Source of Earnings and Disclosure Simon Curtis Executive Vice President & Chief Actuary September 2004

Source of Earnings at Manulife l We have used SOE internally for 10+ years l A key management tool widely understood by management l Used to help make and monitor business and risk management decisions l We first started disclosing SOE externally in September 2002 l We now disclose SOE quarterly in our SIP by Operating Division and follow CIA Education Note Guidelines l We have detailed internal standards for SOE and professional standards for SOE being developed in Canada 2

Manulife’s Source of Earnings Disclosure History September 2002 December 2002 March 2003 June 2003 March First disclosure of total company 5 year annual SOE ( ) Commenced total company annual SOE disclosure in SIP Commenced total company quarterly SOE disclosure in SIP Commenced divisional quarterly SOE disclosure Modified SOE disclosure to reflect emerging CIA Education Note

Source of Earnings Internal By Line of Business within Business Unit Within Division Categorized into 25+ categories 4 External By Division Summarized to 7 key categories

Key Challenges in Taking “Internal” SOE External l External disclosure requires consistency in classification/quantification of items over time and between businesses – rigorous internal policies and control infrastructure needed. l Ongoing refinements to SOE methodology are problematic l Restatement vs. Go-forward only (complex) (less over time consistency) l There are a lot of “grey” area disclosure issues to deal with, and every quarter presents new challenges not covered by existing guidelines (or may cause re-think of guidelines). 5

Key Challenges in Taking “Internal” SOE External l SOE requires strong documented practices on PfADs vs. expected reserves, good experience studies and good control over investment analytics. l Good SOE disclosure can be evolutionary (i.e. learn and improve from successive quarterly repetition for a business). This can be problematic for external disclosure where restatements of numbers or changes in analytics are always a concern. l SOE was developed as subjective management analysis tool ….. evolving this into an objective set of financial metrics without losing its key attractiveness as a vibrant management tool is a challenge. 6

Earnings by Source - External Management Actions Expected profit from Inforce Business Impact of New Business Changes in Actuarial Assumptions & Methods Experience Gains (Losses) Other Pre-tax Earnings attributed to Key Categories NET INCOME 7 Earnings on Surplus Funds

How to Interpret EBS - General Expected Profit from Inforce Business Impact of New Business Experience Gains (Losses) 8 Expected PfAD releases on insurance & non-DAC annuities & net fee income on DAC based products Growth in inforce business should result in increasing value in this line Some volatility in DAC based products as balances move with equity market Difference between new business PfADs and value of future profits on insurance & non-DAC annuities – loss (“strain”) results when conservative PfADs exceed expected profits Value of non capitalized acquisition expenses on DAC products Variance between actual experience and experience expected in reserves on non-DAC products A conservative approach to setting assumptions should result in gains Difference between actual & expected fee income on DAC products

How to Interpret EBS - General (Contd) Change in Actuarial Assumptions and Methods Management Action Interest on Surplus Funds Other 9 Net changes in valuation methods & assumptions Measures impact of changes in future estimates on current reported income Accounting investment income on surplus assets Impact of non valuation events that are within the control of management Example: Premium or policy charge changes We have historically included with “Other”

How to Interpret EBS - Manulife Philosophy Expected Profit from Inforce Business Strain on New Business Experience Gains (Losses) 10 Look for strong core of stable and growing earnings as inforce grows Modest strain consistent with conservative approach to reserving Prudent approach to setting expected assumptions and updating these for experience creates experience gains (some level is almost core)

How to Interpret EBS - Manulife Philosophy (Contd) Change in Assumptions Earnings on Surplus Management Action 11 We do not systematically use valuation basis change capitalization to create current income Source of core stable earnings Generally unusual, non-recurring items

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“User” Reaction to SOE l Internal management has always been a strong supporter of SOE analysis – we have used for 10+ years as key earnings analysis tool l SOE is key link that brings together financial impact of: l Business activities l Valuation methods and assumptions l Risk management activities (ALM) l It is this “linkage” through SOE that is the foundation of our financial management platform 14 Internal

“User” Reaction to SOE l Investment analysts have been primary external audience for SOE disclosure, and it has gained immediate acceptance l Analysts focus on reported GAAP earnings, and SOE is a powerful tool to understand these l Quarterly SOE disclosure allows analysts to invest time and effort into understanding the measure and building it into their analytic package l Analyst issues with disclosure l Misunderstanding of experience gains – are they sustainable? l Confusion on treatment of full term vs. limited term (DAC) businesses l Desire for more details – particularly components of experience gains 15 External

Investment Analyst Reaction SOE Supplemental but directly linked to financial statements earnings Conceptually straightforward – Demystifies the black box Quarterly 16 Embedded Value Supplemental with lack of clear linkage to financial statements earnings Conceptually complex – Actuarial black box – Credibility issues? Annual only

How does SOE Disclosure impact the Role of the Appointed Actuary? l Increases visibility and importance of actuary role in external disclosure l SOE questions always come up on analyst call and actuary is the “expert” l Increases transparency of impact of valuation on earnings l New business strain l Experience gains (conservatism in assumption) l Valuation basis changes l Increases internal discipline on actuarial valuation practices because of visibility of impact on SOE l SOE takes up as much time as valuation in day-to-day work 17

OSFI Draft Guideline D-9 (SOE Disclosure) l Requires SOE disclosure annually for all federally regulated Canadian Lifecos l Disclosure required by Financial Statement Segment using “7” categories l Disclosure expected to be in Financial Statement Notes or MD&A l Generally follows CIA Education Note Guidance but with additional guidance, particularly on definition of “management actions” and “valuation basis changes” 18 Overview

OSFI Draft Guideline D-9 (SOE Disclosure) l Requirement for disclosure to be in Financial Statement Notes or MD&A is not practical l Audit and SOX certification issues l SIP disclosure for public company is reasonable, practical alternative l Changes in asset mix within investment policy – OSFI Guideline suggests these are management actions, not experience gains l Practical and principle issues to isolate from impact of market movement 19 Key Concerns l Definition of basis changes too broad l All error correction l All changes in non formula bulk actuarial liabilities l All changes in MfAD levels, including CTE levels l Changes in non policy liability accounting provisions including asset provisions

Open Issues on SOE l It is important to realize that SOE is management analysis of earnings – format should not be over-prescribed l Need to maintain balance of l If we evolve to “cookbook” prescribed disclosure, core usefulness as real management analysis of earnings will disappear 20 Flexibility to explain earnings logically Rules for general consistency

Open Issues on SOE l SOE has crystallized need for: l More consensus on what is PfAD vs. expected reserve l More consensus on what is change in valuation method and assumptions vs. regular valuation movement l More consensus/literature on methods and frequency for updating expected assumptions l Other SOE issues: l Treatment of currency gains/losses l SOE disclosure will bring differences in valuation practices between companies into public view: l Aggressiveness/conservatism in expected valuation assumptions l Income generation from valuation basis changes l Expect pressure to “explain” intercompany inconsistencies 21