investment analyst views cia general meeting chicago, illinois october 19, 2006

Investment Analyst ViewsInvestment Analyst Views

CIA General MeetingChicago, Illinois

October 19, 2006

Veritas Investment ResearchVeritas Investment Research

Independent Unbiased Research

Rooted in Forensic Accounting

Based on Business Fundamentals

Long-term Investment Horizon

What do investors want to do?What do investors want to do?

Measure earnings

Evaluate risk

Value the company

Evaluate how well management is investing the company’s capital

What tools do investors have?What tools do investors have?

GAAP F/S

Source of Earnings disclosures

Embedded Value disclosures

Notes to the F/S and MD&A, e.g.:CALM disclosuresReserve movementsFair values

What the Street doesWhat the Street does

Forecasting earnings by segment

Key drivers appear to be:Premium growth

Net Income margin

Forecasts are then used to plug into:Forward P:E analysis

Forward P:BV analysis

Relative Price : EarningsRelative Price : Earnings

Source: BMO Nesbitt Burns

Price : Book RegressionPrice : Book Regression

Why we don’t use these techniquesWhy we don’t use these techniques

The market doesn’t need a 15th EPS estimate

Target P:E multiples are difficult to justify theoretically

ROE regressions should be a means, not an end

Short term forecasts are inherently fraught with danger

Cause & effect(Dis)connect between market events and GAAP earnings

Veritas approach to life insuranceVeritas approach to life insurance

Profitability is driven by two key components:

Did the Lifeco sell profitable new business?

Existing book of business – did the LifeCo manage better or worse than model?

SOE: Earnings Quality Concerns?SOE: Earnings Quality Concerns?

Source of Earnings, Common Size Q1-F06

-40%

-20%

0%

20%

40%

60%

80%

100%

IAG MFC SLF

Income taxes

Other

Management actions andchanges in assumptions

Experience gains/losses

Impact of new business

Earnings on surplus

Expected profit on in-force business Source: Company reports and

Veritas calculations.

SOE - Returns on SurplusSOE - Returns on Surplus

Return on Assets Backing Surplus*, 2001-2005

Source: Company reports and Veritas calculations

* Simple average of opening and closing balances

2005 2004 2003 2002 2001

MFC 4.0% 4.3% 4.3% 4.2% 5.4%

SLF 3.7% 3.8% 3.3% 3.8% 5.9%

IAG 3.7% 4.4% 4.3% 3.1% 3.8%

SOE - “Core earnings”SOE - “Core earnings”

0.40 0.41 0.41 0.42 0.45 0.46 0.46 0.490.57

0.62 0.64 0.620.66 0.69 0.72

0.77

0.16 0.18 0.16 0.180.20 0.17 0.16 0.16

0.190.22 0.22 0.25 0.21

0.26 0.25 0.23

-

0.20

0.40

0.60

0.80

1.00

1.20

Q3F

04

Q4F

04

Q1F

05

Q2F

05

Q3F

05

Q4F

05

Q1F

06

Q2F

06

Q3F

04

Q4F

04

Q1F

05

Q2F

05

Q3F

05

Q4F

05

Q1F

06

Q2F

06

Expected profit Earnings on Surplus

MFC SLF

How is shareholders’ money invested?How is shareholders’ money invested?

Assets Backing CapitalAsset Mix Supporting Capital (and Other Liabilities) – Dec. 31, 2005

Source: Company reports, Veritas calculations

•Includes non-policy liabilities and shareholders' equity

** Includes shareholders' equity, long-term debt, liabilities for preferred shares and capital instruments and non- controlling interest in subsidiaries

Bonds Mortgages Stocks Real

Estate Total

GWO 66.0% 2.0% 17.4% 14.6% 100.0%

IAG* 68.8% 7.9% 11.6% 11.7% 100.0%

MFC** 62.1% 11.9% 23.5% 2.5% 100.0%

SLF* 78.4% 3.5% 7.1% 11.1% 100.0%

Allowances for future credit lossesAllowances for future credit losses

Key takeaways

Dollar amounts are much more significant than impaired loans MFC has been reducing its reserve GWO carries a lower reserve

Source: Company reports and Veritas calculations. IAG does not disclose this figure.

Note: Amounts in millions of Canadian dollars

As a Percentage of Bonds and Mortgages Supporting

Actuarial L iabilities

Dollar Value

2005 2005 2004 2003 2002

SLF $2,413 3.2% 2.9% 2.7% 2.3%

MFC $2,906 3.7% 4.3% 6.9% 6.8%

GWO $608 1.5% 1.3% 1.3% 0.8%

The Whole PortfolioThe Whole Portfolio

0%

20%

40%

60%

80%

100%

Q1F06 Q4F04 Q1F06 Q4F04 Q1F06 Q4F04 Q1F06 Q4F04

GWO IAG MFC SLF

Bonds Mortgages

Stocks Real estate

Cash and short-term investments Policy loans and other investments

Invested Asset Composition, Q4-F04 vs. Q1-F06

Bonds OnlyBonds Only

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Q1F06 Q4F04 Q1F06 Q4F04 Q1F06 Q4F04 Q1F06 Q4F04

GWO IAG MFC SLF

AAA AA A BBB BB & low er, and unrated

Bond Portfolio Composition, Q4-F04 vs. Q1-F06

Policy Liabilities - the RollforwardPolicy Liabilities - the Rollforward

Difficult to glean useful information

Source: MFC 2005 annual report

MFC Policy Liability Rollforward, 2005(Amounts in millions of Canadian dollars)

2005

1 Balance, J anuary 1 137,410

2 New polic ies 1,960

3 Normal in-force movement (3,676)

4 Changes in methods and assumptions (50)

5 Changes due to acquisition and assumption transactions 441

6 Currency impact ($4,036)

7 Balance, December 31 132,049

Assumption changes – MFC 2005Assumption changes – MFC 2005

EV ValuationEV Valuation

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

2001 2002 2003 2004 2005

BV EV Share price

MFC share price, EV/share, BV/share

P:EV MultiplesP:EV Multiples

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00

1999 2000 2001 2002 2003 2004 2005

MFC SLF Industrial Alliance Canada Life European average

VNB Multiples (Implied)VNB Multiples (Implied)

-5.00

0.00

5.00

10.00

15.00

20.00

2000 2001 2002 2003 2004 2005

MFC SLF Industrial Alliance

Implied VNB GrowthImplied VNB Growth

Discount Rate MFC SLF

Price $36.06 $44.75

8.50% 0.96% 0.99%

9.00% 1.46% 1.49%

9.50% 1.96% 1.99%

VNB / Share GrowthVNB / Share Growth

-30%

-20%

-10%

0%

10%

20%

30%

40%

2001 2002 2003 2004 2005

MFC SLF

Industrial Alliance Grow th implied by VNB multiple of 15

SLF EV Growth AnalysisSLF EV Growth Analysis

VNB growth rates are not all that affect EV growth

The market discounts for EV adjustments – the risk inherent in managing the existing book of business

2000 2001 2002 2003 2004 2005

Opening EV, Jan 1 9,640 11,025 11,277 14,179 13,160 14,277

Expected growth (on in-force-business) 771 836 947 1,096 1,186 1,190

VNB 563 512 634 580 666 782

EV adjustments* 0 (803) (1,476) 329 645 625

Currency (9) 462 101 (1,744) (574) (596)

VNB +/- EV adj. and currency 554 171 (741) (835) 737 811

EV AdjustmentsEV Adjustments

Note: circles are annual summary; squares are individual components

-350%

-300%

-250%

-200%

-150%

-100%

-50%

0%

50%

100%

150%

200%

2000 2001 2002 2003 2004 2005 2006MFC - black

SLF - white

Investment ThesisInvestment Thesis

6%1.55% 11%

P rojected growth rate

Market implied growth rate

VNB / Share GrowthVNB / Share Growth

V-LIST BUYTarget: $43.50

Directly Forecasting EVDirectly Forecasting EV

Supplement with high level EV forecast:

Opening EV+ EV Accretion

+ Value of New Business-Capital Returned to Shareholders

Closing EV

3855: What’s My Number?3855: What’s My Number?

Vanishing earnings

Balance sheet volatility

Gains / losses on assets backing surplus

3855: Vanishing Earnings3855: Vanishing Earnings

Forecasted EPS is affected

Therefore, forecasted valuation is affected for those using P:E approach

BV will increase – how does this affect those using P:BV regression?

Does the change adversely affect management decisions?

3855: Balance Sheet Volatility3855: Balance Sheet Volatility

Assets backing surplus will be marked to market – GOOD!

Assets backing liabilities will be marked to market – Not so good.

Analysts taking a wait and see approach

3855: Gains on Assets Backing Surplus3855: Gains on Assets Backing Surplus

What is the “right” level?

Accounting is similar to banks’ for Investment Securities

Operating earnings / Core earnings

Analysts taking a wait and see approach

3855: New Disclosures, Please!3855: New Disclosures, Please!

Fair value of assets backing surplus, by asset class

Gains recognized in earnings & OCI separately, by asset class

Liability rollforward by quarter, separately showing effect of asset valuation

Other Requested DisclosuresOther Requested Disclosures

PfADs, reserve details

VNB / segment

SOE / segment

Experience gains or losses by type

Sensitivity to interest rates / equity markets

Questions and AnswersQuestions and Answers

LifeCo Fair Values - ExampleLifeCo Fair Values - ExampleFair Value of Assets Backing Equity, as at December 31, 2005

(Amounts in billions of Canadian dollars)

GWO IAG MFC SLF

Fair value of invested assets 93.6 12.8 173.1 105.4

Carrying value of non-invested assets* 12.8 0.8 12.6 12.3

Estimated fair value of total assets 106.3 13.6 187.7 117.6

Less:

FV of assets backing policy liabilities 76.5 10.1 136.5 84.6

Estimated fair value of non-policy liabilities 20.0 1.1 22.2 16

Estimated fair value of assets backing shareholders’ equity, net of other liabilities

9.8 2.3 29.0 16.4

BV of common shareholders’ equity 8.7 1.4 23.3 14.7

Excess of fair value of book value 1.1 1.0 5.7 1.7

As a % of BV 13.1% 72.3% 24.7% 11.2%

Market cap 25.5 2.6 56.8 26.2

Market cap/FV of equity 2.6 1.1 2.0 1.6

Source: Company reports and Veritas calculations.* Includes goodwill and intangibles.