	23,033		$	26,496
Reinsurance assumed		1,285			1,498
Reinsurance ceded		(5,967	)		(5,048	)
Total premium income	$	18,351		$	22,946

Note 8    ^    Fair Value of Financial Instruments

Financial instruments refer to both on- and off-balance sheet instruments and may be assets or liabilities. These assets or liabilities 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 reflect 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.

The fair values and the basis for determining the fair value of invested assets, derivatives, consumer notes, long-term debt, and liabilities for preferred shares and capital instruments are disclosed in notes 3, 5, 9, 10 and 12, respectively.

The fair value of bank deposits is estimated at $16,380 as at December 31, 2010 (2009 – $14,752), compared to a carrying value of $16,300 as at December 31, 2010 (2009 – $14,735). 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.

The carrying 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 fair values due to their short-term nature.

Financial instruments measured at fair value on the consolidated balance sheets

In accordance with Section 3862, the Company categorizes its fair value measurements according to a three-level hierarchy. The hierarchy prioritizes the inputs used by the Company’s valuation techniques for determining the fair value of the financial instrument. A level is assigned to each fair value measurement based on the lowest level input significant to the fair value measurement in its entirety. The three levels of the fair value hierarchy are defined as follows:

Level 1 – Fair value measurements that reflect unadjusted, quoted prices in active markets for identical assets and liabilities that the Company has the ability to access at the measurement date. Valuations are based on quoted prices reflecting market transactions involving assets or liabilities identical to those being measured.

Level 2 – Fair value measurements using inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in inactive markets, inputs that are observable that are not prices (such as interest rates, credit risks, etc.) and inputs that are derived from or corroborated by observable market data. Most bonds are classified within Level 2. Also, included in the Level 2 category are derivative instruments that are priced using models with observable market inputs, including interest rate swaps, equity swaps, and foreign currency forward contracts.

Level 3 – Fair value measurements using significant non market observable inputs. These include valuations for assets and liabilities that are derived using data, some or all of which is not market observable, including assumptions about risk. Level 3 securities include less liquid securities such as structured asset-backed securities, commercial mortgage-backed securities (“CMBS”), and other securities that have little or no price transparency. Embedded and complex derivative financial instruments are also included in Level 3.

In determining the fair value of its financial instruments, the Company uses observable market data, when available, and minimizes the use of unobservable inputs to the extent possible when determining fair value.

54 2010 Annual Report

The following table presents the Company’s assets and liabilities that are carried at fair value, categorized by level under the fair value hierarchy.

As at December 31,							2010								2009
	Level 1		Level 2		Level 3		Total fair value		Level 1		Level 2		Level 3		Total fair value
Financial assets
Bonds
Fair value option
Canadian government & agency	$	–	$	9,915	$	160	$	10,075	$	–	$	8,014	$	129	$	8,143
U.S. government & agency		–		13,079		168		13,247		–		5,074		321		5,395
Other government & agency		–		6,994		597		7,591		–		4,638		467		5,105
Corporate		–		46,346		1,705		48,051		–		44,547		1,616		46,163
Residential mortgage/asset-backed securities		–		24		360		384		–		32		389		421
Commercial mortgage/asset-backed securities		–		3,750		474		4,224		–		4,271		444		4,715
Other securitized assets		–		1,288		180		1,468		–		1,422		180		1,602
Available-for-sale
Canadian government & agency		–		5,112		34		5,146		–		4,276		49		4,325
U.S. government & agency		–		5,449		–		5,449		–		2,198		2		2,200
Other government & agency		–		1,356		61		1,417		–		971		51		1,022
Corporate		–		3,706		258		3,964		–		5,064		243		5,307
Residential mortgage/asset-backed securities		–		5		93		98		–		6		99		105
Commercial mortgage/asset-backed securities		–		313		28		341		–		369		25		394
Other securitized assets		–		73		32		105		–		181		29		210
Stocks
Fair value option		8,296		1		–		8,297		7,276		–		–		7,276
Available-for-sale		2,178		–		–		2,178		2,412		–		–		2,412
Cash and short-term securities
Fair value option		–		668		–		668		–		651		–		651
Available-for-sale		–		8,811		–		8,811		–		16,118		–		16,118
Other		2,312		–		–		2,312		2,011		–		–		2,011
Derivative assets
Interest rate contracts		–		3,198		68		3,266		–		2,002		72		2,074
Foreign exchange contracts		–		628		–		628		–		593		–		593
Equity contracts		–		–		15		15		–		2		11		13
Segregated funds net assets(1)		194,806		2,193		3,058		200,057		185,851		2,693		3,197		191,741
	$	207,592	$	112,909	$	7,291	$	327,792	$	197,550	$	103,122	$	7,324	$	307,996
Financial liabilities
Derivative liabilities
Interest rate contracts	$	–	$	2,740	$	37	$	2,777	$	–	$	1,709	$	25	$	1,734
Foreign exchange contracts		–		579		43		622		–		899		21		920
Equity contracts		–		–		5		5		–		–		–		–
Embedded derivatives		–		–		–		–		–		–		2		2
Consumer notes		–		978		–		978		–		1,291		–		1,291
	$	–	$	4,297	$	85	$	4,382	$	–	$	3,899	$	48	$	3,947

⁽¹⁾ Segregated funds net assets are recorded at fair value. Investment performance related to segregated funds net assets is fully offset by corresponding amounts credited to contract holders whose interest in the segregated funds net assets is recorded by the Company as segregated funds net liabilities.

Assets and liabilities measured at fair value on the consolidated balance sheets using significant unobservable inputs (Level 3)

The table below provides a fair value roll forward for the twelve months ending December 31, 2010 for the financial instruments for which significant unobservable inputs (Level 3) are used in the fair value measurement. The Company classifies the fair values of financial instruments within Level 3 if there are no observable markets for the instruments or, in the absence of active markets, the majority of the inputs used to determine fair value are based on the Company’s own assumptions about market participant assumptions. The Company prioritizes the use of market-based inputs over entity-based assumptions in determining Level 3 fair values and, therefore, the gains and losses in the tables below include changes in fair value due partly to observable and unobservable factors.

2010 Annual Report 55

Roll-forward of financial instruments measured at fair value using significant unobservable inputs (Level 3)

			Net realized / unrealized gains (losses) included in:											Transfers											Change in unrealized gains (losses) on instruments still held(4)
	Balance as at January 1, 2010		Net income(1)			OCI(2)			Purchases		Sales			Into Level 3(3)		Out of Level 3(3)			Currency movement			Balance as at December 31, 2010
Bonds
Fair value option
Canadian government & agency	$	129	$	10		$	–		$	22	$	–		$	–	$	–		$	(1	)	$	160		$	10
U.S. government & agency		321		(7	)		–			392		–			–		(534	)		(4	)		168			(7	)
Other government & agency		467		31			–			151		(49	)		–		–			(3	)		597			32
Corporate		1,616		153			–			247		(112	)		45		(244	)		–			1,705			98
Residential mortgage/asset-backed securities		389		71			–			–		(100	)		–		–			–			360			103
Commercial mortgage/asset-backed securities		444		85			–			–		(52	)		–		(1	)		(2	)		474			101
Other securitized assets		180		43			–			–		(41	)		–		(1	)		(1	)		180			74
	$	3,546	$	386		$	–		$	812	$	(354	)	$	45	$	(780	)	$	(11	)	$	3,644		$	411
Available-for-sale
Canadian government & agency	$	49	$	16		$	(6	)	$	–	$	(21	)	$	–	$	–		$	(4	)	$	34		$	–
U.S. government & agency		2		–			2			–		–			–		(2	)		(2	)		–			–
Other government & agency		51		–			4			15		(9	)		–		–			–			61			–
Corporate		243		(2	)		(38	)		14		(52	)		50		(15	)		58			258			–
Residential mortgage/asset-backed securities		99		(13	)		53			–		(23	)		–		–			(23	)		93			–
Commercial mortgage/asset-backed securities		25		6			25			–		(3	)		–		–			(25	)		28			–
Other securitized assets		29		(1	)		16			–		(1	)		–		–			(11	)		32			–
	$	498	$	6		$	56		$	29	$	(109	)	$	50	$	(17	)	$	(7	)	$	506		$	–
Net derivatives	$	35	$	(14	)	$	(9	)	$	–	$	–		$	–	$	(9	)	$	(5	)	$	(2	)	$	(11	)
Segregated funds net assets		3,197		30			18			17		(109	)		63		–			(158	)		3,058			83
Total	$	7,276	$	408		$	65		$	858	$	(572	)	$	158	$	(806	)	$	(181	)	$	7,206		$	483

⁽¹⁾ These amounts are included in investment income on the Consolidated Statement of Operations, except for the segregated funds amount which is included in the Investment related section of the Segregated Funds Consolidated Statement of Changes in Net Assets.

⁽²⁾ This amount is included in accumulated other comprehensive income (loss) on the Consolidated Balance Sheet.

⁽³⁾ For financial assets that are transferred into and/or out of Level 3, the Company uses the fair value of the assets at the beginning of the year.

⁽⁴⁾ Amounts relate to those unrealized gains (losses) included in investment income for the year.

56 2010 Annual Report

			Net realized / unrealized gains (losses) included in:											Transfers										Change in unrealized gains (losses) on instruments still held(4)
	Balance as at January 1, 2009		Net income(1)			OCI(2)			Purchases		Sales			Into Level 3(3)		Out of Level 3(3)			Currency movement			Balance as at December 31, 2009
Bonds
Fair value option
Canadian government & agency	$	135	$	2		$	–		$	–	$	–		$	–	$	–		$	(8	)	$	129	$	2
U.S. government & agency		46		4			–			489		(10	)		–		(184	)		(24	)		321		3
Other government & agency		567		(24	)		–			31		(23	)		–		–			(84	)		467		(24	)
Corporate		1,580		127			–			359		(358	)		456		(277	)		(271	)		1,616		273
Residential mortgage/asset-backed securities		623		54			–			–		(192	)		3		(6	)		(93	)		389		235
Commercial mortgage/asset-backed securities		526		58			–			4		(62	)		–		(17	)		(65	)		444		58
Other securitized assets		500		8			–			–		(276	)		10		–			(62	)		180		9
	$	3,977	$	229		$	–		$	883	$	(921	)	$	469	$	(484	)	$	(607	)	$	3,546	$	556
Available-for-sale
Canadian government & agency	$	53	$	–		$	1		$	–	$	–		$	–	$	–		$	(5	)	$	49	$	–
U.S. government & agency		2		–			–			–		–			–		–			–			2		–
Other government & agency		67		–			(9	)		2		–			–		–			(9	)		51		–
Corporate		234		(4	)		29			42		(43	)		40		(2	)		(53	)		243		–
Residential mortgage/asset-backed securities		162		(75	)		88			–		(51	)		1		(2	)		(24	)		99		–
Commercial mortgage/asset-backed securities		35		(3	)		9			–		(7	)		–		(5	)		(4	)		25		–
Other securitized assets		89		2			3			–		(60	)		6		–			(11	)		29		–
	$	642	$	(80	)	$	121		$	44	$	(161	)	$	47	$	(9	)	$	(106	)	$	498	$	–
Net derivatives	$	156	$	(6	)	$	10		$	–	$	–		$	10	$	(121	)	$	(14	)	$	35	$	(27	)
Segregated funds net assets		3,584		(550	)		15			893		(260	)		–		–			(485	)		3,197		(444	)
Total	$	8,359	$	(407	)	$	146		$	1,820	$	(1,342	)	$	526	$	(614	)	$	(1,212	)	$	7,276	$	85

⁽¹⁾ These amounts are included in investment income on the Consolidated Statement of Operations, except for the segregated funds amount which is included in the Investment related section of the Segregated Funds Consolidated Statement of Changes in Net Assets.

⁽²⁾ This amount is included in accumulated other comprehensive income (loss) on the Consolidated Balance Sheet.

⁽³⁾ For financial assets that are transferred into and/or out of Level 3, the Company uses the fair value of the assets at the beginning of the year.

⁽⁴⁾ Amounts relate to those unrealized gains (losses) included in investment income for the year.

The Company may hedge positions with offsetting positions that are classified in a different level. For example, the gains and losses for assets and liabilities in the Level 3 category presented in the tables above may not reflect the effect of offsetting gains and losses on hedging instruments that have been classified by the Company in the Level 1 and Level 2 categories.

The transfers into Level 3 primarily result from securities that were impaired during the year or securities where a lack of observable market data (versus the previous year) resulted in reclassifying assets into Level 3. The transfers from Level 3 primarily result from observable market data now being available from the entire term structure of the bond, thus eliminating the need to extrapolate market data beyond observable points.

Note 9    ^    Consumer Notes

SignatureNotes are instruments issued in the form of publicly traded fixed and/or floating rate securities.SignatureNotes are denominated in U.S. dollars, have a variety of maturities, interest rates and call provisions and may be redeemed upon the death of the holder, subject to an overall program redemption limit of one per cent of the aggregate securities outstanding or an individual redemption limit of US$0.2 of aggregate principal. As at December 31, 2010, interest rates ranged from 0.83% to 6.25% (2009 – 0.72% to 6.25%) and maturities are until 2036. As the assets supporting consumer notes are managed along with assets supporting policy liabilities, the Company has designated consumer notes as trading under the fair value option in order to reduce any recognition inconsistency. Fair values are determined by projecting cash flows and discounting at current corporate rates, defined as U.S. Treasury rates plus company own corporate spread. The fair value attributable to credit risk represents the present value of the spread.

The carrying amount at December 31, 2010 of financial liabilities designated at fair value was $978 (2009 – $1,291), which is $42 higher (2009 – $57) than the contractual amount due at maturity. For the year ended December 31, 2010, the fair value of consumer notes decreased by $13 (2009 – increased by $106). This decrease was comprised of $11 due to the widening of spreads between the risk free and Manulife Financial debt rates and $2 due to a rise in risk free rates in the second half of the year. In 2009, the increase was comprised of a decrease of $111 due to a rise in risk free rates, which was more than offset by an increase of $217 due to the

2010 Annual Report 57

narrowing of spreads between the risk free and Manulife Financial debt rates. The change in fair value is included in interest expense. At December 31, 2010, the accumulated change in fair value due to changes in rates that differ from risk free rates was $70 (2009 – $63). Total amounts included in interest expense relating to the consumer notes was $36 (2009 – $164).

Note 10    ^    Long-Term Debt

As at December 31,	2010		2009
3.40% Senior notes (US$600)	$	593	$	–
4.90% Senior notes (US$500)		493		–
4.079% Medium term notes		896		–
4.896% Medium term notes		997		996
7.768% Medium term notes		597		598
5.161% Medium term notes		549		548
5.505% Medium term notes		399		398
4.67% Medium term notes		350		349
Other notes payable		569		419
Total long-term debt	$	5,443	$	3,308
Fair value	$	5,683	$	3,588

The fair value of long-term debt is determined using quoted market prices where available. For debt instruments that do not have quoted prices, the fair value is determined with reference to quoted prices of a debt instrument with similar characteristics or utilizing a model to discount cash flows based on current market interest rates.

The carrying value of the long-term debt reflects an unamortized fair value increment of US$4 (2009 – US$7), which arose as a result of the acquisition of John Hancock. The amortization of the fair value adjustment is recorded in interest expense in these consolidated financial statements.

The cash amount of interest paid during the year ended December 31, 2010 was $191 (2009 – $200). Issue costs are amortized over the term of the debt.

a) 3.40% Senior notes

On September 17, 2010, MFC issued US$600 in 3.40% senior notes which mature on September 17, 2015 and are redeemable in whole or in part by MFC at any time at the greater of par or the fair value of the debt calculated as the sum of the present values of the remaining scheduled payments of principal and interest to be redeemed discounted from their respective scheduled payment dates at the U.S. Government treasury bond yield plus 30 basis points, in each case together with accrued and unpaid interest.

These US$ senior notes have been designated as a hedge of the Company’s net investment in its U.S. operations to reduce the earnings volatility that would otherwise arise from the translation of the U.S. denominated debt into Canadian dollars.

b) 4.90% Senior notes

On September 17, 2010, MFC issued US$500 in 4.90% senior notes which mature on September 17, 2020 and are redeemable in whole or in part by MFC at any time at the greater of par or the fair value of the debt calculated as the sum of the present values of the remaining scheduled payments of principal and interest to be redeemed discounted from their respective scheduled payment dates at the U.S. Government treasury bond yield plus 35 basis points, in each case together with accrued and unpaid interest.

These US$ senior notes have been designated as a hedge of the Company’s net investment in its U.S. operations to reduce the earnings volatility that would otherwise arise from the translation of the U.S. denominated debt into Canadian dollars.

c) 4.079% Medium term notes

On August 20, 2010, MFC issued $900 in 4.079% medium term notes which mature August 20, 2015 and are redeemable in whole or in part by MFC at any time at the greater of par or the fair value of the debt based on the yield on Government of Canada bonds plus 46 basis points, in each case together with accrued and unpaid interest.

d) 4.896% Medium term notes

On June 2, 2009, MFC issued $1,000 in 4.896% medium term notes which mature June 2, 2014 and are redeemable in whole or in part by MFC at any time at the greater of par or the fair value of the debt based on the yield on Government of Canada bonds plus 57.5 basis points, in each case together with accrued and unpaid interest.

e) 7.768% Medium term notes

On April 8, 2009, MFC issued $600 in 7.768% medium term notes which mature April 8, 2019 and are redeemable in whole or in part by MFC at any time at the greater of par or the fair value of the debt based on the yield on Government of Canada bonds plus 125 basis points, in each case together with accrued and unpaid interest.

58 2010 Annual Report

f) 5.161% Medium term notes

On June 26, 2008, MFC issued $550 in 5.161% medium term notes which mature June 26, 2015 and are redeemable in whole or in part by MFC at any time at the greater of par or the fair value of the debt based on the yield on Government of Canada bonds plus 36 basis points, in each case together with accrued and unpaid interest.

g) 5.505% Medium term notes

Also on June 26, 2008, MFC issued $400 in 5.505% medium term notes which mature on June 26, 2018 and are redeemable in whole or in part by MFC at any time at the greater of par or the fair value of the debt based on the yield on Government of Canada bonds plus 39 basis points, in each case together with accrued and unpaid interest.

h) 4.67% Medium term notes

On March 28, 2006, MFC issued $350 in 4.67% medium term notes which mature March 28, 2013 and are redeemable in whole or in part by MFC at any time at the greater of par or the fair value of the debt based on the yield on Government of Canada bonds plus 11 basis points, in each case together with accrued and unpaid interest.

i) Other notes payable

Other notes payable are comprised of fixed rate notes and a floating rate note. Fixed interest rate notes bear interest at rates ranging from 6.1% to 12.1% and mature in varying amounts to 2015.

On November 30, 2010, MFC issued a $150 floating rate note to Manulife Finance (Delaware) L.P. (“MFLP”). The note bears interest at the 90-day Bankers’ Acceptance rate plus 2.33% and matures December 15, 2016. The note is redeemable in whole or in part by MFC at any time at par value together with accrued and unpaid interest. MFLP is a VIE; however, MFC is not considered the primary beneficiary and, as a result, the note is not eliminated on consolidation (see note 17(b)).

Aggregate maturities of long-term debt are as follows:

As at December 31,	2010		2009
Less than one year	$	407	$	6
One to two years		–		403
Two to three years		350		–
Three to four years		997		349
Four to five years		2,050		996
Greater than five years		1,639		1,554
Total	$	5,443	$	3,308

Note 11    ^    Income Taxes

Income (loss) before income taxes by jurisdiction is as follows:

For the years ended December 31,	2010			2009
Canada	$	810		$	(1,495	)
U.S.		(2,961	)		(2,461	)
Other foreign countries		979			3,804
Loss before income taxes	$	(1,172	)	$	(152	)

Components of the income tax expense (recovery) are as follows:

For the years ended December 31,	2010			2009
Canadian income tax expense (recovery)
Current	$	(460	)	$	(218	)
Future		286			(439	)
	$	(174	)	$	(657	)
U.S. income tax expense (recovery)
Current	$	4		$	(155	)
Future		(845	)		(888	)
	$	(841	)	$	(1,043	)
Other foreign income tax expense
Current	$	52		$	76
Future		103			52
	$	155		$	128
Income tax recovery	$	(860	)	$	(1,572	)

2010 Annual Report 59

The effective income tax rate reported in the Consolidated Statements of Operations varies from Canadian tax rate of 30 per cent for the year ended December 31, 2010 (2009 – 32 per cent) for the following reasons:

Reconciliation of income tax expense (recovery) For the years ended December 31,	2010			2009
Income tax recovery at Canadian statutory tax rate	$	(352	)	$	(49	)
Increase (decrease) in income taxes due to:
Tax-exempt investment income		(135	)		(114	)
Differences in tax rate on income not subject to tax in Canada		(634	)		(1,419	)
Income tax rate change		–			30
Creation (release) of valuation allowance		23			(15	)
General business tax credit		(58	)		(69	)
Goodwill impairment		364			–
Other		(68	)		64
Income tax recovery	$	(860	)	$	(1,572	)

The amount of income taxes paid in cash during the year ended December 31, 2010 was $107 (2009 – $63).

Income taxes are included in the consolidated financial statements as follows:

For the years ended December 31,	2010			2009
Consolidated Statements of Operations
Income tax recovery	$	(860	)	$	(1,572	)
Consolidated Statements of Changes in Equity
Tax expense on stock options exercised		–			1
Tax benefit of financing costs		–			(26	)
Consolidated Statements of Comprehensive Loss
OCI on AFS and cash flow hedges		(203	)		675
Currency translation account		52			249
Income taxes	$	(1,011	)	$	(673	)

Earnings of foreign subsidiaries would generally only be subject to Canadian taxation when distributed to Canada. Additional Canadian tax that would be payable if all foreign subsidiaries’ retained earnings were distributed to the Canadian parent as dividends are estimated at $431 (2009 – $537).

The net future income tax liability is $39 (2009 – $609), of which $1,393 (2009 – $1,883) is reported as a future tax liability. A future tax asset for the Canadian and U.S. jurisdictions of $1,354 (2009 – $1,274) is reported in miscellaneous assets.

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

As at December 31,	2010			2009
Future income tax asset
Loss carry forward	$	1,955		$	1,684
Actuarial liabilities		1,814			1,540
Tax credits		750			699
Accrued interest		380			322
	$	4,899		$	4,245
Valuation allowance		(105	)		(82	)
Future income tax asset	$	4,794		$	4,163
Future income tax liability
Real estate	$	(466	)	$	(287	)
Securities and other investments		(3,339	)		(3,546	)
Sale of invested assets		(365	)		(420	)
Intangible assets		(580	)		(585	)
Other		(83	)		66
Future income tax liability	$	(4,833	)	$	(4,772	)
Net future income tax liability	$	(39	)	$	(609	)

As at December 31, 2010, the Company has approximately $5,865 (2009 – $4,495) of tax loss carry forwards available of which $5,862 expire between the years 2011 and 2030 while $3 have no expiry date. The Company also has capital loss carry forwards in the amount of nil (2009 – $452). A tax benefit, related to these tax loss carry forwards, in the amount of $1,850 (2009 – $1,602) has been recognized in future income taxes, and a benefit of $105 (2009 – $82) has not been recognized.

As at December 31, 2010, the Company has recognized approximately $519 (2009 – $488) of general business tax credit carry forwards available which expire between the years 2021 and 2030.

As at December 31, 2010, the Company has approximately $204 (2009 – $716) of current tax payable included in other liabilities.

60 2010 Annual Report

Unrecognized tax positions

Changes in the amount of unrecognized tax positions are as follows:

For the years ended December 31,	2010			2009
Balance as at January 1	$	3,078		$	3,022
Additions based on tax positions related to the current year		335			408
Additions for tax positions of prior years		227			389
Reductions for tax positions of prior years		(378	)		(401	)
Effect of foreign exchange rate changes		(110	)		(340	)
Balance as at December 31	$	3,152		$	3,078

Included in the balance of unrecognized tax positions as of December 31, 2010, are $1,091 (2009 – $1,179) of unrecognized benefits that, if recognized, would affect the Company’s effective tax rate.

Included in the balance of unrecognized tax positions as of December 31, 2010 are $2,061 (2009 – $1,899) of tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest or penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to an earlier period.

The amount of change in unrecognized tax benefits over the next 12 months cannot be determined.

The Company recognizes interest accrued related to uncertain tax benefits in interest expense (part of other operating costs and expenses) and penalties in tax expense. During the year ended December 31, 2010, the Company recognized approximately $60 (2009 – $258) in interest expense. The Company has approximately $1,026 of accrued interest as at December 31, 2010 (2009 – $974). The Company has not recognized any material amounts of penalties during the years ended December 31, 2010 and 2009.

The Company files income tax returns for all its operations with the major jurisdictions being Canada and U.S. Canadian tax authorities have completed examinations of tax returns filed for all years prior to 2002 and there are no outstanding appeals for years prior to 1996. In the U.S., the Internal Revenue Services (“IRS”) has completed its examinations for the years prior to 2005. The Company has filed protests with the IRS Appeals Division of various adjustments raised by the IRS in its examinations of these years. Examinations of Canadian tax returns for the years 2002 to 2006 and U.S. income tax returns for the years 2005 to 2007 are currently ongoing. Returns for all subsequent years have not been examined.

See also note 18(b) tax related contingency.

Note 12    ^    Liabilities for Preferred Shares and Capital Instruments

As at December 31,	2010		2009
Preferred shares – Class A Shares, Series 1	$	344	$	344
Senior debentures issued to Manulife Financial Capital Trust
6.7% debentures		940		940
7.0% debentures		60		60
Senior debenture issued to Manulife Financial Capital Trust II		1,000		1,000
Surplus notes – 7.375% U.S. dollar		471		497
Subordinated notes – 6.24% Canadian dollar		550		550
Subordinated notes payable to Manulife Finance (Delaware) LLC		1,047		1,190
Total	$	4,412	$	4,581
Fair value	$	4,503	$	4,739

The fair value of liability instruments is determined using quoted market prices where available. For liability instruments that do not have quoted prices, the fair value is determined with reference to the quoted prices of a liability instrument with similar characteristics or utilizing a model to discount cash flows based on current market interest rates.

The carrying value of the surplus notes reflects an unamortized fair value increment of US$41 (2009 – US$43), which arose as a result of the acquisition of John Hancock. The amortization of the fair value adjustment is recorded in interest expense.

The cash amount of interest, including dividends on the Class A, Series 1 preferred shares, paid during the year ended December 31, 2010 was $241 (2009 – $208). Issue costs are amortized over the term of the underlying instruments.

Preferred shares

On June 19, 2003, MFC issued 14 million Class A Shares, Series 1 (“Series 1 Preferred Shares”) at a price of $25.00 per share, for an aggregate amount of $350. The Series 1 Preferred Shares are non-voting and are entitled to non-cumulative preferential cash dividends payable quarterly, if and when declared, at a per annum rate of 4.10%. With regulatory approval, the Series 1 Preferred Shares may be redeemed by MFC on or after June 19, 2010, in whole or in part, at declining premiums that range from $1.25 to nil per Series 1 Preferred Share, by either payment of cash or the issuance of MFC common shares. On or after December 19, 2015, the Series 1 Preferred Shares will be convertible at the option of the holder into MFC common shares, the number of which is determined

2010 Annual Report 61

by a prescribed formula, and is subject to the right of MFC prior to the conversion date to redeem for cash or find substitute purchasers for such preferred shares. The prescribed formula is the face amount of the Series 1 Preferred Shares divided by the greater of $2.00 and 95% of the then market price of MFC common shares.

Senior debentures issued to Manulife Financial Capital Trust

On December 10, 2001, MLI issued senior debentures to Manulife Financial Capital Trust (the “Trust”). The debentures mature on December 31, 2051 and interest is payable semi-annually on June 30 and December 31. Prior to June 30, 2012, MLI may redeem the debentures at the greater of par or the fair value of the debt based on the yield on Government of Canada bonds plus 40 basis points in the case of the 7.0% debentures and 32 basis points in the case of the 6.7% debentures. On or after June 30, 2012, the debentures may be redeemed at par, in each case together with accrued and unpaid interest.

At the option of the Trust, the 7.0% debentures are convertible into 40 MLI Class A Shares Series 2 per one thousand dollars face value and the 6.7% debentures are convertible into 40 MLI Class A Shares Series 4 per one thousand dollars face value. Under certain circumstances, the 7.0% debentures will be automatically converted into 40 MLI Class A Shares Series 3 per one thousand dollars face value and the 6.7% debentures will be automatically converted into 40 MLI Class A Shares Series 5 per one thousand dollars face value. On or after June 30, 2051, the MLI Class A Shares Series 2 and Series 3 will be convertible at the option of the holder into MFC common shares. On or after December 31, 2012, the MLI Class A Shares Series 4 and Series 5 will be convertible at the option of the holder into MFC common shares. In each case, the number of MFC common shares is determined by the face amount of the MLI Class A Shares divided by the greater of $1.00 and 95% of the then market price of MFC common shares.

The Trust is a VIE; however, because the Company is not the primary beneficiary, the Trust is not consolidated (see note 17(b)).

Senior debenture issued to Manulife Financial Capital Trust II

On July 10, 2009, MLI issued a $1,000 senior debenture to Manulife Financial Capital Trust II (“Trust II”). The debenture matures on December 31, 2108 and interest is payable semi-annually on June 30 and December 31. From July 10, 2009 to December 30, 2019, the rate of interest is 7.535% per annum. On December 31, 2019 and on every fifth anniversary after December 31, 2019 (the “Interest Reset Date”), the rate of interest will be reset to the yield on five year Government of Canada bonds plus 5.2%.

On or after December 31, 2014, MLI may redeem the debenture, in whole or in part, at the greater of par or the fair value of the debt based on the yield on uncallable Government of Canada bonds to the next Interest Reset Date plus (a) 1.0325% if the redemption date is prior to December 31, 2019 or (b) 2.065% if the redemption date is after December 31, 2019, together with accrued and unpaid interest.

Trust II is a VIE; however, because the Company is not the primary beneficiary, Trust II is not consolidated (see note 17(b)).

U.S. dollar surplus notes

On February 25, 1994, John Hancock Mutual Life Insurance Company, now JHUSA, issued US$450 of 7.375% surplus notes maturing on February 15, 2024. Any payment of interest or principal on the surplus notes requires prior approval from the Commissioner of the Office of Financial and Insurance Regulation of the State of Michigan.

Canadian dollar subordinated debt

On February 16, 2001, MLI issued, in two tranches, $800 in unsecured subordinated debentures. Debentures with principal of $550 were outstanding at December 31, 2010 and due to mature on February 16, 2016, bearing interest at a fixed rate of 6.24% for 10 years and thereafter at the 90-day Bankers Acceptance rate plus 1% (adjusted quarterly). The debentures were redeemable in whole or in part by MLI, subject to regulatory approval, at any time prior to February 16, 2011, at the greater of par or the fair value of the debt based on the yield on Government of Canada bonds plus 21.25 basis points; thereafter at par; in each case together with accrued and unpaid interest.

On February 16, 2011, MLI redeemed the outstanding $550 principal amount of the 6.24% subordinated debentures at par plus accrued and unpaid interest.

Subordinated notes payable to Manulife Finance (Delaware) LLC

On December 14, 2006, Manulife Holdings (Delaware) LLC (“MHD”), now John Hancock Holdings Delaware LLC (“JHH”), a wholly owned subsidiary of MLI, issued a $650 subordinated note to Manulife Finance (Delaware) LLC (“MFLLC”) a subsidiary of MFLP. MFLP and its subsidiaries are related parties to the Company. The note matures on December 15, 2036 and bears interest payable semi-annually at the 90-day Bankers Acceptance rate plus 0.72%. With regulatory approval, JHH may redeem the note, in whole or in part, at any time for the amount of principal and unpaid interest.

On December 14, 2006, MHD (now JHH) issued a $550 senior note to MFLLC which matures on December 15, 2016. On September 30, 2008, the $550 senior note payable to MFLLC was converted to subordinated debt and its interest rate was increased to the 90-day Bankers Acceptance rate plus 0.552%.

On November 30, 2010, JHH redeemed $150 of its $550 subordinated note payable to MFLLC.

MFLP is a VIE; however, MFC is not considered the primary beneficiary and, as a result, the subordinated debentures issued by MFLP and the subordinated notes receivable by MFLLC are not consolidated (see note 17(b)).

62 2010 Annual Report

Maturity profile of capital instruments

There are no scheduled maturities for any of the outstanding capital instruments within the next five years. However, $550 of subordinated debentures were redeemed on February 16, 2011.

Note 13    ^    Share Capital

The authorized capital of MFC consists of:

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

b) an unlimited number of Class A, Class B and Class 1 preferred shares without nominal or par value, issuable in series.

Preferred shares

On June 3, 2009, MFC issued 14 million Class 1 Shares Series 1 (“Class 1 Series 1 Preferred Shares”) at a price of $25.00 per share, for an aggregate amount of $350. The Class 1 Series 1 Preferred Shares are entitled to non-cumulative preferential cash dividends, payable quarterly, if and when declared, at a per annum rate of 5.6% until September 19, 2014, after which the dividend rate will be reset every five years at a rate equal to the five year Government of Canada bond yield plus 3.23%. On September 19, 2014 and on September 19 every five years thereafter, the Class 1 Series 1 Preferred Shares will be convertible at the option of the holder into Class 1 Shares Series 2 (“Class 1 Series 2 Preferred Shares”). The Class 1 Series 2 Preferred Shares are entitled to non-cumulative preferential cash dividends, payable quarterly, if and when declared, at a rate equal to the three month Government of Canada Treasury Bill yield plus 3.23%. Subject to regulatory approval, MFC may redeem the Class 1 Series 1 Preferred Shares, in whole or in part, at par on September 19, 2014 and on September 19 every five years thereafter.

On March 4, 2009, MFC issued 18 million Class A Shares, Series 4 (“Series 4 Preferred Shares”) at a price of $25.00 per share, for an aggregate amount of $450. The Series 4 Preferred Shares are entitled to non-cumulative preferential cash dividends, payable quarterly, if and when declared, at a per annum rate of 6.6% until June 19, 2014, after which the dividend rate will be reset every five years at a rate equal to the five year Government of Canada bond yield plus 4.56%. On June 19, 2014 and on June 19 every five years thereafter, the Series 4 Preferred Shares will be convertible at the option of the holder into Class A Shares, Series 5 (“Series 5 Preferred Shares”). The Series 5 Preferred Shares are entitled to non-cumulative preferential cash dividends, payable quarterly, if and when declared, at a rate equal to the three month Government of Canada Treasury Bill yield plus 4.56%. Subject to regulatory approval, MFC may redeem the Series 4 Preferred Shares, in whole or in part, at par on June 19, 2014 and on June 19 every five years thereafter.

On January 3, 2006, MFC issued 12 million Class A Shares, Series 3 (“Series 3 Preferred Shares”) at a price of $25.00 per share, for an aggregate amount of $300. The Series 3 Preferred Shares are non-voting and entitled to non-cumulative preferential cash dividends payable quarterly, if and when declared, at a per annum rate of 4.50%. With regulatory approval, the Series 3 Preferred Shares may be redeemed by MFC on or after March 19, 2011, in whole or in part, for cash, at declining premiums that range from $1.00 to nil per share.

On February 18, 2005, MFC issued 14 million Class A Shares, Series 2 (“Series 2 Preferred Shares”) at a price of $25.00 per share, for an aggregate amount of $350. The Series 2 Preferred Shares are non-voting and are entitled to non-cumulative preferential cash dividends payable quarterly, if and when declared, at a per annum rate of 4.65%. With regulatory approval, the Series 2 Preferred Shares may be redeemed by MFC on or after March 19, 2010, in whole or in part, for cash, at declining premiums that range from $1.00 to nil per share.

Common shares

On November 30, 2009, MFC issued 132 million common shares at $19.00 per share. Net cash proceeds, after deducting commissions and fees of the issue, were $2,413. Net proceeds including tax benefits were $2,435.

On December 11, 2008, MFC issued 117 million common shares at $19.40 per share. Net cash proceeds, after deducting commissions and fees of the issue, were $2,190. Net proceeds including tax benefits were $2,208.

On May 7, 2009, MFC announced amendments to its dividend re-investment and share purchase plans. These plans provide registered common shareholders with a means to automatically reinvest the cash dividends paid on their common shares in the purchase of additional common shares. These plans are open to registered shareholders residing in Canada or the United States. MFC has the flexibility to fund the plans through open market purchases and treasury issuances.

For the years ended December 31,			2010				2009
	Number of shares (in millions)		Amount		Number of shares (in millions)		Amount
Common shares
Balance, January 1		1,758	$	18,937		1,610	$	16,157
Issued on exercise of stock options and deferred share units and acquisition of a subsidiary		1		3		8		166
Issued under dividend re-investment and share purchase plans		19		314		8		179
Issued by public offering, net		–		–		132		2,435
Balance, December 31		1,778	$	19,254		1,758	$	18,937

2010 Annual Report 63

Note 14    ^    Capital Management

Manulife Financial manages its capital on a total company basis as well as at each regulated entity level. Manulife Financial seeks to manage its capital with the objectives of:

ⁿ Operating with sufficient capital to be able to honour all policyholder and other obligations with a high degree of confidence;

ⁿ Securing stability and flexibility through maintaining best access to capital markets, achievement of target credit ratings and by maintaining the confidence of regulators, policyholders, rating agencies, investors and other creditors; and

ⁿ Seeking to optimize return on capital to meet shareholders’ expectations, subject to capital adequacy considerations established to meet the first two objectives.

In its assessments of capital adequacy, the Company typically adopts regulatory capital definitions and measures applicable to any given entity and jurisdiction in which an entity operates. These are supplemented by an internal capital measurement framework that reflects the Company’s view of risk.

The Board of Directors reviews and approves the Company’s capital management policies. Each quarter, the Audit Committee reviews the Company’s capital position. In addition, the Appointed Actuary discusses with the Board key sensitivities of the Company’s capital ratios as assessed in the context of annual capital planning and Dynamic Capital Adequacy Testing (“DCAT”) analysis. Operational oversight of capital management is provided by the Finance Committee, consisting of senior finance, risk management and investment executives and chaired by the Chief Actuary. The committee oversees capital policies and reviews issues and initiatives that affect the capital position of MFC’s subsidiaries and the Company as a whole.

As part of its annual DCAT, the Company assesses the strength of its capital position under severe shock scenarios. The scenarios are determined each year to ensure their ongoing relevance to the Company’s business and risk profile. The 2010 results of this testing indicated that, given the actions taken in 2010, the Company’s capital levels provided for sufficient assets to discharge liabilities and guarantee obligations, in the various adverse scenarios tested. These scenarios included tests of risks related to equity markets, credit, interest rates and inflation, amongst others.

The measure of available capital in the table below serves as the foundation of the Company’s capital management activities at the consolidated level. For regulatory reporting purposes, the numbers are further adjusted for various additions or deductions to capital as mandated by the guidelines issued by OSFI. The Company remains well within regulatory constraints on the composition of capital between equity and other instruments.

Consolidated capital

As at December 31,	2010			2009
Total equity(1)	$	26,873		$	28,907
Less AOCI (loss) on cash flow hedges		(99	)		(48	)
Total equity less AOCI (loss) on cash flow hedges	$	26,972		$	28,955
Liabilities for preferred shares and qualifying capital instruments(2)		4,011			4,037
Non-controlling interest in subsidiaries		254			202
Total capital	$	31,237		$	33,194

⁽¹⁾ Total equity includes unrealized gains and losses on AFS bonds and AFS equities, net of taxes. Starting in 2009, the current period net unrealized gain or loss on AFS bonds is not part of OSFI regulatory capital. As at December 31, 2010, the gain on AFS bonds, net of taxes, was $200 (2009 – $572).

⁽²⁾ Qualifying capital instruments consist of qualifying debentures, net of unamortized issuance costs. See note 12.

In 2010, the Company’s capital decreased by $1,957 compared to the prior year. The decrease was primarily due to $312 of net losses, $691 of shareholder dividends paid in cash, $361 decrease in unrealized gains on AFS securities, and $646 due to the negative impact of the strengthened Canadian dollar. Throughout the year, MFC issued 19 million common shares for a total consideration of $314 under its dividend re-investment and share purchase plans.

MFC issued senior debt of Canadian $900 and US$1,100 in 2010. While such funding may be deployed in subsidiaries as capital, at the MFC consolidated level senior indebtedness is typically not considered capital, consistent with the current OSFI guidelines.

Note 15    ^    Stock-Based Compensation

Under MFC’s Executive Stock Option Plan (“ESOP”), stock options are granted to selected individuals. Options provide the holder with the right to purchase common shares of MFC at an exercise price equal to the higher of the prior day or prior five day average closing market price of common shares on the Toronto Stock Exchange on 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 73,600,000 common shares have been reserved for issuance under the ESOP.

In 2000, MFC granted deferred share units (“DSUs”) to certain employees under the ESOP. These DSUs vested over a three-year period and each DSU entitles the holder to receive one common share on retirement or termination of employment. When dividends are paid on common shares, holders of DSUs are deemed to receive dividends at the same rate, payable in the form of additional DSUs. The number of these DSUs outstanding was 1.8 million as at December 31, 2010 (2009 – 2.4 million).

64 2010 Annual Report

In addition, for certain new employees and pursuant to the Company’s deferred compensation program, MFC grants DSUs under the ESOP which entitle the holder to receive cash payment equal to the value of the same number of common shares plus credited dividends on retirement or termination of employment. In 2010, the Company granted 17,000 DSUs (2009 – nil) to certain new hires which vest over a maximum period of five years. In 2010, 35,000 DSUs (2009 – 56,000) were granted to certain employees who elected to defer receipt of all or part of their annual bonus. These DSUs vested immediately. Also, in 2010, 20,000 DSUs (2009 – nil) were granted to certain employees to defer payment of all or part of their Restricted Share Units (“RSUs”) and/or Performance Share Units (“PSUs”). These DSUs also vested immediately.

The fair values of the 0.2 million DSUs issued in the year were $17.15 per unit, as at December 31, 2010.

MFC’s Global Share Ownership Plan (“GSOP”) allows qualifying employees to choose to apply up to 5 per cent of their annual base earnings toward the purchase of common shares. MFC matches a percentage of the employee’s eligible contributions up to a maximum amount. MFC’s contributions vest immediately. All contributions are used to purchase common shares in the open market.

Under the Stock Plan for Non-Employee Directors, each eligible director may elect to receive his or her annual director’s retainer and fees in DSUs or common shares in lieu of cash. Upon termination of Board service, an eligible director who has elected to receive DSUs will be entitled to receive cash equal to the value of the DSUs accumulated in his or her account or, at his or her direction, an equivalent number of common shares. A total of one million common shares have been reserved for issuance under this plan.

	2010			2009
For the years ended December 31,	Number of DSUs (in thousands)
Outstanding, January 1		4,943			4,914
Issued		157			139
Reinvested		157			208
Redeemed		(2,159	)		(317	)
Forfeited or expired		–			(1	)
Outstanding, December 31		3,098			4,943

Of the DSUs outstanding as at December 31, 2010, 1,813,000 (2009 – 2,355,000) entitle the holder to receive common shares, 859,000 (2009 – 2,198,000) entitle the holder to receive payment in cash and 426,000 (2009 – 390,000) entitle the holder to receive payment in cash or common shares, at the option of the holder.

MFC previously granted stock options to directors under the Director Equity Incentive Plan (“DEIP”). No stock options were granted under this plan in 2010, as a result of a decision made by the Board of Directors in 2004 to permanently discontinue stock option grants to directors. The number of options outstanding under the DEIP was 70,000 as at December 31, 2010 (2009 – 70,000).

For the year ended December 31, 2010, 3.0 million RSUs (2009 – 3.8 million), nil Special RSUs (2009 – 0.6 million) and 0.7 million Performance Share Units (“PSUs”) (2009 – 1.5 million) were granted to certain eligible employees under MFC’s Restricted Share Unit Plan. The fair values of the RSUs and PSUs granted in the year were $17.15 per unit, as at December 31, 2010. Each RSU/PSU entitles the recipient to receive payment equal to the market value of one common share, plus credited dividends, at the time of vesting, subject to any performance conditions. RSUs granted in February 2010 vest 25 per cent on the first anniversary and 75 per cent on the date that is 34 months from the grant date, and the related compensation expense is recognized over this period, except where the employee is eligible to retire prior to a vesting date, in which case the cost is recognized over the period between the grant date and the date on which the employee is eligible to retire. Compensation expense related to RSUs was $45 for the year ended December 31, 2010 (2009 – $31).

PSUs granted in February 2010 vest 25 per cent on the first anniversary and 75 per cent on the date that is 34 months from the grant date, subject to performance conditions that are equally weighted over the three performance periods. The related compensation expense is recognized over this period, except where the employee is eligible to retire prior to a vesting date, in which case the cost is recognized over the period between the grant date and the date on which the employee is eligible to retire. Compensation expense related to PSUs was $9 for the year ended December 31, 2010 (2009 – $20).

				2010					2009
Options outstanding For the years ended December 31,	Number of options (in millions)			Weighted average exercise price		Number of options (in millions)			Weighted average exercise price
Outstanding, January 1		35		$	24.72		27		$	27.29
Granted		6		$	19.40		9		$	16.33
Exercised		–			–		(1	)	$	18.32
Expired		(4	)	$	17.81		–		$	–
Forfeited		(1	)	$	21.54		–		$	–
Outstanding, December 31		36		$	24.68		35		$	24.72
Exercisable, December 31		22		$	26.97		22		$	25.46

2010 Annual Report 65

	Options outstanding						Options exercisable
As at December 31, 2010	Number of options		Weighted average exercise price		Weighted average contractual remaining life (in years)		Number of options (in millions)		Weighted average exercise price		Weighted average remaining contractual life
14.79 - 19.52		15	$	17.39		7.76		3	$	16.82		4.97
19.53 - 25.45		9	$	21.96		1.74		9	$	21.95		1.32
25.46 - 40.38		12	$	35.74		4.65		10	$	35.20		4.31
Total		36	$	24.68		5.15		22	$	26.97		3.22

The weighted average fair value of each option granted in 2010 has been estimated at $4.99 (2009 – $3.45) using the Black-Scholes option-pricing model. The pricing model uses the following weighted average assumptions for these options: risk-free interest rate of 3.0% (2009 – 2.0%), dividend yield of 2.75% (2009 – 4.4%), expected volatility of 30% (2009 – 35%) and expected life of 6.7 (2009 – 6.25) years. Expected volatility is estimated by considering the historical volatility of the share price over a period equivalent to the expected life of the options prior to its date of grant, which reflects the assumption that historical volatility is indicative of future trends.

The stock-based compensation expense recognized during the year is shown in the following table:

For the years ended December 31,	2010		2009
Expense arising from equity-settled stock-based payment transactions	$	25	$	24
Expense arising from cash-settled stock-based payment transactions		59		55
Total stock-based compensation expense	$	84	$	79

The carrying amount of the liability relating to the cash-settled awards at December 31, 2010 is $96 and is included within Other Liabilities.

Dilutive effect of stock-based compensation awards

For the years ended December 31,	2010			2009
Diluted earnings (loss) per common share	$	(0.27	)	$	0.82
Net income (loss) available to common shareholders	$	(470	)	$	1,338
Weighted average number of common shares (in millions)		1,765			1,626
Stock-based awards (1) (in millions)		–			5
Weighted average number of diluted common shares(2)(in millions)		1,765			1,631

⁽¹⁾ The dilutive effect of stock-based awards was calculated using the treasury stock method. This method calculates the number of incremental shares by assuming the outstanding stock-based awards are (i) exercised and (ii) then reduced by the number of shares assumed to be repurchased from the issuance proceeds, using the average market price of MFC common shares for the period. For the year ended December 31, 2010, the diluted calculation utilizes the basic weighted average number of common shares because the loss for the year results in all stock-based awards being anti-dilutive. Excluded from the calculation were an average of 41 million (2009 – 22 million) anti-dilutive stock-based awards.

⁽²⁾ Convertible preferred share liabilities have not been included in the calculation since MFC has the right to redeem them for cash prior to the conversion date.

Note 16    ^    Employee Future Benefits

The Company maintains a number of pension plans, both defined benefit and defined contribution, and post-employment benefit plans for its eligible employees and agents. These plans include broad-based pension plans for employees that are funded, supplemental pension plans for executives that are primarily unfunded, and other post-employment benefit plans that are also primarily unfunded.

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. Assumptions and methods prescribed for regulatory funding purposes differ from those used for accounting purposes. For 2011, the expected required funding for the Company’s largest Canadian and U.S. pension plans is expected to be in the range of $10 to $50.

The Company measures its accrued benefit obligation and the fair value of plan assets for accounting purposes as at December 31 of each year. Actuarial valuations to determine employer required annual contributions for Canadian based pension plans are generally required at least once every three years. The most recent actuarial valuation of the main Canadian staff pension plan was performed as at September 1, 2008. The date of the next required actuarial valuation of the Canadian staff pension plan for funding purposes is September 1, 2011. Pension plans based in the United States require annual valuations, with the most recent valuation performed as at January 1, 2010.

66 2010 Annual Report

Pension and post-employment benefit plans

	Pension benefits						Post-employment benefits
For the years ended December 31,	2010			2009			2010			2009
Changes in plan assets:
Fair value of plan assets, January 1	$	2,755		$	2,749		$	321		$	300
Expected return on plan assets		212			250			27			30
Employer contributions		99			104			58			70
Plan participants’ contributions		1			1			5			6
Benefits paid		(251	)		(277	)		(62	)		(76	)
Actuarial gains		158			247			14			40
Effect of changes in exchange rates		(105	)		(319	)		(18	)		(49	)
Fair value of plan assets, December 31(1)	$	2,869		$	2,755		$	345		$	321

⁽¹⁾ The fair value of plan assets does not include the rabbi trust assets that support non-qualified U.S. retirement plan obligations for certain executives and retired executives in respect of service prior to May 1, 2008. In the event of insolvency of the Company, the rabbi trust assets can be used to satisfy claims of general creditors. At December 31, 2010, assets in the rabbi trust with respect to these pension benefit obligations were $343 (2009 – $368) compared to the related pension benefit obligations of $356 (2009 – $362).

	Pension benefits						Post-employment benefits
For the years ended December 31,	2010			2009			2010			2009
Changes in accrued benefit obligation:
Balance, January 1	$	3,637		$	3,804		$	801		$	904
Service cost		63			63			10			10
Interest cost		194			217			42			51
Plan participants’ contributions		1			1			5			6
Curtailments		–			–			(31	)		–
Actuarial losses		228			258			50			9
Benefits paid		(251	)		(277	)		(62	)		(76	)
Effect of changes in exchange rates		(129	)		(429	)		(30	)		(103	)
Balance, December 31	$	3,743		$	3,637		$	785		$	801

	Pension benefits						Post-employment benefits
As at December 31,	2010			2009			2010			2009
Excess of benefit obligations over fair value of plan assets, end of year	$	(874	)	$	(882	)	$	(440	)	$	(480	)
Unrecognized net actuarial (gain) loss		979			975			35			(1	)
Unrecognized prior service cost		(26	)		(31	)		–			–
Net asset (liability)	$	79		$	62		$	(405	)	$	(481	)

Amounts recognized in the consolidated balance sheets

	Pension benefits						Post-employment benefits
As at December 31,	2010			2009			2010			2009
Accrued benefit asset	$	694		$	661		$	–		$	–
Accrued benefit liability		(615	)		(599	)		(405	)		(481	)
Net asset (liability)	$	79		$	62		$	(405	)	$	(481	)

As at December 31, 2010, the Company’s broad-based funded pension plans consisted of assets of $2,855 (2009 – $2,741) and pension benefit obligations of $2,974 (2009 – $2,911), which results in a pension benefit deficit of $119 (2009 – $170).

The Company’s executive supplemental pension plans are primarily unfunded and, as at December 31, 2010, consisted of assets of $14 (2009 – $14) and pension benefit obligations of $769 (2009 – $726), which results in a pension benefit deficit of $755 (2009 – $712). Of this deficit, $540 (2009 – $540) has been charged to earnings to date. Further, the rabbi trust assets that support a portion of these executive pension obligations amounted to $343 as at December 31, 2010 (2009 – $368). These assets form part of the general fund assets of the Company but are held by an external trustee. Other assets that support these obligations also form part of the general fund assets of the Company and are not separately segregated.

The Company’s post-employment benefit obligation consisted of $500 (2009 – $540) for funded plans and $285 (2009 – $261) for unfunded plans.

2010 Annual Report 67

Assets and obligations of the various pension plans by category, including rabbi trust assets, were as follows:

	Pension benefits
As at December 31,	2010			2009
Broad-based funded pension plans
Fair value of plan assets	$	2,855		$	2,741
Benefit obligation		2,974			2,911
Shortfall of fair value of plan assets over obligations	$	(119	)	$	(170	)
Executive supplemental pension plans
Fair value of plan assets	$	14		$	14
Benefit obligation		769			726
Shortfall of fair value of plan assets over obligations	$	(755	)	$	(712	)
Other
Rabbi trust assets	$	343		$	368
Total
Fair value of assets	$	3,212		$	3,123
Benefit obligation		3,743			3,637
Shortfall of fair value of assets over obligations	$	(531	)	$	(514	)

The assets that support the portion of the post-employment benefit plans that are not funded form part of the general fund assets of the Company.

The weighted average asset allocation for the Company’s funded pension plans was as follows:

	Actual allocation
As at December 31,	2010		2009
Equity securities(1)		47%		51%
Debt securities		45%		41%
Real estate		3%		3%
Other		5%		5%
Total		100%		100%

⁽¹⁾ Pension benefit plans include investments in MFC common shares of $0.3 (2009 – $0.8).

Components of the net benefit expense for the pension plans and other post-employment benefit plans were as follows:

	Pension benefits						Post-employment benefits
For the years ended December 31,	2010			2009			2010			2009
Defined benefit current service cost	$	63		$	63		$	10		$	10
Defined contribution current service cost		67			68			–			–
Interest cost		194			217			42			51
Actual return on plan assets		(370	)		(497	)		(41	)		(70	)
Actuarial losses		228			258			50			9
Plan curtailments		–			–			(31	)		–
Pension costs incurred before adjustments	$	182		$	109		$	30		$	–
Difference between costs arising in the year and costs recognized:
Return on plan assets(1)		158			247			14			40
Actuarial losses(2)		(205	)		(248	)		(51	)		(15	)
Plan amendments(3)		(1	)		(1	)		–			(3	)
Net benefit expense	$	134		$	107		$	(7	)	$	22

⁽¹⁾ Expected return on plan assets of $239 (2009 – $280) less deferral of actual (positive) negative return on plan assets of $(411) (2009 – $(567)).

⁽²⁾ Actuarial loss amortized of $22 (2009 – $4) less actual actuarial loss incurred of $(278) (2009 – $(267)).

⁽³⁾ Amortization of plan amendment gains recognized of $1 (2009 – $4).

68 2010 Annual Report

Key weighted average assumptions

The weighted average assumptions used by the Company to determine the accrued benefit obligation and net benefit expense for all defined benefit pension and post-employment benefit plans were as follows:

	Pension benefits				Post-employment benefits
For the years ended December 31,	2010		2009		2010		2009
To determine the accrued benefit obligation at end of year:
Discount rate		4.9%		5.5%		5.1%		5.8%
Rate of compensation increase		3.9%		4.1%		3.4%		3.3%
Initial health care cost trend rate(1)		n/a		n/a		8.0%		8.0%
To determine the net benefit expense for the year:
Discount rate		5.5%		6.1%		5.8%		6.2%
Expected return on plan assets(2)		7.0%		7.4%		7.8%		8.0%
Rate of compensation increase		4.1%		4.0%		3.3%		3.3%
Initial health care cost trend rate(1)		n/a		n/a		8.0%		8.2%

⁽¹⁾ The health care cost trend rate used to measure the U.S. based post-employment obligation was 8.5% grading to 5.0% for 2028 and years thereafter (2009 – 8.5% grading to 5.0% for 2028) and to measure the expense was 8.5% grading to 5.0% for 2028 and years thereafter (2009 – 8.5% grading to 5.0% for 2016). In Canada, the rate used to measure the post-employment benefit obligation was 6.8% grading to 4.8% for 2026 and years thereafter (2009 – 6.5% grading to 4.8% for 2020) and to measure the expense was 6.5% grading to 4.8% for 2020 and years thereafter (2009 – 6.1% grading to 4.9% for 2013).

⁽²⁾ The expected return on pension plan assets for U.S. based plans was 7.8% (2009 – 8.0%). Plans based in Canada had an expected return on plan assets of 5.5% (2009 – 6.2%). Other pension plans had an expected return of 4.5% (2009 – 4.6%).

The overall expected long-term rate of return is 7.1% on the combined assets for all the funded defined benefit pension and post-employment benefit plans. The expected long-term rate of return is based on the historical returns and the future return expectations in each country for each asset class and on the target asset allocation of the portfolio for each such plan.

Assumptions regarding future mortality are based on published statistics and mortality tables. The current longevities underlying the values of the obligations in the defined benefit pension and post-employment benefit plans are as follows:

As at December 31, 2010	Canada		U.S.
Longevity at age 65 for current pensioners
Males		20		20
Females		22		22
Longevity at age 65 for current members aged 45
Males		21		21
Females		23		23

Sensitivity of key assumptions

Assumptions adopted can have a significant effect on the obligations and expenses reported for defined benefit pension and post-employment benefit plans. The sensitivities of the obligations and expenses to changes in the key assumptions are set out in the following table.

As at and for the year ended December 31, 2010	Pension benefits						Post-employment benefits
	Obligation			Expense			Obligation			Expense
Discount rate:
Impact of a 1% increase	$	(333	)	$	(21	)	$	(74	)	$	(1	)
Impact of a 1% decrease	$	412		$	25		$	89		$	3
Expected return on plan assets:
Impact of a 1% increase		n/a		$	(28	)		n/a		$	(4	)
Impact of a 1% decrease		n/a		$	28			n/a		$	4
Rate of compensation increase:
Impact of a 0.25% increase	$	4		$	1		$	–		$	–
Impact of a 0.25% decrease	$	(5	)	$	(1	)	$	–		$	–
Health care cost trend rate:
Impact of a 1% increase		n/a			n/a		$	45		$	6
Impact of a 1% decrease		n/a			n/a		$	(38	)	$	(5	)

The calculation of the benefit obligation is sensitive to the mortality assumptions. As the actuarial estimates of mortality continue to be refined, the effect of an increase of one year in the lives shown above would increase the benefit obligation by $129.

2010 Annual Report 69

Cash flows – contributions

Total cash payments for all employee future benefits, comprised of cash contributed by the Company to funded defined benefit pension and post-employment benefit plans, cash payments directly to beneficiaries for unfunded pension and post-employment benefit plans, and cash contributed to defined contribution pension plans, were as follows:

	Pension benefits				Post-employment benefits
For the years ended December 31,	2010		2009		2010		2009
Defined benefit	$	99	$	104	$	58	$	70
Defined contribution		67		68		–		–
Total	$	166	$	172	$	58	$	70

Cash flows – estimated benefit payments

The future benefit payments under the defined benefit pension plans and post-employment benefit plans are estimated to be as follows:

For the years ended December 31,	Pension benefits		Post-employment benefits
2011	$	277	$	57
2012		272		58
2013		272		59
2014		274		59
2015		274		60
2016 - 2020		1,328		310

Investment policy and strategy

The Company’s overall investment strategy for funded defined benefit pension and post-employment benefit plans varies by country and also by plan, depending on several factors including legislative requirements, types of benefit provided, plan demographics and plan funded status. The investment policies and strategies of the plans have been developed primarily to diversify the plan assets and to manage risks. Overall, investments are allocated primarily between the major asset classes of fixed income and equity, with a relatively smaller proportion of investments in alternative asset classes. Currently, the overall target asset allocation is set at approximately the following: for Canada, fixed income 66% and public equity 34%; for the U.S., fixed income 37%, public equity 52% and other types of investments 11%.

Fair value measurements

Fair value measurements of defined benefit pension and other post-employment benefit plan assets are categorized according to a three-level hierarchy, as described in note 8.

The fair values of these plan assets by asset category are as follows:

As at December 31, 2010	Total fair value		Level 1(1)		Level 2(1)		Level 3(1)
Defined benefit pension plans
Cash and cash equivalents	$	49	$	49	$	–	$	–
Equities(2)		1,360		772		588		–
Fixed income(2)		1,260		547		642		71
Other investments(3)		200		2		–		198
Total defined benefit pension plan assets	$	2,869	$	1,370	$	1,230	$	269
Post-employment benefit plans
Cash and cash equivalents	$	24	$	24	$	–	$	–
Equities(2)		172		50		122		–
Fixed income(2)		144		23		119		2
Other investments(3)		5		–		–		5
Total post-employment benefit plan assets	$	345	$	97	$	241	$	7

70 2010 Annual Report

As at December 31, 2009	Total fair value		Level 1(1)		Level 2(1)		Level 3(1)
Defined benefit pension plans
Cash and cash equivalents	$	39	$	39	$	–	$	–
Equities(2)		1,395		755		640		–
Fixed income(2)		1,090		731		276		83
Other investments(3)		231		3		–		228
Total defined benefit pension plan assets	$	2,755	$	1,528	$	916	$	311
Post-employment benefit plans
Cash and cash equivalents	$	24	$	24	$	–	$	–
Equities(2)		160		27		133		–
Fixed income(2)		132		27		103		2
Other investments(3)		5		–		–		5
Total post-employment benefit plan assets	$	321	$	78	$	236	$	7

⁽¹⁾ See note 8 for a description of the categorization of assets under the three-level fair value hierarchy.

⁽²⁾ Includes investments in mutual funds, common/collective trusts, separate accounts and separate accounts of group annuity contracts that share exposure to equities or fixed income securities respectively.

⁽³⁾ Includes investments in private equity, timber and agriculture and other assets.

The changes in Level 3 defined benefit pension and other post-employment benefit plan assets measured at fair value on a recurring basis are summarized as follows:

	Private equity			Timber and agriculture and other
Balance as at January 1, 2010	$	138		$	180
Actual return on plan assets
Relating to assets still held at the reporting date		11			(2	)
Relating to assets sold during the year		12			7
Purchases, sales and settlements		(36	)		(20	)
Effect of changes in foreign exchange rates		(6	)		(8	)
Balance as at December 31, 2010	$	119		$	157

	Private equity			Timber and agriculture and other
Balance as at January 1, 2009	$	188		$	191
Actual return on plan assets
Relating to assets still held at the reporting date		(22	)		28
Relating to assets sold during the year		5			2
Purchases, sales and settlements		(7	)		(13	)
Effect of changes in foreign exchange rates		(26	)		(28	)
Balance as at December 31, 2009	$	138		$	180

Note 17    ^    Variable Interest Entities

In its capacities as an investor and as an investment manager, the Company has relationships with various types of entities, some of which are considered VIEs. The Company also has relationships with VIEs used to arrange certain of the Company’s financings.

The variable interest holder, if any, that will absorb a majority of the VIE’s expected losses, receive a majority of the VIE’s expected residual returns, or both, is deemed to be the primary beneficiary and must consolidate the VIE. An entity that holds a significant variable interest in a VIE, but is not the primary beneficiary, must disclose certain information regarding its involvement with the VIE.

The Company determines whether it is the primary beneficiary of a VIE by evaluating the contractual rights and obligations associated with each party involved with the entity, calculating estimates of the entity’s expected losses and expected residual returns, and allocating the estimated amounts to each party. In addition, the Company considers qualitative factors, such as the extent of the Company’s involvement in creating or managing the VIE.

If it is not determined to be the primary beneficiary, the Company does not consolidate the VIE. The Company assesses the materiality of its relationship with the VIE to determine if it holds a significant variable interest, which requires disclosure. This assessment considers the materiality of the VIE relationship to the Company as, among other factors, a percentage of total investments, percentage of total net investment income, and percentage of total funds under management. For purposes of assessing materiality and disclosing significant variable interests, the Company aggregates similar entities.

2010 Annual Report 71

a) Investment entities that are variable interest entities

Variable interest entities that are consolidated with the Company’s segregated funds

The Company’s segregated funds are considered the primary beneficiary of certain timberland VIEs. The consolidation of these VIEs in the segregated funds as at December 31, 2010 resulted in an increase in segregated fund assets of $1,563 (2009 – $1,648), an increase in segregated fund liabilities of $868 (2009 – $911) and an increase in net assets held by other contract holders of $695 (2009 – $737).

The liabilities recognized as a result of consolidating the timberland VIEs do not represent additional claims on the general fund assets of the Company; rather, they represent claims against the assets recognized as a result of consolidating the VIEs. Conversely, the assets recognized as a result of consolidating the timberland VIEs do not represent additional assets which the Company can use to satisfy claims against its general fund liabilities; rather, they can only be used to settle the liabilities recognized as a result of consolidating the VIEs.

Variable interest entities that are consolidated in the Company’s general fund

As described below, the Company consolidates a portion of MFLP into its general fund which results in no quantitative changes to the Company’s assets, liabilities or equity.

Variable interest entities that are not consolidated

Except as noted above, the Company has determined that it is not the primary beneficiary of any VIE in which it invests or manages.

The following is a discussion of the VIEs with which the Company has significant relationships.

Collateralized debt obligation funds

The Company acts as an investment manager to certain asset-backed investment vehicles, commonly known as collateralized debt obligation funds (“CDOs”). The Company has determined that most of the CDOs it manages are VIEs. The Company also invests in the debt and/or equity of these CDOs, and in the debt and/or equity of CDOs managed by others. Any net losses in excess of the CDO equity are borne by the debt owners. Owners of securities issued by CDOs that are managed by the Company have no recourse to the Company’s assets in the event of default by the CDO. The Company’s risk of loss from any CDO that it manages, or in which it invests, is limited to its investment in the CDO.

The maximum exposure to losses from CDOs managed by the Company is $23 (2009 – $29). This consists of $7 (2009 – $14) in tranches rated below BBB and $16 (2009 – $15) in equity tranches.

Company-managed CDOs As at December 31,	2010			2009
Total assets	$	1,361		$	1,498
Total debt	$	5,005		$	5,598
Total other liabilities		6			7
Total liabilities	$	5,011		$	5,605
Total equity(1)		(3,650	)		(4,107	)
Total liabilities and equity(2)	$	1,361		$	1,498

⁽¹⁾ Changes in asset values reflect fair value adjustments to securities held in CDO funds managed by the Company’s subsidiaries, as well as purchases, sales and maturities. Changes in liabilities reflect issuance and extinguishment of debt financing by the CDO funds. Since the funds’ assets are carried at fair value and their debt is carried at par, previous declines in the assets’ fair values generated negative equity in the funds.

⁽²⁾ Includes the Company’s investment in the debt and equity of Company-managed VIE and non-VIE CDOs.

Low-income housing partnerships

The Company has investments that qualify for low-income housing tax credits (“LIH Partnerships”) in the U.S. and has determined that most of the LIH Partnerships are VIEs. These investments are primarily made through real estate limited partnerships. The Company is usually the sole limited partner or an investor member and is not the general partner or managing member in any of the LIH Partnerships.

The Company’s maximum exposure to losses from its investments in LIH Partnerships is $453 (2009 – $546). This consists of $378 (2009 – $423) of equity investments, $61 (2009 – $66) of mortgages, and $14 (2009 – $57) of outstanding equity capital commitments.

LIH Partnerships(1) As at December 31,	2010		2009
Total assets	$	1,317	$	1,242
Total debt	$	802	$	715
Total other liabilities		144		131
Total liabilities	$	946	$	846
Total equity		371		396
Total liabilities and equity(2)	$	1,317	$	1,242

⁽¹⁾ Certain data in the table above is reported with a six to twelve month lag due to the delayed availability of financial statements of the LIH Partnerships.

⁽²⁾ Includes the Company’s investment in the debt and equity of the LIH Partnerships.

72 2010 Annual Report

Timberland investments

The Company acts as an investment manager of timberland properties with total assets of $9 billion, of which $7 billion relates to funds that the general fund and institutional segregated funds invest in (the “Timber Funds”). In its capacity as investment manager to the Timber Funds, the Company earns investment advisory fees, and in the majority of cases earns forestry management fees and is eligible for performance advisory fees. The Company has determined that most of the Timber Funds are VIEs.

The maximum exposure of the Company’s general fund to losses from the Timber Funds is $634 (2009 – $538). This consists of $190 (2009 – $161) of equity investments, $408 (2009 – $373) of debt investments, and $36 (2009 – $4) of outstanding equity commitments to these funds.

Timber Funds As at December 31,	2010		2009
Total assets	$	6,611	$	6,480
Total debt	$	3,209	$	3,058
Total other liabilities		75		160
Total liabilities	$	3,284	$	3,218
Total equity		3,327		3,262
Total liabilities and equity(1)	$	6,611	$	6,480

⁽¹⁾ Includes the Company’s investment in the debt and equity of the Timber Funds.

Other entities

The Company has investment relationships with a wide variety of other entities (“Other Entities”), which result from its direct investment in their debt and/or equity. This category includes energy investment partnerships, investment funds organized as limited partnerships, and businesses that have undergone debt restructurings and reorganizations. Many of these entities are VIEs. The Company believes that its relationships with these Other Entities are not significant and, accordingly, does not provide any summary financial data for them. The Company’s maximum exposure to losses as a result of its involvement with Other Entities is generally limited to amounts invested, which are included on the Company’s Consolidated Balance Sheets in the appropriate investment categories.

b) Financing entities that are variable interest entities

To the extent that non-consolidated VIEs are used to access capital markets, the Company’s borrowings from the VIEs are included on the Company’s Consolidated Balance Sheets in the appropriate liability categories.

Manulife Financial Capital Trust

Manulife Financial Capital Trust (the “Trust”), an open-end trust, is deemed to be a VIE; however, because the Company is not the primary beneficiary, the Trust is not consolidated. Manulife Financial Capital Securities (“MaCS”) issued by the Trust are, at the option of their holders, exchangeable into newly issued Class A Shares Series 2 or Class A Shares Series 4 of MLI. Under certain circumstances and without the consent of the holders, the MaCS will be automatically exchanged into MLI Class A Shares Series 3 or MLI Class A Shares Series 5. The MaCS form part of the Company’s Tier 1 regulatory capital.

Manulife Financial Capital Trust II

Manulife Financial Capital Trust II (“Trust II”), an open-end trust, is deemed to be a VIE; however, because the Company is not the primary beneficiary, Trust II is not consolidated. Under certain circumstances and without the consent of the holders, Manulife Financial Capital Trust II Notes – Series 1 (“MaCS II – Series 1”) or interest thereon issued by Trust II may be automatically exchanged or paid by the issuance of non-cumulative Class 1 preferred shares of MLI. The MaCS II – Series 1 form part of the Company’s Tier 1 regulatory capital.

Manulife Finance (Delaware), L.P.

On December 14, 2006, MFLP, a wholly owned partnership, issued $550 of senior debentures which mature December 15, 2026 and $650 of subordinated debentures which mature December 15, 2041. The senior debentures bear interest at the rate of 4.448% per annum, payable semi-annually until December 15, 2016 and thereafter at the 90-day Bankers Acceptance rate plus 1.5%, payable quarterly. The subordinated debentures bear interest at the rate of 5.059% per annum, payable semi-annually until December 15, 2036 and thereafter at the 90-day Bankers Acceptance rate plus 1%, payable quarterly. MFLP may redeem the senior debentures, upon certain tax changes or at any time prior to December 15, 2016, for the amount of principal, unpaid interest plus a premium calculated with reference to the Government of Canada yield. MFLP may redeem the senior debentures on December 15, 2016 and on any interest payment date thereafter for the amount of principal and unpaid interest. With regulatory approval, MFLP may redeem the subordinated debentures, upon certain tax changes or at any time prior to December 15, 2036, for the amount of principal, unpaid interest plus a premium calculated with reference to the Government of Canada yield. With regulatory approval, MFLP may redeem the subordinated debentures on December 15, 2036 and on any interest payment date thereafter for the amount of principal and unpaid interest. Proceeds of the debentures were lent by MFLP to the Company in the form of subordinated notes payable to MFLLC (see note 12).

2010 Annual Report 73

On November 30, 2010, the Company repaid $150 of the $550 subordinated note payable to MFLP and borrowed $150 from MFLP in the form of a floating rate loan maturing December 15, 2016. The remaining proceeds from the subordinated notes payable to MFLP form part of the Company’s Tier 2B regulatory capital.

In order to manage exposure to the interest rate difference between the debentures issued and the subordinated notes receivable from MHD (now JHH, see note 12), MFLP has entered into interest rate swaps.

In accordance with VIE accounting guidelines, MFLP is divided into silos and a host entity. The debt silos are comprised of debt instruments issued by MFLP and the corresponding amounts lent by MFLP to the Company and the interest rate swaps described above. The amounts the Company has invested in MFLP’s equity, plus accumulated interest thereon, comprise the host entity and another silo. The Company is not the primary beneficiary of and, therefore, does not consolidate the debt silos. The Company owns 100% of the host entity and the accumulated interest silo and consolidates both. The impact of this application of the silo aspects of the VIE accounting guidelines resulted in the Company recognizing its debt payable to MFLP, instead of recognizing MFLP’s senior and subordinated debentures payable to the investing public. There is no numerical impact to the Company’s assets, liabilities or equity as a result of this accounting.

Note 18    ^    Commitments and Contingencies

a) Legal proceedings

The Company is regularly involved in legal actions, both as a defendant and as a plaintiff. The legal actions naming the Company as a defendant ordinarily involve its activities as a provider of insurance protection and wealth management products, as well as an investment adviser, employer and taxpayer. In addition, government and regulatory bodies that oversee the Company’s operations in the various jurisdictions in which it operates regularly make inquiries and, from time to time, require the production of information or conduct examinations concerning the Company’s compliance with, among other things, insurance laws, securities laws and laws governing the activities of broker-dealers.

The Company announced on June 19, 2009 that it had received an enforcement notice from staff of the Ontario Securities Commission (“OSC”) relating to its disclosure before March 2009 of risks related to its variable annuity guarantee and segregated funds business. The notice indicated that it was the preliminary conclusion of OSC staff that the Company failed to meet its continuous disclosure obligations related to its exposure to market price risk in its segregated funds and variable annuity guaranteed products. The Company had the opportunity to respond to the notice before the OSC staff made a decision whether to commence proceedings. The Company responded to the notice and is cooperating with OSC staff in responding to further inquiries. The process is ongoing.

The Company may become subject to regulatory or other action by regulatory authorities in other jurisdictions based on similar allegations.

Proposed class action lawsuits against the Company have been filed in Canada and the United States, on behalf of investors in those jurisdictions, based on similar allegations. The Company may become subject to other similar lawsuits by investors.

The Company believes that its disclosure satisfied applicable disclosure requirements and intends to vigorously defend itself against any claims based on these allegations.

b) Tax related contingency

The Company is an investor in a number of leasing transactions and has established provisions for possible disallowance of the tax treatment and for interest on past due taxes. During the year ended December 31, 2010, the Company recorded additional charges of $99 after tax related to these provisions. The Company continues to believe that deductions originally claimed in relation to these arrangements are appropriate. Should the tax attributes of the Company’s lease transactions be fully denied, the maximum after-tax exposure including interest is estimated to be an additional US$220 as at December 31, 2010.

The Company is subject to income tax laws in various jurisdictions. Tax laws are complex and potentially subject to different interpretations by the taxpayer and the relevant tax authority. The provision for income taxes and deferred tax represents management’s interpretation of the relevant tax laws and its estimate of current and future income tax implications of the transactions and events during the period. The Company may be required to change its provision for income taxes or deferred tax balances when the ultimate deductibility of certain items is successfully challenged by taxing authorities or if estimates used in determining valuation allowances on deferred tax asset significantly change, or when receipt of new information indicates the need for adjustment in valuation allowances. Additionally, future events, such as changes in tax laws, tax regulations, or interpretations of such laws or regulations, could have an impact on the provision for income tax, deferred tax balances and the effective tax rate. Any such changes could materially affect the amounts reported in the consolidated financial statements in the year these changes occur.

c) Investment commitments

In the normal course of business, various investment commitments are outstanding which are not reflected in the consolidated financial statements. There were $3,154 (2009 – $2,833) of outstanding investment commitments as at December 31, 2010, of which $713 (2009 – $207) mature in 30 days, $1,597 (2009 – $1,343) mature in 31 to 365 days and $844 (2009 – $1,283) mature after one year.

74 2010 Annual Report

d) Letters of credit

In the normal course of business, third party relationship banks issue letters of credit on the Company’s behalf. The Company’s businesses utilize letters of credit for which third parties are the beneficiaries, as well as for affiliate reinsurance transactions between subsidiaries of MFC. As at December 31, 2010, letters of credit for which third parties are beneficiary, in the amount of $414 (2009 – $504), were outstanding.

e) Guarantees

Guarantees regarding Manulife Finance (Delaware), L.P.

MFC has guaranteed the payment of amounts on the $550 senior debentures due December 15, 2026 and $650 subordinated debentures due December 15, 2041 issued by MFLP, a wholly owned partnership. The Company does not consolidate these debentures; however, the Company does have obligations in the same total principal amounts to MFLP and a subsidiary of MFLP. The senior debentures pay a fixed interest rate of 4.448% per annum, payable semi-annually, until December 15, 2016 and, thereafter, will pay a floating rate of interest equal to the 90-day Bankers Acceptance rate plus 1.5%, payable quarterly. The subordinated debentures pay a fixed interest rate of 5.059% per annum, payable semi-annually, until December 15, 2036 and, thereafter, will pay a floating rate of interest equal to the 90-day Bankers Acceptance rate plus 1%, payable quarterly. MFC’s guarantee of the senior debentures has the effect of making the $550 senior debentures into a senior obligation of the Company. MFC’s guarantee of the $650 subordinated debentures is a subordinated obligation of the Company.

Guarantees regarding The Manufacturers Life Insurance Company

On January 29, 2007, MFC provided a full and unconditional guarantee of MLI’s $550 subordinated debentures due February 16, 2016 and a subordinated guarantee of Class A Shares and Class B Shares of MLI and any other class of preferred shares that rank on a parity with Class A Shares or Class B Shares of MLI. MFC’s guarantee of the subordinated debentures is a direct unsecured obligation of MFC and ranks equally with all other unsecured subordinated indebtedness of MFC, except for other guarantees or obligations of MFC which by their terms are designated as ranking as equally in right of payment with or subordinate to the subordinated indebtedness of MFC.

The following tables set forth certain condensed consolidating financial information for MFC and MFLP:

As at and for the year ended December 31, 2010	MFC (Guarantor)			Manulife Finance (Delaware), L.P.			MLI Consolidated			Other Subsidiaries of MFC on a Combined Basis			Consolidating Adjustments			Total Consolidated Amounts
Total revenue	$	151		$	53		$	36,844		$	1,479		$	(894	)	$	37,633
Net income (loss) attributed to shareholders		(391	)		(3	)		(147	)		(583	)		733			(391	)
Invested assets		39			4			196,508			2,897			–			199,448
Total other assets		32,776			1,445			17,101			6,442			(39,540	)		18,224
Policy liabilities		–			–			143,610			8,334			–			151,944
Total other liabilities		6,100			1,293			38,455			538			(7,531	)		38,855
As at and for the year ended December 31, 2009
Total revenue	$	59		$	60		$	39,302		$	2,000		$	(1,314	)	$	40,107
Net income (loss) attributed to shareholders		1,402			2			2,726			(1,153	)		(1,575	)		1,402
Invested assets		3			7			185,391			2,150			(81	)		187,470
Total other assets		32,700			1,384			17,975			5,101			(38,785	)		18,375
Policy liabilities		–			–			134,826			6,861			–			141,687
Total other liabilities		3,796			1,232			36,772			121			(6,670	)		35,251

Guarantees regarding Manulife Finance Holdings Limited (“MFHL”)

MFC has guaranteed the payment of amounts on the $220 6.822% senior notes due May 31, 2011 and the $175 6.646% senior notes due November 30, 2011 assumed by MFHL, a wholly owned subsidiary.

Details of guarantees regarding certain securities issued or to be issued by JHUSA, John Hancock Life Insurance Company of New York and MFHL are outlined in note 22(k).

f) Pledged assets

In the normal course of business, certain of MFC’s subsidiaries pledge their assets in respect of liabilities incurred, strictly for the purpose of providing collateral for the counterparty. In the event of the Company’s default, the counterparty is entitled to apply the collateral in order to settle the liability. The pledged assets are returned to the Company if the underlying transaction is terminated or, in the case of derivatives, if the net exposure moves to an asset position due to market value changes.

2010 Annual Report 75

The amounts pledged were as follows:

	2010				2009
As at December 31,	Bonds		Other		Bonds		Other
In respect of:
Derivatives	$	1,818	$	10	$	1,194	$	12
Regulatory requirements		170		51		167		34
Real estate		–		70		–		85
Repurchase agreements		486		–		–		–
Non-registered retirement plans in trust		–		423		–		453
Other		2		–		1		1
Total	$	2,476	$	554	$	1,362	$	585

The Company is required to deposit securities with government agencies in U.S. states where it conducts business. As of December 31, 2010, the fair value of securities on deposit was approximately $34 (2009 – $52). These amounts are included under regulatory requirements in the table above.

g) Lease obligations

The Company has a number of operating lease obligations, primarily for the use of office space. The future minimum lease payments by year and in aggregate, under non-cancelable operating leases, are presented below:

2011	$	110
2012		95
2013		79
2014		57
2015		36
Thereafter		438
Total minimum lease payments	$	815

h) Restrictions on dividends and capital distributions

Dividends and capital distributions are restricted under the ICA. These restrictions apply to both the Company and its primary operating subsidiary MLI. The ICA prohibits the declaration or payment of any dividend on shares of an insurance company if there are reasonable grounds for believing a company does not have adequate capital and adequate and appropriate forms of liquidity or the declaration or the payment of the dividend would cause the company to be in contravention of any regulation made under the ICA respecting the maintenance of adequate capital and adequate and appropriate forms of liquidity, or of any direction made to the Company by the Superintendent. The ICA also requires an insurance company to notify the Superintendent of the declaration of a dividend at least 15 days prior to the date fixed for its payment. Similarly, the ICA prohibits the purchase for cancellation of any shares issued by an insurance company or the redemption of any redeemable shares or other similar capital transactions, if there are reasonable grounds for believing that the company does not have adequate capital and adequate and appropriate forms of liquidity or the payment would cause the Company to be in contravention of any regulation made under the ICA respecting the maintenance of adequate capital and adequate and appropriate forms of liquidity, or any direction made to the company by the Superintendent. These latter transactions would require the prior approval of the Superintendent.

The ICA requires Canadian non-operating insurance companies to maintain, at all times, adequate levels of capital which is assessed by comparing capital available to a risk metric in accordance with Capital Regime for Regulated Insurance Holding Companies and Non-Operating Life Companies, issued by OSFI. OSFI expects holding companies to manage their capital in a manner commensurate with the group risk profile and control environment. See also note 14.

Regulated subsidiaries of MFC must also maintain minimum levels of capital. Such amounts of capital are based on the local capital regime and the statutory accounting basis in each jurisdiction. The most significant of these are the Minimum Continuing Capital and Surplus Requirements for MFC’s Canadian insurance subsidiaries and the Risk Based Capital requirements for MFC’s U.S. insurance subsidiaries. The Company maintains capital in excess of the minimum required in all jurisdictions.

There are additional restrictions on shareholder dividend distributions in foreign jurisdictions. In the U.S., MFC’s principal U.S. insurance subsidiary JHUSA is domiciled in the state of Michigan. Michigan regulatory approval is required if a shareholder dividend distribution from a Michigan insurance subsidiary would exceed that subsidiary’s earned regulatory surplus. Regulatory approval is also required if the distribution (together with other distributions during the previous 12 months) exceeds the greater of the subsidiary’s statutory net operating income for the previous year and 10 per cent of its surplus determined at the end of the previous year. The determination must be made in accordance with statutory accounting principles. In addition, Michigan law requires that notification be given to the local insurance commissioner no later than five days following declaration, and at least 10 days prior to payment, of any dividend or distribution.

76 2010 Annual Report

i) 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 businesses operating as separate “closed blocks”, transfers are governed by the terms of MLI’s and John Hancock Mutual Life Insurance Company’s plans of demutualization.

Note 19    ^    Segmented Information

The Company’s reporting segments are U.S. Insurance and U.S. Wealth Management, which combine to form the U.S. Division, as well as the Asia, Canadian and Reinsurance Divisions and the Corporate and Other segment. 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 significant product and service offerings of each segment are:

Protection (U.S. Insurance, Asia and Canadian Divisions). Offers a variety of individual life insurance and individual and group long-term care insurance. Products are distributed through multiple distribution channels, including insurance agents, brokers, banks, financial planners and direct marketing.

Wealth Management (U.S. Wealth, Asia and Canadian Divisions). Offers annuities, pension contracts, and mutual fund products and services. These businesses also offer a variety of retirement products to group benefit plans. Annuity contracts provide non-guaranteed, partially guaranteed, and fully guaranteed investment options through general and separate account products. The Canadian Wealth Management business also includes Manulife Bank, which offers a variety of deposit and credit products to Canadian customers. These businesses distribute products through multiple distribution channels, including insurance agents and brokers affiliated with the Company, securities brokerage firms, financial planners, pension plan sponsors, pension plan consultants and banks.

Reinsurance. Provides life and property and casualty retrocession coverage and international employee benefits management services. Manulife Financial writes reinsurance business in the Americas, Europe, Asia and Australia. The Division has offices in Canada, the United States, Germany, Belgium, Barbados, Singapore and Japan.

Corporate and Other Segment. Comprised of the Investment Division’s external asset management business, earnings on assets backing capital, net of amounts allocated to operating divisions, changes in actuarial methods and assumptions, the John Hancock Accident and Health operation and other non operating items.

Certain allocation methodologies are employed in the preparation of segmented financial information. Indirect expenses are allocated to business segments using allocation formulas applied on a consistent basis, while capital is apportioned to the Company’s business segments using a risk-based methodology. The income statement impact of changes in actuarial assumptions and model refinements (note 6(f)) and the income statement impact of the goodwill impairment charge (note 4) are reported in the Corporate and Other segment.

The Company allocates gains and losses, that arise when investment and market related experience differs from the assumptions used in the valuation of policy liabilities, in accordance with the way the Company manages the assets and related risk positions. These gains and losses are accumulated into two pools – insurance and wealth management and then allocated pro-rata to the reporting segments based on their respective policy liabilities. Market related gains and losses on product features, such as segregated fund guarantees and future fees assumed in variable universal life and equity-linked policy liabilities, as well as gains and losses on full pass-through products, such as par insurance, are not included in the pools.

2010 Annual Report 77

By segment For the year ended December 31, 2010	Asia Division			Canadian Division			U.S. Insurance			U.S. Wealth Management			Reinsurance Division			Corporate and Other			Total
Revenue
Premium income
Life and health insurance	$	4,214		$	2,615		$	5,979		$	–		$	972		$	–		$	13,780
Annuities and pensions		641			1,240			–			2,690			–			–			4,571
Total premium income	$	4,855		$	3,855		$	5,979		$	2,690		$	972		$	–		$	18,351
Investment income		1,758			3,992			3,955			2,357			145			815			13,022
Other revenue		842			1,762			612			2,789			26			229			6,260
Total revenue	$	7,455		$	9,609		$	10,546		$	7,836		$	1,143		$	1,044		$	37,633
Interest expense	$	59		$	248		$	44		$	50		$	2		$	674		$	1,077
Goodwill impairment	$	–		$	–		$	–		$	–		$	–		$	1,039		$	1,039
Income (loss) before income taxes	$	778		$	766		$	(41	)	$	1,051		$	218		$	(3,944	)	$	(1,172	)
Income tax recovery (expense)		(91	)		199			25			(276	)		(35	)		1,038			860
Net income (loss)	$	687		$	965		$	(16	)	$	775		$	183		$	(2,906	)	$	(312	)
Less net income attributed to participating policyholders		64			15			–			–			–			–			79
Net income (loss) attributed to shareholders	$	623		$	950		$	(16	)	$	775		$	183		$	(2,906	)	$	(391	)
Segregated funds deposits	$	3,232		$	5,030		$	1,287		$	14,995		$	–		$	–		$	24,544
Goodwill
Balance, January 1	$	537		$	2,166		$	2,427		$	1,843		$	70		$	79		$	7,122
Impairment		–			–			(1,039	)		–			–			–			(1,039	)
Acquisition of subsidiaries		–			(2	)		–			–			–			2			–
Effect of exchange rate changes		35			–			(76	)		(92	)		(3	)		(6	)		(142	)
Balance, December 31	$	572		$	2,164		$	1,312		$	1,751		$	67		$	75		$	5,941
As at December 31, 2010 Policy liabilities	$	22,000		$	42,346		$	57,896		$	28,411		$	1,538		$	(247	)	$	151,944
Total assets	$	30,418		$	69,227		$	64,434		$	35,954		$	2,639		$	15,000		$	217,672
Segregated funds net assets held by policyholders	$	24,026		$	40,773		$	12,196		$	120,021		$	–		$	1,956		$	198,972

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 businesses pertain.

By geographic location For the year ended December 31, 2010	Asia		Canada		United States		Other		Total
Revenue
Premium income
Life and health insurance	$	4,221	$	2,655	$	6,393	$	511	$	13,780
Annuities and pensions		641		1,240		2,690		–		4,571
Total premium income	$	4,862	$	3,895	$	9,083	$	511	$	18,351
Investment income		1,791		4,614		6,488		129		13,022
Other revenue		755		1,389		4,026		90		6,260
Total revenue	$	7,408	$	9,898	$	19,597	$	730	$	37,633

78 2010 Annual Report

By segment For the year ended December 31, 2009	Asia Division			Canadian Division		U.S. Insurance			U.S. Wealth Management			Reinsurance Division			Corporate and Other			Total
Revenue
Premium income
Life and health insurance(1)	$	3,853		$	3,383	$	6,640		$	–		$	1,123		$	–		$	14,999
Annuities and pensions		172			1,909		–			5,866			–			–			7,947
Total premium income	$	4,025		$	5,292	$	6,640		$	5,866		$	1,123		$	–		$	22,946
Investment income (loss)		1,978			4,244		2,821			2,731			204			(675	)		11,303
Other revenue		830			1,448		649			2,580			24			327			5,858
Total revenue	$	6,833		$	10,984	$	10,110		$	11,177		$	1,351		$	(348	)	$	40,107
Interest expense	$	60		$	276	$	36		$	179		$	1		$	749		$	1,301
Income (loss) before income taxes	$	1,265		$	103	$	(2,245	)	$	3,176		$	330		$	(2,781	)	$	(152	)
Income tax recovery (expense)		464			670		804			(990	)		(69	)		693			1,572
Net income (loss)	$	1,729		$	773	$	(1,441	)	$	2,186		$	261		$	(2,088	)	$	1,420
Less net income (loss) attributed to participating policyholders		(10	)		28		–			–			–			–			18
Net income (loss) attributed to shareholders	$	1,739		$	745	$	(1,441	)	$	2,186		$	261		$	(2,088	)	$	1,402
Segregated funds deposits	$	3,813		$	5,728	$	2,269		$	17,265		$	–		$	9		$	29,084
Goodwill
Balance, January 1	$	639		$	2,118	$	2,866		$	2,156		$	82		$	68		$	7,929
Acquisition of subsidiaries		–			48		–			–			–			–			48
Effect of exchange rate changes		(102	)		–		(439	)		(313	)		(12	)		11			(855	)
Balance, December 31	$	537		$	2,166	$	2,427		$	1,843		$	70		$	79		$	7,122
As at December 31, 2009 Policy liabilities	$	17,877		$	38,876	$	54,004		$	29,384		$	1,693		$	(147	)	$	141,687
Total assets	$	25,628		$	63,568	$	59,004		$	38,503		$	2,974		$	16,168		$	205,845
Segregated funds net assets held by policyholders	$	27,218		$	36,258	$	11,431		$	113,440		$	–		$	2,318		$	190,665

⁽¹⁾ At the end of the first quarter of 2009, Canadian Group Benefits entered into an external reinsurance agreement which resulted in a substantial reduction in net premium revenue reported in the consolidated statement of operations. The Company retains certain benefits and certain risks on this business.

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 businesses pertain.

By geographic location For the year ended December 31, 2009	Asia		Canada		United States		Other		Total
Revenue
Premium income
Life and health insurance	$	3,860	$	3,431	$	7,139	$	569	$	14,999
Annuities and pensions		172		1,909		5,866		–		7,947
Total premium income	$	4,032	$	5,340	$	13,005	$	569	$	22,946
Investment income		1,848		3,985		5,339		131		11,303
Other revenue		844		1,527		3,464		23		5,858
Total revenue	$	6,724	$	10,852	$	21,808	$	723	$	40,107

Note 20    ^    Related Parties

a) Balances with related parties

A number of the entities as disclosed in note 21 transacted with the Company during the reporting period in transactions made in the normal course of business. All related party transactions have taken place at terms that would exist in arm’s length transactions.

b) Compensation of key management personnel

Key management personnel of the Company are those that have the authority and responsibility for planning, directing and controlling the activities of the Company. Directors (both executive and non-executive) and senior management are considered key personnel. Accordingly, the summary of compensation of key management personnel is as follows:

For the year ended December 31, 2010
Short-term employee benefits	$	17
Post-employment benefits		2
Share-based payments		22
Termination benefits		2
Other long-term benefits		1
	$	44

2010 Annual Report 79

Note 21    ^    Significant Subsidiaries

The following is a list of the directly and indirectly held major operating subsidiaries of Manulife Financial Corporation.

As at December 31, 2010	Ownership Percentage		Address		Description
The Manufacturers Life Insurance Company		100		Toronto, Canada	Leading Canadian-based financial services company that offers a diverse range of financial protection products and wealth management services
Manulife Holdings (Alberta) Limited		100		Calgary, Canada	Holding company
John Hancock Holdings (Delaware) LLC		100		Wilmington, Delaware, U.S.A.	Holding company
The Manufacturers Investment Corporation		100		Michigan, U.S.A.	Holding company
John Hancock Life Insurance Company (U.S.A.)		100		Michigan, U.S.A.	U.S. life insurance company licensed in all states, except New York
John Hancock Subsidiaries LLC		100		Wilmington, Delaware, U.S.A.	Holding company
Declaration Management & Research LLC		100		McLean, Virginia, U.S.A.	Provides institutional investment advisory services
John Hancock Financial Network, Inc.		100		Boston, Massachusetts, U.S.A.	Financial services distribution organization
The Berkeley Financial Group, LLC		100		Boston, Massachusetts, U.S.A.	Holding company
John Hancock Advisers, LLC		100		Boston, Massachusetts, U.S.A.	Investment advisor
John Hancock Funds, LLC		100		Boston, Massachusetts, U.S.A.	U.S. broker-dealer
Hancock Natural Resource Group, Inc.		100		Boston, Massachusetts, U.S.A.	Manager of globally diversified timberland and agricultural portfolios for public and corporate pension plans, high net-worth individuals, foundations and endowments
John Hancock Life Insurance Company of New York		100		New York, U.S.A.	U.S. life insurance company licensed in New York
John Hancock Investment Management Services, LLC		100		Boston, Massachusetts, U.S.A.	Investment advisor
John Hancock Life & Health Insurance Company		100		Boston, Massachusetts, U.S.A.	U.S. life insurance company licensed in all states
John Hancock Distributors LLC		100		Delaware, U.S.A.	U.S. broker-dealer
John Hancock Insurance Agency, Inc.		100		Delaware, U.S.A.	U.S. insurance agency
Manulife Reinsurance Limited		100		Hamilton, Bermuda	Provides life and financial reinsurance
Manulife Reinsurance (Bermuda) Limited		100		Hamilton, Bermuda	Provides life and financial reinsurance
Manulife Holdings (Bermuda) Limited		100		Hamilton, Bermuda	Holding company
Manufacturers P&C Limited		100		St. Michael, Barbados	Provides property and casualty and financial reinsurance
Manufacturers Life Reinsurance Limited		100		St. Michael, Barbados	Provides life and financial reinsurance
Manulife International Holdings Limited		100		Hamilton, Bermuda	Holding company
Manulife (International) Limited		100		Hong Kong, China	Life insurance company serving Hong Kong and Taiwan
Manulife-Sinochem Life Insurance Co. Ltd.		51		Shanghai, China	Chinese life insurance company
Manulife Asset Management International Holdings Limited		100		St. Michael, Barbados	Holding company
Manulife Asset Management (Hong Kong) Limited		100		Hong Kong, China	Hong Kong investment management and advisory company marketing mutual funds
Manulife Asset Management (Taiwan) Co., Ltd.		100		Taipei, Taiwan	Asset management company
Manulife Bank of Canada		100		Waterloo, Canada	Provides integrated banking products and service options not available from an insurance company
Manulife Canada Ltd.		100		Waterloo, Canada	Canadian life insurance and accident and sickness insurance company

80 2010 Annual Report

As at December 31, 2010	Ownership Percentage		Address		Description
FNA Financial Inc.		100		Toronto, Canada	Holding company
Manulife Asset Management Limited		100		Toronto, Canada	Investment counseling, portfolio and mutual fund management in Canada
First North American Insurance Company		100		Toronto, Canada	Canadian property and casualty insurance company
NAL Resources Management Limited		100		Calgary, Canada	Management company for oil and gas properties
Manulife Securities Investment Services Inc.		100		Burlington, Canada	Mutual fund dealer for Canadian operations
MLI Resources Inc.		100		Calgary, Canada	Holding company for oil and gas assets and Japanese and Malaysian operations
Manulife Holdings Berhad		58.7		Kuala Lumpur, Malaysia	Investment holding company
Manulife Insurance Berhad		58.7		Kuala Lumpur, Malaysia	Malaysian life insurance company
Manulife Asset Management (Malaysia) Sdn Bhd		58.7		Kuala Lumpur, Malaysia	Asset management company
Manulife Life Insurance Company		100		Tokyo, Japan	Japanese life insurance company
Manulife Asset Management (Japan) Limited (formerly “MFC Global Investment Management (Japan) Limited”)		100		Tokyo, Japan	Japanese investment management and advisory company
PT Asuransi Jiwa Manulife Indonesia		100		Jakarta, Indonesia	Indonesian life insurance company
PT Manulife Aset Manajemen Indonesia		100		Jakarta, Indonesia	Indonesian investment management and advisory company marketing mutual funds
The Manufacturers Life Insurance Co. (Phils.), Inc.		100		Manila, Philippines	Filipino life insurance company
Manulife (Singapore) Pte. Ltd.		100		Singapore	Singaporean life insurance company
Manulife (Vietnam) Limited		100		Ho Chi Minh City, Vietnam	Vietnamese life insurance company
Manulife Asset Management (Vietnam) Company Ltd.		100		Ho Chi Minh City, Vietnam	Vietnamese fund management company
Manulife Insurance (Thailand) Public Company Limited		94.7		Bangkok, Thailand	Thai life insurance company
Manulife Asset Management (Thailand) Company Limited		94.7		Bangkok, Thailand	Investment management
Manulife Asset Management (Europe) Holdings Limited (formerly “MFC Global Fund Management (Europe) Limited”)		100		London, England	Holding company
Manulife Asset Management (Europe) Limited		100		London, England	Investment management company for Manulife Financial’s international funds
EIS Services (Bermuda) Limited		100		Hamilton, Bermuda	Investment holding company
Berkshire Insurance Services Inc.		100		Toronto, Canada	Investment holding company
JH Investments (Delaware) LLC		100		Boston, Massachusetts, U.S.A.	Investment holding company
Manulife Securities Incorporated		100		Burlington, Canada	Investment dealer
Manulife Asset Management (North America) Limited		100		Toronto, Canada	Investment advisor
Manulife Asset Management (Singapore) Pte. Ltd.		100		Singapore	Asset management company
John Hancock Reassurance Company Ltd.		100		Hamilton, Bermuda	Provides reinsurance to affiliated MFC companies

2010 Annual Report 81

Note 22    ^    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 United States generally accepted accounting principles (“U.S. GAAP”). As required by applicable United States federal securities laws, material differences between Canadian and U.S. GAAP are quantified and described below.

a) Condensed Consolidated Balance Sheets

As at December 31,			2010						2009
	Note 22 Reference		U.S. GAAP			Canadian GAAP			U.S. GAAP			Canadian GAAP
Assets
Cash and short-term securities			$	11,881		$	11,791		$	18,849		$	18,780
Securities
Bonds and other fixed maturity investments		f (i), g (iv)		131,264			101,560			113,543			85,107
Stocks		f (ii), g (iv), g (vii)		20,966			10,475			19,108			9,688
Loans
Mortgages		f (xiv), g (iv)		32,557			31,816			30,866			30,699
Private placements and other fixed maturity investments		f (iii)		1,939			22,343			2,126			22,912
Policy loans				6,486			6,486			6,609			6,609
Bank loans				2,353			2,355			2,457			2,457
Real estate		f (iv)		4,306			6,358			3,912			5,897
Other investments		f (v), f (xi), g (iv)		6,353			6,264			5,317			5,321
Total invested assets			$	218,105		$	199,448		$	202,787		$	187,470
Other assets
Accrued investment income		g (iv)	$	1,628		$	1,621		$	1,546		$	1,540
Outstanding premiums				671			671			812			812
Deferred acquisition costs		f (vii)		19,545			–			18,926			–
Reinsurance deposits and amounts recoverable		f (x), g (vi)		4,914			–			4,986			–
Goodwill and intangible assets				5,802			7,857			8,177			9,127
Derivatives		f (xi), g (iv)		3,896			3,909			2,684			2,680
Value of business acquired		f (viii)		2,630			–			3,062			–
Miscellaneous		g (iv)		3,914			4,166			4,248			4,216
Total other assets			$	43,000		$	18,224		$	44,441		$	18,375
Segregated funds net assets(1)		g (iv)	$	180,641		$	–		$	174,449		$	–
Total assets			$	441,746		$	217,672		$	421,677		$	205,845
Segregated funds net assets(1)		g (iv)				$	200,057					$	191,741
Liabilities and equity
Policy liabilities		f (vi), f (x), g (i), g (iv)	$	181,576		$	151,944		$	174,525		$	141,687
Deferred realized net gains		f (iv)		–			128			–			108
Bank deposits				16,792			16,300			14,736			14,735
Consumer notes		f (xii)		961			978			1,261			1,291
Long-term debt				5,462			5,443			3,319			3,308
Future income tax liability(2)		g (iv)		2,770			1,393			2,140			1,883
Derivatives		f (xi)		3,460			3,404			2,691			2,656
Other liabilities		f (vi), f (ix), g (iv)		13,268			6,543			12,471			6,487
			$	224,289		$	186,133		$	211,143		$	172,155
Liabilities for preferred shares and capital instruments				4,426			4,412			4,587			4,581
Segregated funds net liabilities(1)		g (iv)		180,641			–			174,449			–
Noncontrolling interest in subsidiaries(3)		g (x)		476			254			414			202
Participating policyholders’ equity(4)				–			159			–			80
Shareholders’ equity
Common shares and preferred shares		f (xv)		20,744			20,676			20,359			20,359
Retained earnings and contributed surplus		f (xv)		15,736			11,680			15,082			13,052
Accumulated other comprehensive income (loss)
on available-for-sale securities and others		f (xiii)		2,056			251			1,080			612
on cash flow hedges				403			(99	)		552			(48	)
on translation of self-sustaining foreign operations				(7,025	)		(5,794	)		(5,989	)		(5,148	)
Total shareholders’ equity			$	31,914		$	26,714		$	31,084		$	28,827
Total liabilities and equity			$	441,746		$	217,672		$	421,677		$	205,845
Segregated funds net liabilities(1)		g (iv)				$	200,057					$	191,741

⁽¹⁾ U.S. GAAP terminology is separate accounts.

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

⁽³⁾ Noncontrolling interest is a component of equity under U.S. GAAP but included in liabilities under Canadian GAAP.

⁽⁴⁾ Under U.S. GAAP there is no definition of participating policyholders’ equity.

82 2010 Annual Report

b) Condensed Consolidated Statements of Operations

For the years ended December 31,			2010						2009
	Note 22 Reference		U.S. GAAP			Canadian GAAP			U.S. GAAP			Canadian GAAP
Revenue
Premium income		g (i)	$	12,218		$	18,351		$	12,954		$	22,946
Net investment income (investment income)				11,062			13,022			9,001			11,303
Fee income and other revenue				8,137			6,260			7,864			5,858
Total revenue			$	31,417		$	37,633		$	29,819		$	40,107
Policy benefits and expenses
Policyholder benefits		g (i), g (ii)	$	18,687		$	27,928		$	17,750		$	30,081
Commissions, investment and general expenses		g (ix)		5,236			8,459			4,884			8,609
Amortization of deferred acquisition costs and value of business acquired				1,771			–			2,408			–
Goodwill impairment				2,239			1,039
Other		g (x)		1,368			1,379			1,476			1,569
Total policy benefits and expenses			$	29,301		$	38,805		$	26,518		$	40,259
Income (loss) before income taxes and change in accounting policy			$	2,116		$	(1,172	)	$	3,301		$	(152	)
Income taxes				(404	)		860			(158	)		1,572
Net income (loss)			$	1,712		$	(312	)	$	3,143		$	1,420
Adjust for noncontrolling interest included in net income under Canadian GAAP		g (x)	$	–		$	40		$	–		$	(16	)
Net income (loss) attributed to shareholders, policyholders and noncontrolling interest		g (x)	$	1,712		$	(272	)	$	3,143		$	1,404
Attributed to:
Noncontrolling interest			$	60		$	40		$	11		$	(16	)
Manulife Financial Corporation				1,652			(312	)		3,132			1,420
			$	1,712		$	(272	)	$	3,143		$	1,404
Weighted average number of common shares outstanding(in millions)				1,765			1,765			1,626			1,626
Weighted average number of diluted common shares outstanding(in millions)				1,768			1,765			1,631			1,631
Basic earnings (loss) per common share			$	0.89		$	(0.27	)	$	1.89		$	0.82
Diluted earnings (loss) per common share			$	0.89		$	(0.27	)	$	1.88		$	0.82
Dividends per common share			$	0.52		$	0.52		$	0.78		$	0.78

c) Reconciliation of Canadian GAAP to U.S. GAAP net income

For the years ended December 31,	Note 22 Reference		2010			2009
Net income (loss) determined in accordance with Canadian GAAP			$	(312	)	$	1,420
Net investment income
Bonds excluding other than temporary impairments(1)		f (i)		(1,749	)		(3,535	)
Interest rate related other than temporary impairments		f (i)		–			(635	)
Stocks(2)		f (ii)		(169	)		(1,590	)
Cash flow hedges(3)		f (xi)		(223	)		1,775
Real estate		f (iv)		(103	)		(194	)
Other		f (v)		(42	)		(311	)
			$	(2,286	)	$	(4,490	)
Deferred acquisition costs, differences(4)		f (vii)		1,214			1,174
Value of business acquired, differences		f (viii)		(162	)		(241	)
Consumer notes fair value adjustment		f (xii)		(13	)		110
Policy liabilities		f (vi), f (ix)		5,701			6,826
Commissions, investment and general expenses				–			(12	)
Goodwill impairment				(1,200	)		–
Income taxes on above items(5)				(1,270	)		(1,628	)
Noncontrolling interest included in net income under Canadian GAAP		g (x)		40			(16	)
Net income determined in accordance with U.S. GAAP			$	1,712		$	3,143

⁽¹⁾ Bonds classified in 2010 as AFS for U.S. GAAP and fair value option (“FVO”) for Canadian GAAP include net realized gains on U.S. GAAP of $795 and net unrealized and realized gains on Canadian GAAP of $2,543.

⁽²⁾ Stocks classified in 2010 as AFS for U.S. GAAP and FVO for Canadian GAAP include net realized gains on U.S. GAAP of $777 and net unrealized and realized gains on Canadian GAAP of $945.

⁽³⁾ Cash flow hedge accounting on certain forward start interest rate derivatives not elected for Canadian GAAP but elected for U.S. GAAP.

2010 Annual Report 83

⁽⁴⁾ Deferred acquisition costs consist of $2,823 (2009 – $3,341) of expenditures that have been capitalized and $1,609 of amortization (2009 – $2,167).

⁽⁵⁾ U.S. GAAP terminology is deferred income taxes.

d) Other comprehensive income reconciliation

For the years ended December 31,	2010			2009
Comprehensive loss in accordance with Canadian GAAP	$	(1,370	)	$	(548	)
Difference in Canadian GAAP to U.S. GAAP net income (loss)	$	2,024		$	1,723
Difference in Canadian GAAP to U.S. GAAP other comprehensive income (loss):
Changes in unrealized gains on AFS financial securities, net of income tax expense of $887 (2009 – $1,774)		1,948			3,823
Adjustments to net unrealized gains (losses):
Actuarial liabilities, net of income tax benefit of $98 (2009 – $117)		(440	)		(457	)
Deferred acquisition costs, net of income tax benefit of $46 (2009 – $240)		(113	)		(526	)
Deferred revenue, net of income tax benefit of $9 (2009 – income tax expense of $13)		(17	)		24
Value of business acquired, net of income tax benefit of $53 (2009 – $139)		(100	)		(262	)
Changes in gains on derivative investments designated as cash flow hedges, net of income tax benefit of $73 (2009 – $822)		(98	)		(1,281	)
Additional pension obligation, net of income tax expense of $44 (2009 – $10)		59			(3	)
Changes in unrealized currency translation gains (losses) of self-sustaining operations, net of income tax expense of $6 (2009 – income tax benefit of $13)(1)		(390	)		(54	)
Total difference in other comprehensive income (loss), excluding amounts attributed to noncontrolling interest under U.S. GAAP	$	849		$	1,264
Other comprehensive loss attributed to noncontrolling interest under U.S. GAAP	$	(8	)	$	(18	)
Comprehensive income in accordance with U.S. GAAP	$	1,495		$	2,421

⁽¹⁾ U.S. GAAP included a gain of $79 (2009 – $562), net of tax, arising from hedges of foreign currency exposure of a net investment in a foreign operation, whereas Canadian GAAP included a gain of $115 (2009 – $562).

e) Derivative instruments and hedging activities

The Company has designated certain invested assets differently for Canadian GAAP than U.S. GAAP. Given that the determination of actuarial liabilities is dependent upon the carrying value of assets required to support liabilities under Canadian GAAP, in order to mitigate recognition inconsistency, assets supporting actuarial liabilities have been designated as held for trading using the fair value option available under Canadian GAAP. Accordingly, the Company does not apply hedge accounting for assets supporting actuarial liabilities under Canadian GAAP. Interest rate and cross currency swaps are used in the portfolios supporting actuarial liabilities to manage duration and currency risks and have not been designated as hedging instruments under Canadian GAAP. Under U.S. GAAP, most assets supporting actuarial liabilities have been designated as AFS and in certain cases may have been designated as hedged items. These differences create reconciling items between Canadian GAAP and U.S. GAAP.

Under U.S. GAAP the Company has entered into hedge accounting relationships as follows: 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. Any ineffective portion of the hedge relationship is 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 under a cash flow hedge is recorded in OCI 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 $11, included in AOCI as at December 31, 2010 (2009 – losses of $13), will be reclassified into earnings within the next 12 months. Cash flow hedges include hedges of certain forecasted transactions up to a maximum of 36 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 currency translation account.

84 2010 Annual Report

f) Narrative description of material measurement and income recognition differences between Canadian GAAP and U.S. GAAP

	Canadian GAAP	U.S. GAAP
(i) Bonds and other fixed maturity investments	Under Canadian GAAP, bonds are classified as trading or AFS and are carried at fair values based on prices quoted in active markets. Bonds for which market quotes are not available are categorized as private placements and are carried at amortized cost. Impairment charges are recorded on AFS bonds for other than temporary declines in fair value due to changes in issuer credit. Reversals of impairment losses on AFS bonds are recognized when the fair value subsequently increases and the increase can be objectively related to an event occurring after the impairment loss was recognized.	Bonds and other fixed maturity investments that are classified as trading or AFS are carried at fair value, using valuation methods including prices quoted in active markets, and in the absence of such market quotes, using valuation techniques. Impairment charges are recorded for AFS bonds for other than temporary declines in fair value when the Company does not expect to recover the amortized cost of the security.
(ii) Stocks	Stocks are classified as AFS or trading, and are carried at fair value when based on prices quoted in active markets. When market quotes are not available, AFS stocks are carried at cost.	Stocks may be classified as AFS or trading securities only when prices quoted in active markets are available, otherwise they are categorized as other investments and carried at cost.
(iii) Private placements and other fixed maturity investments	Private placement and other fixed maturity investments include fixed income securities and private placement loans for which prices quoted in active markets are not available, as well as investments in leveraged leases. Private placement loans and leveraged leases are carried at cost less allowance for impairments, if any.	Private placements and other fixed maturity investments include investments in leveraged leases which are accounted for at amortized cost, less allowance for impairments, if any. Investments in private placement loans are categorized as bonds and other fixed maturity investments under U.S. GAAP.
(iv) 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 to fair value, if the carrying amount of the real estate is deemed not recoverable, taking into account undiscounted expected cash flows, and the impairment is deemed to be other than temporary. Realized gains and losses are recognized in income immediately.
(v) Other investments	Other investments consist primarily of investments in Limited Partnerships (LPs) or Limited Liability Companies (LLCs) and are accounted for using the equity method of accounting when the Company has the ability to exercise significant influence (generally indicated by an ownership interest of 20% or more) but does not have a controlling financial interest. The Company uses the cost method for its investments in LPs and LLCs when it does not have the ability to exercise significant influence.	The Company accounts for its investments in LPs and LLCs using the equity method of accounting where its ownership interests are more than insignificant but do not amount to a controlling financial interest in the partnership.
(vi) Policy liabilities	Actuarial liabilities for all types of policies are calculated using CALM and represent the current amount of balance sheet assets 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 a provision 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 premium persistency, 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 a provision for adverse deviation, the impact of which is to increase actuarial liabilities and decrease the income that would otherwise be recognized at the time new policies are sold. Assumptions are updated regularly and the effects of any changes in assumptions, whether positive or negative, are recognized in income immediately. The margins for adverse deviations are recognized in income over the term of the liabilities as the risk of deviation from estimates declines.	The measurement and valuation of policy liabilities under U.S. GAAP is dependant on the product category as follows: a) Non-participating insurance (including whole life and term insurance, 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 plus 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 (or acquisition in the case of a business combination). 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”) or Value of Business Acquired (“VOBA”) asset, in which case the DAC or VOBA asset is reduced or written off and, to the extent necessary, actuarial liabilities are increased. The actuarial reserve basis may not subsequently be reduced even if the circumstances causing the strengthening are no longer applicable.

2010 Annual Report 85

	Canadian GAAP	U.S. GAAP
(vi) Policy liabilities (cont’d)	The future net investment income assumed in the calculation of actuarial liabilities is based on the projection of cash flows on the actual balance sheet assets supporting those liabilities, combined with an assumed re-investment strategy. Actuarial liabilities include allowances for credit losses associated with the assets supporting liabilities, as well as allowances for interest rate mismatch, liquidity, and other investment-related risks. The allowances for investment risks, other than fixed income credit risk, are established through scenario testing. The term of the liability used in the valuation may be shorter than the ultimate contractual maturity. Actuarial liabilities for guaranteed minimum death, withdrawal, annuitization and maturity benefits under segregated fund contracts are calculated using stochastic modeling techniques, with assumptions regarding the distribution of future segregated fund returns derived primarily from historical data.	b) Limited-payment contracts (including payout annuities), universal life-type contracts and investment contracts The actuarial liability for limited-payment contracts is determined using an approach similar to that applied to non-participating insurance contracts (described above), except that the excess of gross premiums less net premiums is deferred and recognized over the lifetime of the policies. The actuarial liability for universal life-type contracts and investment contracts is equal to the policyholder account value or a similar amount. There is no provision for adverse deviation. If it is determined that expected future income for universal life-type contracts is no longer adequate to recover the existing DAC or VOBA, the DAC or VOBA asset is reduced or written off and, to the extent necessary, actuarial liabilities are increased. The actuarial reserve basis may not subsequently be reduced even if the circumstances causing the strengthening are no longer applicable. For contracts of this type that are acquired in a business combination, the actuarial liabilities may include an adjustment based on the fair value of the liabilities at the date of acquisition. Recognition of additional actuarial liabilities is required for insurance benefit features under universal life-type contracts and for annuitization benefits. The additional actuarial liability is based on the estimated proportion of contract assessments required to fund insurance benefits and annuitization benefits in excess of the policyholder account value. The estimate of the required proportion must consider a range of possible future scenarios and is updated regularly as experience emerges and to reflect changes in assumptions regarding future experience. c) 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 dividend fund or non-forfeiture assumptions. There is no provision for adverse deviation. The assumptions are not changed unless it is determined that expected future income is no longer adequate to recover the existing DAC or VOBA, in which case the DAC or VOBA asset is reduced or written off and, to the extent necessary, actuarial liabilities are increased. The actuarial reserve basis may not subsequently be reduced if the circumstances causing the strengthening are no longer applicable. In addition, actuarial liabilities included in the above categories, are adjusted to reflect the changes that would have been necessary if the unrealized gains and losses on AFS bonds and stocks had been realized. This adjustment to actuarial liabilities directly impacts shareholder equity and is not reflected in net income, consistent with the treatment of the corresponding adjustments to the carrying value of the assets. d) Segregated fund contracts Actuarial liabilities for guaranteed minimum death and annuitization benefits under segregated fund contracts are valued under specific U.S. GAAP requirements, with fund return assumptions consistent with those used for Canadian GAAP. Guaranteed minimum withdrawal and maturity benefits under segregated fund contracts are considered to be embedded derivatives and accounted for as stand-alone financial instruments where appropriate. Liabilities for these guaranteed benefits are measured at fair value using stochastic techniques, with assumptions regarding the distribution of future segregated fund returns derived from option pricing parameters observed in the market. These liabilities are excluded from actuarial liabilities and included in other liabilities on the Consolidated Balance Sheets.
(vii)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.	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. DAC associated with non-participating insurance policies are amortized and charged to income in proportion to premium income recognized. For non-participating limited payment insurance policies, the DAC asset is amortized in proportion to the in-force face amount of the policies.

86 2010 Annual Report

	Canadian GAAP	U.S. GAAP
(vii)Deferred acquisition costs(cont’d)		DAC associated with 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. The proportion of gross profits required to amortize the DAC is re-estimated periodically based on actual experience and updated assumptions regarding future experience, and total amortization to date is adjusted to reflect any change in this estimated proportion. In addition, DAC relating to these contracts should be adjusted to reflect the changes that would have been necessary if the unrealized gains and losses on AFS bonds and stocks had actually been realized. These amounts are recorded in OCI.
(viii) Value of business acquired	The value of in-force policies acquired in a business combination is implicitly recognized as a reduction in actuarial liabilities.	VOBA is determined at the acquisition date and recorded as an asset. The initial determination is based on a projection of future profits, net of the cost of required capital, which are discounted at a risk-adjusted yield. The VOBA asset is allocated among the various product lines, and is amortized and charged to income using the same methodologies used for DAC amortization but reflecting premiums or profit margins after the date of acquisition only. Changes to VOBA that would have been necessary had unrealized gains and losses on AFS bonds and stocks actually been realized are recorded in OCI.
(ix) Deferred revenue	All premium income is recorded as revenue. The anticipated costs of future services are included within the actuarial liabilities.	For limited-payment contracts, universal life type contracts and investment contracts, fees assessed to policyholders relating to services that are to be provided in future years are recorded as deferred revenue. Deferred revenue is included in other liabilities and is amortized to fee income in the same pattern as the amortization of the DAC asset. Changes to deferred revenue that would have been necessary had unrealized gains and losses on AFS bonds and stocks actually been realized are recorded in OCI.
(x) Reinsurance ceded	Under Canadian GAAP, actuarial liabilities are reported net of amounts expected to be recovered from reinsurers under reinsurance treaties. Cash flows expected to be paid to, and received from, reinsurers are included in the CALM valuation.	Actuarial liabilities are not reduced to reflect amounts ceded to reinsurers; rather, amounts recoverable from reinsurers are reported separately as an asset on the balance sheet. Amounts recoverable from reinsurers are estimated using methods and assumptions consistent with those used to estimate the actuarial liabilities for the reinsured policies. The estimated net profit or loss from long-duration reinsurance treaties is recognized over the lifetime of the reinsured policies. This treatment may create volatility in net income due to the difference in timing between recognition of claims paid to policyholders and recognition of claims reimbursement received from reinsurers.
(xi) Derivatives	Canadian GAAP accounting standards for derivatives and hedging activities are substantially harmonized with U.S. GAAP. However, U.S. GAAP reported earnings may continue to exhibit reconciliation differences in any given period relative to Canadian GAAP because the Company designates bonds and stocks backing actuarial liabilities differently under Canadian GAAP than U.S. GAAP, and therefore applies hedge accounting differently. The Company elects not to designate bonds and stocks backing actuarial liabilities as hedged items for Canadian GAAP accounting purposes. These assets backing actuarial liabilities are designated as fair value. Derivatives in portfolios backing actuarial liabilities are not designated as hedging items. Accordingly, the changes in fair value of such derivatives and assets are recognized in investment income as they occur. Refer to note (e) above.	The Company has elected to designate certain bond and stock assets backing actuarial liabilities categorized as AFS as hedged items. Derivatives in portfolios backing actuarial liabilities are designated as hedging items. Accordingly, the changes in fair value of such derivatives and assets are recognized in OCI or earnings as applicable as they occur and subsequently recorded in investment income on sale or maturity of the bond and stock assets involved. Refer to note (e) above.
(xii) Consumer notes	The Company has elected to designate consumer notes as trading under the fair value option. As such, these notes are carried at fair value with subsequent changes in fair value recorded in earnings.	Consumer notes are carried at amortized cost.

2010 Annual Report 87

	Canadian GAAP	U.S. GAAP
(xiii) Employers’ accounting for defined benefit pension and other post-retirement plans	The cost of defined benefit pension benefits is recognized using the projected benefit method pro-rated on services and estimates of expected return on plan assets, salary escalation and retirement ages of employees. Actuarial gains and losses that exceed 10% of the greater of the accrued benefit obligation or the market-related value of the plan assets are amortized to income on a straight-line basis over the estimated average remaining service lives of plan members. The expected return on plan assets is based on an estimate of the long-term expected rate of return on plan assets and a market-related value of plan assets. The market-related value of plan assets is determined using a methodology where the difference between the actual and expected market value of plan assets is recognized over five years. Prepaid benefit costs are included in other assets and accrued benefit liabilities are included in other liabilities.	The funded status of a defined benefit pension or other post-retirement benefit plan is recognized on the balance sheet as an asset or liability with an offset to OCI. The funded status is measured as the difference between plan assets at their fair value and the benefit obligation.
(xiv) Mortgage securitizations	Mortgage securitizations are transacted through special purpose entities that meet specific criteria which precluded them from consolidation with the Company’s results. The arrangements transfer control to third parties, and consideration other than beneficial interest in the mortgages is received. The mortgages are removed from the Consolidated Balance Sheet and a gain or loss is recorded in investment income at the time of sale.	Mortgage securitizations are accounted for as secured borrowings as the mortgages are transferred to a special purpose entity that is consolidated with the results of the Company. The notes issued, backed by the mortgages, to third parties are not participating interests in the mortgages, as defined by ASC 860 “Transfers and Servicing” and therefore sale accounting is precluded. The mortgages remain on balance sheet with a corresponding liability to make payments due on the notes. The liability is carried at amortized cost in other liabilities with interest expense recognized using the effective interest rate method.
(xv) Stock-based compensation	The Company provides stock-based compensation to certain employees and directors as described in note 15. Stock-based awards are expensed with a corresponding increase to either other liabilities or contributed surplus, depending on the terms of the award. When common shares under the programs are issued, corresponding amounts previously recognized in contributed surplus are charged to common shares. Compensation expense is not recognized for certain DSU awards granted prior to January 1, 2002 given transitional requirements in accordance with Canadian GAAP.	The Company provides stock-based compensation to certain employees and directors as described in note 15. Stock-based awards are expensed with a corresponding increase to either other liabilities or contributed surplus, depending on the terms of the award. When common shares under the programs are issued, corresponding amounts previously recognized in contributed surplus are charged to common shares. Compensation expense is recognized for all DSU plans under U.S. GAAP.

g) Narrative description of presentation differences between Canadian GAAP and U.S. GAAP

	Canadian GAAP	U.S. GAAP
(i) 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.	For participating and non-participating insurance contracts 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 limited payment contracts, universal life type contracts and investment 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.
(ii) 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 participating and non-participating insurance 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, benefits incurred in the period in excess of related policyholders’ account balances are recorded in the Consolidated Statements of Operations.

88 2010 Annual Report

	Canadian GAAP	U.S. GAAP
(iii) Change in actuarial liabilities	Interest credited on policyholders’ account balances is included in change in actuarial liabilities in the Consolidated Statements of Operations.	For participating and non-participating insurance contracts, all interest credited on policyholders’ account balances is included in the change in actuarial liabilities in the Consolidated Statements of Operations. Interest required to support limited payment contracts, universal life type contracts and investment contracts is included in actuarial liabilities in the Consolidated Balance Sheets and is classified in policyholder payments in the Consolidated Statements of Operations.
(iv) Segregated funds 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 separate financial statements and are not included in the general fund Consolidated Balance Sheets or Consolidated Statements of Operations.	U.S. GAAP equivalent is labeled “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. General Account classification is required for Separate Account contracts for which all of the investment risk is not passed along to the Separate Accounts holder. This results in the reclassification of certain segregated funds under Canadian GAAP to the General Account for U.S. GAAP.
(v) 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, including limited payment contracts, universal life-type contracts and investment contracts are disclosed as a financing activity in the Consolidated Statements of Cash Flows.
(vi) Reinsurance	Where transfer of risk has occurred, 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 portion accounted for as deposits with reinsurers.
(vii) Stocks	Investments in stocks in which the market price is not available are classified as stocks and are carried at cost.	Investments in stocks in which the market price is not available are classified as other invested assets and are carried at cost.
(viii) Consolidation accounting	A VIE is consolidated by the Company when the Company is exposed to the majority of the VIE’s expected losses, residual returns, or both. Control over a limited partnership by its general partner (or by corollary, control over a limited liability company by its managing member) is evaluated based on facts and circumstances. Factors which are considered include whether the general partner is subject to removal without cause by unrelated limited partners, and whether unrelated limited partners have participating rights for significant decisions that would be expected to be made in the ordinary course of the limited partnership’s business.	A VIE is consolidated by the Company if the Company has both (1) the power to direct the activities of a VIE that most significantly impacts the VIE’s economic performance and (2) an obligation to absorb losses or right to receive benefits of the VIE that could potentially be significant to the VIE. The Company may be required to consolidate a VIE even though the Company is exposed to less than a majority of the VIE’s expected losses or residual returns. This assessment is reviewed quarterly by the Company. Application of the criteria described above was deferred indefinitely for certain entities that have the characteristics of an investment company. For these companies, criteria for consolidation are the same as under Canadian GAAP. The Company presumes that the general partner of a partnership (or managing member of a limited liability company) controls the partnership, unless limited partners have either substantive kickout rights (defined as the ability of a simple majority of those limited partners not related to the general partner to remove the general partner without cause and no other barriers to removal exist) or have substantive participating rights.
(ix) Investment income and expenses	Investment income and related investment expenses are presented gross in the Consolidated Statements of Operations.	Investment income and related investment expenses are presented on a net basis in the Consolidated Statements of Operations.
(x) Non-controlling interests in subsidiaries	Non-controlling interests in subsidiaries are presented between liabilities and equity (the “mezzanine”) in the Consolidated Balance Sheets. Results of operations attributable to non-controlling interests are presented within total policy benefits and expenses in the Consolidated Statements of Operations.	Noncontrolling interests in subsidiaries are presented as equity in the Consolidated Balance Sheets. The Company’s net income includes and presents separately amounts attributable to noncontrolling interests in the Consolidated Statements of Operations. Other comprehensive income is allocated between the total amount attributable to controlling and to noncontrolling interests.

2010 Annual Report 89

h) Additional U.S. GAAP Disclosures

Goodwill impairment

As disclosed in Note 14 of our Consolidated Financial Statements for the third quarter ended September 30, 2010, a preliminary goodwill impairment charge of $2,598 was recorded under U.S. GAAP reflecting the Company’s best estimate of the expected goodwill impairment of its U.S. Insurance and U.S. Wealth operations attributable to the continued declined in the U.S. economy. In the fourth quarter of 2010, the Company completed its goodwill impairment analysis which resulted in an aggregate impairment charge of $2,239 reflecting the entire goodwill balance attributable to the U.S. Insurance reporting unit and $215 relating to the Canadian Insurance reporting unit under U.S. GAAP. The final goodwill impairment charge recorded under U.S. GAAP was $1,200 higher than the goodwill impairment charge recorded under Canadian GAAP.

Invested assets

The carrying value of securities designated as fair value option includes a net unrealized gain of $477 (2009 – $169). The change in the net unrealized gain on fair value option securities included in investment income during the year ended December 31, 2010 was $308 (2009 – $744).

Deferred acquisition costs and value of business acquired

Under U.S. GAAP, acquisition costs incurred in relation to the ongoing acceptance of liabilities are deferred and amortized over the life of the related policy. Amounts incurred during the year in relation to these costs are as follows:

For the years ended December 31,	2010			2009
Balance, beginning of year	$	18,926		$	21,373
Capitalization		2,823			3,341
Amortization		(1,609	)		(2,167	)
Change in unrealized investment gains (losses)		(159	)		(766	)
Adoption of FSP No. FAS 115-2:
Impact on unrealized investment gains (losses)		–			(357	)
Impact on DAC asset		–			(11	)
Change in foreign exchange rates		(436	)		(2,487	)
Balance, end of year	$	19,545		$	18,926

VOBA is the equivalent of DAC for business acquired as a block. Amounts incurred during the year in relation to these costs are as follows:

For the years ended December 31,	2010			2009
Balance, beginning of year	$	3,062		$	4,239
Amortization		(162	)		(241	)
Change in unrealized investment gains (losses)		(153	)		(401	)
Adoption of FSP No. FAS 115-2:
Impact on unrealized investment gains (losses)		–			(64	)
Impact on VOBA asset		–			(46	)
Change in foreign exchange rates		(117	)		(425	)
Balance, end of year	$	2,630		$	3,062

Amortization of the year end VOBA over the next five years is projected as follows:

	Amortization
2011	$	227
2012	$	207
2013	$	190
2014	$	161
2015	$	155

i) Recently adopted U.S. GAAP accounting and reporting changes

FASB Accounting Standards Codification

Effective July 1, 2009, the Company adopted Statement of Financial Accounting Standard (“SFAS”) No.168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162”, and FASB Accounting Standards Update (“ASU”) No. 2009-1, Generally Accepted Accounting Principles amendments based on Statement of Financial Accounting Standards No. 168 – The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles.

FASB Accounting Standards Codification (“ASC”) Topic 105 establishes the FASB Codification as the single source of authoritative U.S. GAAP recognized by the FASB, to be applied by non-governmental entities and to supersede all previous U.S. GAAP literature. The adoption of this guidance had no effect on the Company’s financial statements, as it did not change U.S. GAAP principles.

90 2010 Annual Report

Derivatives and hedging

Effective July 1, 2010, the Company adopted ASU No. 2010-11, “Scope Exception Related to Embedded Credit Derivatives” which amends ASC Topic 815, “Derivatives and Hedging” (ASC 815). ASU No. 2010-11 clarifies the scope exception for embedded credit derivative features related to the transfer of credit risk created by the subordination of one financial instrument to another. The amendments address how to determine which embedded credit derivative features, including those in collateralized debt obligations and synthetic collateralized debt obligations, are considered to be embedded derivatives that should not be analyzed for potential bifurcation and separate accounting at fair value. The adoption of this guidance did not have a material impact on the Company’s financial statements.

Consolidation accounting

Effective January 1, 2010, the Company adopted ASU No. 2009-17, “Improvements to Financial Reporting by Enterprises Involved with Variable Interests Entities”, which amends ASC Topic 810, “Consolidations” (“ASC 810”). The amendments revised the accounting principles for assessing consolidation of a variable interest entity and included the following features:

ⁿ A new concept of control – now defined as an entity’s ability to make decisions that are most economically significant to the VIE coupled with economic exposure to the VIE’s variability. This definition replaces the previous concept of “exposure to the majority of the VIE’s variability” in determining when to consolidate another entity.

ⁿ New guidance for determining which party, among parties with shared decision making powers over a VIE, makes the most significant decisions for the VIE.

ⁿ A bright line test for removal rights over an entity’s decision maker by its equity owners, whereby removal rights are disregarded as an element of control unless they can be exercised successfully by a single party. Expanded guidance on whether fees charged to a VIE by its decision maker are variable interests, which could result in consolidation by the decision maker.

ⁿ Removal of the previous scope exception for Qualifying Special Purpose Entities.

ASC 810 retains a scope exception for consolidation by investment companies of their investments. The Company also adopted ASU No. 2010-10, “Amendments for Certain Investment Funds” an amendment to ASC 810. This guidance was effective January 1, 2010, and deferred these amendments for relationships with investment companies.

The adoption of these amendments resulted in consolidation of certain Collateralized Debt Obligation funds (“CDO funds”) sponsored by the Company. The impact on the Company’s financial statements of consolidating these funds was an increase in assets, liabilities and equity (including noncontrolling interest) of $557, $512 and $45, respectively. All amounts are net of tax. The Company has control over the CDO funds because the Company provides collateral management services to the funds and has significant investments in the funds.

Liabilities recognized as a result of consolidating the CDO funds do not represent claims against the general assets of the Company. Conversely, assets recognized as a result of consolidating the CDO funds can only be used to settle liabilities recognized as a result of consolidating the CDO funds.

The Company’s maximum exposure to loss as a result of its involvement with these CDO funds is limited to its investment in them, valued at $13 as of January 1, 2010, the date of adoption.

Transfers of financial assets

Effective January 1, 2010, the Company adopted ASU No. 2009-16, “Accounting for Transfers of Financial Assets”, which amends ASC Topic 860 “Transfers and Servicing” (“ASC 860”). This guidance focuses on securitization activity and affects the transferor’s derecognition principles for assets transferred. Amendments to ASC 860 eliminated the qualifying status concept of Qualifying Special Purpose Entities, removing their previous exemption from consolidation accounting by transferors of financial assets to them. Further, ASC 860 does not permit derecognition accounting for transfers of portions of financial assets when the portions transferred do not meet the definition of a participating interest. ASC 860 strengthens the requirement that transferred assets be legally isolated from the transferor and all of its consolidated affiliates in order for the transfer to be accounted for as a sale. ASC 860 requires that retained interests in transferred assets be recognized at fair value instead of amounts based on relative fair value allocations of the previous carrying value of assets transferred. These new requirements are applicable to transfers of financial assets occurring on or after January 1, 2010. The adoption of these amendments had no impact on the Company’s financial statements.

Subsequent events

Effective April 1, 2009, the Company adopted SFAS No. 165, “Subsequent Events”, which is now incorporated into ASC Topic 855, “Subsequent Events” (“ASC 855”). This guidance was retroactively amended by the FASB in February 2010 by issuance of ASU No. 2010-09, “Subsequent Events”, which requires an entity which files or furnishes its financial statements with the U.S. Securities and Exchange Commission (“SEC”) to evaluate subsequent events through the date that its financial statements are issued. The adoption of this guidance had no impact on the Company’s financial statements.

Fair value measurements

Effective December 31, 2009, the Company adopted ASU No. 2009-12, “Fair Value Measurements and Disclosures – Investment in Certain Entities That Calculate Net Asset per Share (or Its Equivalent)”. This amendment to ASC Topic 820, “Fair Value Measurement and Disclosures” (“ASC 820”), allows entities to use the net asset value of certain investments when determining fair value, provided certain criteria are met. The adoption of this new amendment had no impact on the Company’s financial statements.

2010 Annual Report 91

Effective December 31, 2009, the Company adopted ASU No. 2009-5, “Fair Value Measurements and Disclosures Measuring Liabilities at Fair Value”. This amendment to ASC 820 simplifies in certain instances the assessment of fair value of a liability. This amendment, when applicable, allows the use of the fair value of the instrument associated with the liability when it is traded as an asset to be used as a proxy for its fair value as a liability, given inherent difficulties in measuring the fair value of such liabilities directly. The fair value of the liability is not adjusted to reflect any restrictions on its transfer. The adoption of this amendment had no impact on the Company’s financial statements.

Effective April 1, 2009, the Company adopted FASB Staff Position (“FSP”) No. SFAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”, which is now incorporated into ASC 820. This accounting guidance carries forward and elaborates on previous fair value concepts. The fair value of an asset or liability continues to be the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date under then current market conditions. ASC 820 provides indicators of when a transaction is considered disorderly and elaborates on how to determine the fair value of a financial instrument if such conditions exist. The adoption of this guidance had no impact on the Company’s financial statements.

Other than temporary impairments

Effective April 1, 2009, the Company adopted FSP No. SFAS 115-2 and SFAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments”, which is now incorporated into ASC Topic 320 – “Investments – Debt and Equity Securities” (“ASC 320”). In addition, on April 13, 2009, the SEC issued Staff Accounting Bulletin No. 111 which reflects these changes to ASC 320. Collectively, this new guidance removes the concept of “intent and ability to hold until recovery of value” associated with OTTI of a debt security whose fair value is less than its cost. Impairment losses should be recorded in earnings on a held-to-maturity or AFS debt security only when management does not expect to recover the amortized cost of the security.

The Company’s adoption of this guidance required reassessment of previous impairment losses recorded on debt securities held at March 31, 2009, with any reversals of previous impairment losses recorded through retained earnings and offset to accumulated other comprehensive income for AFS debt securities and other actuarial related amounts included in other comprehensive income, and related impact on deferred acquisition costs, as applicable, as at April 1, 2009.

As a result of the adoption of the amendments to ASC 320 in 2009, the Company recognized an increase in retained earnings of $1,628, as well as a corresponding (decrease) increase in other comprehensive income of $(1,673) attributable to AFS debt securities of $(2,052), actuarial reserves of $62, deferred acquisition costs of $283, deferred revenue of $(7), and value of business acquired of $41. Other balance sheet items increased (decreased) as follows: actuarial liabilities of $6, deferred acquisition costs of $(6), deferred revenue of $3 and value of business acquired of $(30). All amounts are net of tax.

Noncontrolling interests in Consolidated Financial Statements

Effective January 1, 2009, the Company adopted SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51”, which is now incorporated into ASC Topic 810 “Consolidation” (“ASC 810”). ASC 810 presents accounting guidance for noncontrolling interests in a subsidiary and for deconsolidation of a subsidiary. Noncontrolling interests in subsidiaries are included in a separate component of equity on the Consolidated Balance Sheet, net income attributable to both the Company’s interest and the noncontrolling interests are presented separately on the Consolidated Statement of Operations, and any changes in the Company’s ownership of a subsidiary which does not result in deconsolidation would be accounted for as transactions in the Company’s own stock. Deconsolidation will typically result in the recognition of a gain or loss, with any retained noncontrolling interest measured initially at fair value. This accounting guidance was applied prospectively, except for the presentation and disclosure requirements which were applied retrospectively. The adoption of this guidance had no measurement impact on the Company’s financial statements. The additional disclosure requirements for noncontrolling interests in subsidiaries are presented in notes 22 a, b, c, d and k.

Business combinations

Effective January 1, 2009, the Company adopted SFAS No. 141 (revised 2007), “Business Combinations”, which replaced SFAS No. 141, “Business Combinations” and which is now incorporated into ASC Topic 805 “Business Combinations” (“ASC 805”). ASC 805 retains the principle that all business combinations are required to be accounted for under the acquisition method of accounting but the method of applying the acquisition method was modified in a number of significant aspects. Some of the more significant new requirements under ASC 805 include the following:

ⁿ the acquisition date is defined as the date that the acquirer achieves control over the acquiree,

ⁿ any consideration transferred will be measured at fair value as of acquisition date,

ⁿ identifiable assets acquired, and liabilities assumed and any noncontrolling interest in the acquiree will be recorded at their acquisition date fair value, with certain exceptions,

ⁿ all acquisition costs associated with the business combination are expensed as incurred, and

ⁿ adjustments to valuation allowances on deferred taxes and acquired tax contingencies are no longer part of the acquisition accounting, instead they affect income tax expense.

These changes are effective on a prospective basis for all business combinations for which the acquisition date is on or after January 1, 2009, except that the change in accounting for adjustments made to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions applies to acquisitions occurring prior to January 1, 2009. The adoption of this guidance had no impact on the Company’s financial statements.

92 2010 Annual Report

j) Future U.S. GAAP accounting and reporting changes

Transition to International Financial Reporting Standards

On December 21, 2007, the United States Securities and Exchange Commission approved rule amendments that will allow the Company, subject to certain conditions, upon adoption of IFRS on January 1, 2011, to eliminate the reconciliation of IFRS to U.S. GAAP in the notes to the consolidated financial statements. Accordingly, for fiscal periods beginning January 1, 2011, the Company does not anticipate including a reconciliation of IFRS to U.S. GAAP in its consolidated financial statements.

k) Information Provided in Connection with the Fixed Investment Option of the Deferred Annuity Contracts andSignatureNotes Issued or Assumed by John Hancock Life Insurance Company (U.S.A.) and the Fixed Investment Option of the Deferred Annuity Contracts to be Issued by John Hancock Life Insurance Company of New York

The following condensed consolidating financial information, presented in accordance with U.S. GAAP, and the related disclosure have been included in these consolidated financial statements with respect to JHUSA and John Hancock Life Insurance Company of New York (“JHNY”) in compliance with Regulation S-X and Rule 12h-5 of the United States Securities and Exchange Commission (the “Commission”) and, with respect to Manulife Finance Holdings Limited (“MFHL”), in accordance with National Instrument 51-102 – Continuous Disclosure Obligations of Canadian provincial securities laws. These financial statements are (i) incorporated by reference in the registration statements of MFC and its subsidiaries that are described below and which relate to MFC’s guarantee of certain securities to be issued by its subsidiaries and (ii) with respect to MFHL, are provided in reliance on an exemption from continuous disclosure obligations pursuant to Canadian provincial securities law requirements.

JHUSA sells deferred annuity contracts that feature a market value adjustment and are registered with the Commission. The deferred annuity contracts contain variable investment options and fixed investment period options. The fixed investment period options enable the participant to invest fixed amounts of money for fixed terms at fixed interest rates, subject to a market value adjustment if the participant desires to terminate a fixed investment period before its maturity date. The annuity contract provides for the market value adjustment to keep the parties whole with respect to the fixed interest bargain for the entire fixed investment period. These fixed investment period options that contain a market value adjustment feature are referred to as “MVAs”.

JHUSA may also sell medium-term notes to retail investors under itsSignatureNotes program and JHNY may also sell MVAs.

Effective December 31, 2009, John Hancock Variable Life Insurance Company (the “Variable Company”) and John Hancock Life Insurance Company (the “Life Company”) merged with and into JHUSA. In connection with the mergers, JHUSA assumed the Variable Company’s rights and obligations with respect to the MVAs issued by the Variable Company and the Life Company’s rights and obligations with respect to theSignatureNotes issued by the Life Company.

MFC fully and unconditionally guaranteed the payment obligations of JHUSA and JHNY under the MVAs and of JHUSA under theSignatureNotes (including the MVAs andSignatureNotes assumed by JHUSA in the merger), and such MVAs and theSignatureNotes were registered with the Commission. TheSignatureNotes and MVAs assumed or issued by JHUSA and the MVAs issued by JHNY are collectively referred to in this note as the “Guaranteed Securities”. Each of JHUSA, JHNY and [MIC/MFHL] is, and each of the Variable Company and the Life Company was, a wholly-owned subsidiary of MFC.

MFC’s guarantees of the Guaranteed Securities are unsecured obligations of MFC, and are subordinated in right of payment to the prior payment in full of all other obligations of MFC, except for other guarantees or obligations of MFC which by their terms are designated as ranking equally in right of payment with or subordinate to MFC’s guarantees of the Guaranteed Securities.

The laws of the State of New York govern MFC’s guarantees of theSignatureNotes issued or assumed by JHUSA and the MVAs issued by JHNY and the laws of the Commonwealth of Massachusetts govern MFC’s guarantees of the MVAs issued or assumed by JHUSA. MFC has consented to the jurisdiction of the courts of New York and Massachusetts. However, because a substantial portion of MFC’s assets are located outside the United States, the assets of MFC located in the United States may not be sufficient to satisfy a judgment given by a federal or state court in the United States to enforce the subordinate guarantees. In general, the federal laws of Canada and the laws of the Province of Ontario, where MFC’s principal executive offices are located, permit an action to be brought in Ontario to enforce such a judgment provided that such judgment is subsisting and unsatisfied for a fixed sum of money and not void or voidable in the United States and a Canadian court will render a judgment against MFC in a certain dollar amount, expressed in Canadian dollars, subject to customary qualifications regarding fraud, violations of public policy, laws limiting the enforcement of creditor’s rights and applicable statutes of limitations on judgments. There is currently no public policy in effect in the Province of Ontario that would support avoiding the recognition and enforcement in Ontario of a judgment of a New York or Massachusetts court on MFC’s guarantees of theSignatureNotes issued or assumed by JHUSA or the MVAs issued by JHNY or a Massachusetts court on guarantees of the MVAs issued or assumed by JHUSA.

MFC is a holding company. The assets of MFC consist primarily of the outstanding capital stock of its subsidiaries and investments in other international subsidiaries. MFC’s cash flows primarily consist of dividends and interest payments from its operating subsidiaries, offset by expenses and shareholder dividends and stock repurchases for MFC. As a holding company, MFC’s ability to meet its cash requirements, including, but not limited to, paying any amounts due under its guarantees, substantially depends upon dividends from its operating subsidiaries.

2010 Annual Report 93

These subsidiaries are subject to certain regulatory restrictions under laws in Canada, the United States and certain other countries, which may limit their ability to pay dividends or make contributions or loans to MFC. For example, some of MFC’s subsidiaries are subject to restrictions prescribed by the ICA on their ability to declare and pay dividends. The restrictions related to dividends imposed by the ICA are described in note 18(h).

In the United States, insurance laws in Michigan, New York, Massachusetts and Vermont, the jurisdictions in which certain U.S. insurance company subsidiaries of MFC are domiciled, impose general limitations on the payment of dividends and other upstream distributions or loans by these insurance subsidiaries. These limitations are also described in note 18(h).

In Asia, the insurance laws of the jurisdictions in which MFC operates either provide for specific restrictions on the payment of dividends or other distributions or loans by subsidiaries or impose solvency or other financial tests, which could affect the ability of subsidiaries to pay dividends in certain circumstances.

There can be no assurance that any current or future regulatory restrictions in Canada, the United States or Asia will not impair MFC’s ability to meet its cash requirements, including, but not limited to, paying any amounts due under its guarantee.

The following condensed consolidating financial information, presented in accordance with U.S. GAAP, reflects the effects of the mergers and is provided in compliance with Regulation S-X of the Commission and in accordance with Rule 12h-5 of the Commission. In the case of MFHL, a reporting issuer in all of the provinces of Canada, the condensed consolidating financial information is provided as a condition of MFHL’s reliance on an exemption from continuous disclosure obligations pursuant to Canadian provincial securities law requirements.

Condensed Consolidating Balance Sheet

As at December 31, 2010	Manulife Financial Corporation (Guarantor)		Manulife Finance Holdings Limited		John Hancock Life Insurance Company (U.S.A.) (Issuer)		John Hancock Life Insurance Company of New York (Issuer)		Other Subsidiaries		Consolidation Adjustments			Consolidated Manulife Financial Corporation
Assets
Invested assets	$	39	$	3	$	80,867	$	9,685	$	128,418	$	(907	)	$	218,105
Investments in unconsolidated subsidiaries		37,456		2		4,128		1		16		(41,603	)		–
Other assets		503		407		37,762		1,437		19,858		(16,967	)		43,000
Separate account assets		–		–		125,050		7,312		49,769		(1,490	)		180,641
Total assets	$	37,998	$	412	$	247,807	$	18,435	$	198,061	$	(60,967	)	$	441,746
Liabilities and equity
Policy liabilities	$	–	$	–	$	85,895	$	6,429	$	95,285	$	(6,033	)	$	181,576
Consumer notes		–		–		961		–		–		–			961
Other liabilities		847		–		19,065		3,127		22,675		(9,424	)		36,290
Long-term debt		4,893		407		–		–		612		(450	)		5,462
Liabilities for preferred shares and capital instruments		344		–		1,009		–		4,360		(1,287	)		4,426
Separate account liabilities		–		–		125,050		7,312		49,769		(1,490	)		180,641
Shareholders’ equity		31,914		5		15,827		1,567		24,810		(42,209	)		31,914
Noncontrolling interest in subsidiaries		–		–		–		–		550		(74	)		476
Total liabilities and equity	$	37,998	$	412	$	247,807	$	18,435	$	198,061	$	(60,967	)	$	441,746

As at December 31, 2009	Manulife Financial Corporation (Guarantor)		Manulife Finance Holdings Limited		John Hancock Life Insurance Company (U.S.A.) (Issuer)		John Hancock Life Insurance Company of New York (Issuer)		Other Subsidiaries		Consolidation Adjustments			Consolidated Manulife Financial Corporation
Assets
Invested assets	$	3	$	–	$	89,143	$	2,162	$	112,569	$	(1,090	)	$	202,787
Investments in unconsolidated subsidiaries		34,194		2		3,664		1		17		(37,878	)		–
Other assets		693		–		34,009		772		21,668		(12,701	)		44,441
Separate account assets		–		–		118,702		6,958		50,252		(1,463	)		174,449
Total assets	$	34,890	$	2	$	245,518	$	9,893	$	184,506	$	(53,132	)	$	421,677
Liabilities and equity
Policy liabilities	$	–	$	–	$	90,310	$	1,075	$	89,318	$	(6,178	)	$	174,525
Consumer notes		–		–		1,261		–		–		–			1,261
Other liabilities		562		–		18,081		382		18,417		(5,404	)		32,038
Long-term debt		2,900		–		–		–		1,005		(586	)		3,319
Liabilities for preferred shares and capital instruments		344		–		1,063		–		4,417		(1,237	)		4,587
Separate account liabilities		–		–		118,702		6,958		50,252		(1,463	)		174,449
Shareholders’ equity		31,084		2		16,101		1,478		20,603		(38,184	)		31,084
Noncontrolling interest in subsidiaries		–		–		–		–		494		(80	)		414
Total liabilities and equity	$	34,890	$	2	$	245,518	$	9,893	$	184,506	$	(53,132	)	$	421,677

94 2010 Annual Report

Condensed Consolidating Statements of Operations

For the twelve months ended December 31, 2010	Manulife Financial Corporation (Guarantor)			Manulife Finance Holdings Limited		John Hancock Life Insurance Company (U.S.A.) (Issuer)				John Hancock Life Insurance Company of New York (Issuer)		Other Subsidiaries			Consolidation Adjustments			Consolidated Manulife Financial Corporation
Revenue
Premium income	$	–		$	–	$	2,689			$	1,249	$	8,350		$	(70	)	$	12,218
Net investment income		20			21		5,191				284		5,573			(27	)		11,062
Fee income and other revenue		51			–		2,019				289		6,490			(712	)		8,137
Total revenue	$	71		$	21	$	9,899			$	1,822	$	20,413		$	(809	)	$	31,417
Policy benefits and expenses
Policyholder benefits	$	–		$	–	$	6,211			$	1,455	$	11,033		$	(12	)	$	18,687
Commissions, investment and general expenses		53			–		1,776				207		3,978			(778	)		5,236
Amortization of deferred acquisition costs and value of business acquired		–			–		665				65		1,041			–			1,771
Goodwill impairment		–			–		1,677				–		562			–			2,239
Other		110			20		487				10		760			(19	)		1,368
Total policy benefits and expenses	$	163		$	20	$	10,816			$	1,737	$	17,374		$	(809	)	$	29,301
Income (loss) before income taxes	$	(92	)	$	1	$	(917	)		$	85	$	3,039		$	–		$	2,116
Income tax (expense) recovery		18			2		(206	)			105		(323	)		–			(404	)
Income (loss) after income taxes	$	(74	)	$	3	$	(1,123	)		$	190	$	2,716		$	–		$	1,712
Equity in net income (loss) of unconsolidated subsidiaries		1,726			–		247				–		–			(1,973	)		–
Net income (loss)	$	1,652		$	3	$	(876	)		$	190	$	2,716		$	(1,973	)	$	1,712
Attributed to:
Noncontrolling interests	$	–		$	–	$	–			$	–	$	64		$	(4	)	$	60
Manulife Financial Corporation		1,652			3		(876	)	��		190		2,652			(1,969	)		1,652
	$	1,652		$	3	$	(876	)		$	190	$	2,716		$	(1,973	)	$	1,712

For the twelve months ended December 31, 2009	Manulife Financial Corporation (Guarantor)			Manulife Finance Holdings Limited		John Hancock Life Insurance Company (U.S.A.) (Issuer)			John Hancock Life Insurance Company of New York (Issuer)			Other Subsidiaries			Consolidation Adjustments			Consolidated Manulife Financial Corporation
Revenue
Premium income	$	–		$	–	$	4,303		$	31		$	8,620		$	–		$	12,954
Net investment income		30			–		3,103			199			5,727			(58	)		9,001
Fee income and other revenue		61			–		2,516			225			6,635			(1,573	)		7,864
Total revenue	$	91		$	–	$	9,922		$	455		$	20,982		$	(1,631	)	$	29,819
Policy benefits and expenses
Policyholder benefits	$	–		$	–	$	6,129		$	(108	)	$	11,734		$	(5	)	$	17,750
Commissions, investment and general expenses		42			–		2,299			63			4,006			(1,526	)		4,884
Amortization of deferred acquisition costs and value of business acquired		–			–		1,247			129			1,034			(2	)		2,408
Other		250			–		555			8			761			(98	)		1,476
Total policy benefits and expenses	$	292		$	–	$	10,230		$	92		$	17,535		$	(1,631	)	$	26,518
Income (loss) before income taxes	$	(201	)	$	–	$	(308	)	$	363		$	3,447		$	–		$	3,301
Income tax (expense) recovery		44			–		284			(124	)		(362	)		–			(158	)
Income (loss) after income taxes	$	(157	)	$	–	$	(24	)	$	239		$	3,085		$	–		$	3,143
Equity in net income (loss) of unconsolidated subsidiaries		3,289			–		420			–			–			(3,709	)		–
Net income (loss)	$	3,132		$	–	$	396		$	239		$	3,085		$	(3,709	)	$	3,143
Attributed to:
Noncontrolling interest	$	–		$	–	$	–		$	–		$	16		$	(5	)	$	11
Manulife Financial Corporation		3,132			–		396			239			3,069			(3,704	)		3,132
	$	3,132		$	–	$	396		$	239		$	3,085		$	(3,709	)	$	3,143

2010 Annual Report 95

Condensed Consolidating Statement of Cash Flows

For the year ended December 31, 2010	Manulife Financial Corporation (Guarantor)			Manulife Finance Holdings Limited			John Hancock Life Insurance Company (U.S.A.) (Issuer)			John Hancock Life Insurance Company of New York (Issuer)			Other Subsidiaries			Consolidation Adjustments			Consolidated Manulife Financial Corporation
Operating activities
Net income (loss)	$	1,652		$	3		$	(876	)	$	190		$	2,716		$	(1,973	)	$	1,712
Adjustments for non-cash items in net income:
Equity in net income of unconsolidated subsidiaries		(1,726	)		–			(247	)		–			–			1,973			–
Increase in actuarial liabilities and policy related items		–			–			(2,547	)		4,583			8,697			–			10,733
Net realized investment gains and other investment items		(16	)		–			(615	)		192			(2,146	)		–			(2,585	)
Capitalized amounts net of amortization of deferred acquisition costs and value of business acquired		–			–			(512	)		(14	)		(526	)		–			(1,052	)
Amortization of premium/discount		–			–			102			79			(312	)		–			(131	)
Other amortization		–			(14	)		123			–			264			14			387
Future income tax expense (recovery)		(21	)		(2	)		662			(212	)		379			2			808
Stock option expense		–			–			8			–			17			–			25
Goodwill impairment		–			–			1,677			–			562			–			2,239
Dividends from unconsolidated subsidiaries		1,360			–			99			–			–			(1,459	)		–
Net (loss) income adjusted for non-cash items	$	1,249		$	(13	)	$	(2,126	)	$	4,818		$	9,651		$	(1,443	)	$	12,136
Changes in other operating assets and liabilities		(2	)		(1	)		(1,774	)		2,067			594			(2	)		882
Cash (used in) provided by operating activities	$	1,247		$	(14	)	$	(3,900	)	$	6,885		$	10,245		$	(1,445	)	$	13,018
Investing activities
Purchases and mortgage advances	$	–		$	–		$	(28,397	)	$	(10,381	)	$	(37,319	)	$	–		$	(76,097	)
Disposals and repayments		–			–			30,064			2,501			22,491			–			55,056
Changes in investment broker net receivables and payables		–			–			100			(2	)		39			–			137
Net cash decrease from purchase of subsidiaries		–			–			–			–			(28	)		–			(28	)
Notes receivable from affiliates		–			–			–			–			81			(81	)		–
Notes receivable from parent		–			(404	)		–			–			256			148			–
Notes receivable from subsidiaries		229			–			14			–			–			(243	)		–
Capital contribution to unconsolidated subsidiaries		(2,992	)		–			(332	)		–			(348	)		3,672			–
Return of capital from unconsolidated subsidiaries		–			–			4			–			–			(4	)		–
Cash (used in) provided by investing activities	$	(2,763	)	$	(404	)	$	1,453		$	(7,882	)	$	(14,828	)	$	3,492		$	(20,932	)
Financing activities
Increase (decrease) in securities sold but not yet purchased	$	–		$	–		$	–		$	–		$	536		$	–		$	536
Issue of long-term debt, net proceeds		2,174			421			–			–			(407	)		(14	)		2,174
Repayment of long-term debt		–			–			–			–			(1	)		–			(1	)
Dividends paid to parent		–			–			–			(99	)		(1,360	)		1,459			–
Return of capital to parent		–			–			–			–			(4	)		4			–
Capital contribution by parent		–			–			348			–			3,324			(3,672	)		–
Net redemptions of structured products		–			–			(827	)		912			(1,999	)		–			(1,914	)
Changes in bank deposits, net		–			–			(831	)		–			2,405			–			1,574
Redemption of subordinated note payable		–			–			–			–			(150	)		–			(150	)
Capital from joint venture partner		–			–			–			–			40			–			40
Consumer notes matured		–			–			(293	)		–			–			–			(293	)
Shareholder dividends paid in cash		(691	)		–			–			–			–			–			(691	)
Notes payable to affiliates		(81	)		–			–			–			–			81			–
Notes payable to parent		–			–			–			–			(243	)		243			–
Notes payable to subsidiaries		148			–			–			–			–			(148	)		–
Funds borrowed, net		–			–			–			–			5			–			5
Common shares issued, net		2			–			–			–			1			–			3
Cash provided by (used in) financing activities	$	1,552		$	421		$	(1,603	)	$	813		$	2,147		$	(2,047	)	$	1,283
Cash and short-term securities
Increase (decrease) during the year	$	36		$	3		$	(4,050	)	$	(184	)	$	(2,436	)	$	–		$	(6,631	)
Effect of exchange rate changes on cash and short-term securities		–			–			(205	)		(122	)		(12	)		–			(339	)
Balance, January 1		3			–			7,613			793			9,915			–			18,324
Balance, December 31	$	39		$	3		$	3,358		$	487		$	7,467		$	–		$	11,354
Cash and short-term securities Beginning of year
Gross cash and short-term securities	$	3		$	–		$	7,891		$	812		$	10,143		$	–		$	18,849
Net payments in transit, included in other liabilities		–			–			(278	)		(19	)		(228	)		–			(525	)
Net cash and short-term securities, January 1	$	3		$	–		$	7,613		$	793		$	9,915		$	–		$	18,324
End of year
Gross cash and short-term securities	$	39		$	3		$	3,713		$	509		$	7,617		$	–		$	11,881
Net payments in transit, included in other liabilities		–			–			(355	)		(22	)		(150	)		–			(527	)
Net cash and short-term securities, December 31	$	39		$	3		$	3,358		$	487		$	7,467		$	–		$	11,354

96 2010 Annual Report

Condensed Consolidating Statement of Cash Flows

For the year ended December 31, 2009	Manulife Financial Corporation (Guarantor)			Manulife Finance Holdings Limited		John Hancock Life Insurance Company (U.S.A.) (Issuer)			John Hancock Life Insurance Company of New York (Issuer)			Other Subsidiaries			Consolidation Adjustments			Consolidated Manulife Financial Corporation
Operating activities
Net income (loss)	$	3,132		$	–	$	396		$	239		$	3,085		$	(3,709	)	$	3,143
Adjustments for non-cash items in net income:
Equity in net income of unconsolidated subsidiaries		(3,289	)		–		(420	)		–			–			3,709			–
Increase in actuarial liabilities and policy related items		–			–		(457	)		5			10,969			–			10,517
Net realized investment gains and other investment items		(25	)		–		2,044			(1	)		(2,605	)		–			(587	)
Capitalized amounts net of amortization of deferred acquisition costs and value of business acquired		–			–		(509	)		17			(440	)		–			(932	)
Amortization of premium/discount		–			–		166			7			(548	)		–			(375	)
Other amortization		–			–		144			–			252			–			396
Future income tax expense (recovery)		(22	)		–		(121	)		33			564			–			454
Stock option expense		–			–		10			–			14			–			24
Dividends from unconsolidated subsidiaries		3,300			–		–			–			–			(3,300	)		–
Net income (loss) adjusted for non-cash items	$	3,096		$	–	$	1,253		$	300		$	11,291		$	(3,300	)	$	12,640
Changes in other operating assets and liabilities		60			–		(544	)		(158	)		752			–			110
Cash provided by (used in) operating activities	$	3,156		$	–	$	709		$	142		$	12,043		$	(3,300	)	$	12,750
Investing activities
Purchases and mortgage advances	$	–		$	–	$	(20,120	)	$	(887	)	$	(27,422	)	$	–		$	(48,429	)
Disposals and repayments		–			–		19,245			258			18,681			–			38,184
Changes in investment broker net receivables and payables		–			–		(94	)		–			35			–			(59	)
Redemption of preferred shares issued by a subsidiary		668			–		–			–			–			(668	)		–
Net cash decrease from purchase of subsidiaries		–			–		–			–			(13	)		–			(13	)
Notes receivable from affiliates		–			–		13			–			1,371			(1,384	)		–
Notes receivable from parent		–			–		–			–			(138	)		138			–
Notes receivable from subsidiaries		(59	)		–		–			–			–			59			–
Capital contribution to unconsolidated subsidiaries		(4,986	)		–		(973	)		–			–			5,959			–
Return of capital from unconsolidated subsidiaries		–			–		66			–			–			(66	)		–
Cash (used in) provided by investing activities	$	(4,377	)	$	–	$	(1,863	)	$	(629	)	$	(7,486	)	$	4,038		$	(10,317	)
Financing activities
Increase (decrease) in securities sold but not yet purchased	$	–		$	–	$	–		$	–		$	(1,123	)	$	–		$	(1,123	)
Issue of long-term debt, net proceeds		1,592			–		–			–			1			–			1,593
Repayment of long-term debt		(2,000	)		–		–			–			–			–			(2,000	)
Return of capital to parent		–			–		–			–			(66	)		66			–
Capital contribution by parent		–			–		–			550			1,888			(2,438	)		–
Net redemptions of structured products		–			–		(508	)		155			(2,355	)		–			(2,708	)
Changes in bank deposits, net		–			–		1,712			–			883			–			2,595
Capital from joint venture partner		–			–		–			–			35			–			35
Consumer notes matured		–			–		(527	)		–			–			–			(527	)
Shareholder dividends paid in cash		(1,149	)		–		–			–			(3,300	)		3,300			(1,149	)
Notes payable to affiliates		(763	)		–		–			–			(622	)		1,385			–
Notes payable to parent		–			–		–			–			59			(59	)		–
Notes payable to subsidiaries		138			–		–			–			–			(138	)		–
Funds repaid, net		–			–		–			–			(10	)		–			(10	)
Issue of debenture		–			–		–			–			1,000			–			1,000
Tax benefit of stock options exercised		–			–		9			–			(10	)		1			–
Redemption of preferred shares		–			–		–			–			(668	)		668			–
Preferred shares issued, net		784			–		–			–			–			–			784
Common shares issued, net		2,599			–		–			–			3,379			(3,523	)		2,455
Cash provided by (used in) financing activities	$	1,201		$	–	$	686		$	705		$	(909	)	$	(738	)	$	945
Cash and short-term securities
(Decrease) increase during the year	$	(20	)	$	–	$	(468	)	$	218		$	3,648		$	–		$	3,378
Effect of exchange rate changes on cash and short-term securities		–			–		(1,178	)		(133	)		(623	)		–			(1,934	)
Balance, January 1		23			–		9,259			708			6,890			–			16,880
Balance, December 31	$	3		$	–	$	7,613		$	793		$	9,915		$	–		$	18,324
Cash and short-term securities Beginning of year
Gross cash and short-term securities	$	23		$	–	$	9,630		$	708		$	6,998		$	–		$	17,359
Net payments in transit, included in other liabilities		–			–		(371	)		–			(108	)		–			(479	)
Net cash and short-term securities, January 1	$	23		$	–	$	9,259		$	708		$	6,890		$	–		$	16,880
End of year
Gross cash and short-term securities	$	3		$	–	$	7,891		$	812		$	10,143		$	–		$	18,849
Net payments in transit, included in other liabilities		–			–		(278	)		(19	)		(228	)		–			(525	)
Net cash and short-term securities, December 31	$	3		$	–	$	7,613		$	793		$	9,915		$	–		$	18,324

2010 Annual Report 97

Note 23    ^    Subsequent Events

On February 16, 2011, MLI redeemed the outstanding $550 principal amount of the 6.24% subordinated debentures at par plus accrued and unpaid interest.

On March 11, 2011, MFC issued eight million Class 1 Shares Series 3 (“Series 3 Preferred Shares”) at a price of $25.00 per share, for an aggregate amount of $200. The Series 3 Preferred Shares are entitled to non-cumulative preferential cash dividends, payable quarterly, if and when declared, at a per annum rate of 4.20% until June 19, 2016, after which the dividend rate will be reset every five years at a rate equal to the five year Government of Canada bond yield plus 1.41%. On June 19, 2016 and on June 19 every five years thereafter, the Series 3 Preferred Shares will be convertible at the option of the holder into Class 1 Shares Series 4 (“Series 4 Preferred Shares”). The Series 4 Preferred Shares are entitled to non-cumulative floating preferential cash dividends, payable quarterly, if and when declared, at a rate equal to the three month Government of Canada Treasury Bill yield plus 1.41%.

Note 24    ^     Comparatives

Certain comparative amounts have been reclassified to conform with the current year’s presentation. In addition, certain deferred tax balances for the comparative period have been re-expressed because certain subsidiaries were no longer included in the U.S. consolidated tax return. The impact of this presentation change was an increase in both future income tax assets (included in miscellaneous assets) and future tax liabilities as at December 31, 2009 of $705. The change in presentation did not have any impact on net income.

98 2010 Annual Report