Manulife Financial Corporation

Transcription

1 Title: Manulife Financial Corporation - MFC (T) Cdn$13.32 Price: Cdn$13.32 StockRating: Sector Perform TargetPrice: Cdn$14.00 Headline: Title August 7, 2014 The NBF Daily Bulletin MFC (T) Stock Rating: Target: Risk Rating: Cdn$21.70 Outperform (Unchanged) Cdn$26.00 (Was $24.00) Below Average (Unchanged) Est. Total Return 22% Stock Data: 52-week Low-High $ $22.53 Shares Outstanding EOP (mln) 1,858 Market Capitalization ($mln) $40,326 Quarterly Dividend Per Share $0.13 Dividend Yield 2.4% Price-to-Book 1.5x S&P/TSX Composite Weighting 2.12% (Year-End 12/31) 2013A 2014E 2016E EPS (Excl. Trust Unit Conv.) $1.44 $1.60 $2.07 $2.32 Y/Y Growth 51% 11% 29% 12% Core EPS $1.57 $1.72 $1.91 $2.11 Y/Y Growth 7% 9% 11% 11% MFC Core EPS to Common $1.35 $1.57 $1.90 $2.16 Y/Y Growth 15% 16% 21% 14% Dividend / Share $0.52 $0.57 $0.70 $0.82 F/D Avg. Shares 1,838 1,859 1,877 1,865 Book Value / Share $13.98 $15.56 $16.99 $18.29 Price / Book 1.6x 1.4x 1.3x 1.2x Price / Earnings 15.1x 13.5x 10.5x 9.4x Net Income to Common 2,999 2,978 3,882 4,323 Core Earn. from Ops. U.S. Insurance 1,117 1,202 1,289 1,359 U.S. Wealth Management ,056 1,166 Canadian Division 1,179 1,283 1,427 1,556 Asia & Japan Division 1,083 1,157 1,257 1,382 Corporate & Other (535) (395) (335) (312) Core Earn. (pre-tax) 3,824 4,187 4,695 5,151 Taxes & Preferred Div. (934) (988) (1,106) (1,207) Core Earn. (after-tax) 2,890 3,199 3,588 3,944 Inv. Gains, Hedge, Other (403) (272) (14) 90 MFC Core Earn. to Com. 2,486 2,926 3,574 4,033 Industry Rating: Market Weight (NBF Economics & Strategy Group) Company Profile: Manulife is the largest Canadian Lifeco by market capitalization. The company s products portfolio includes life insurance, pensions, long-term care, mutual funds, annuities and group benefits. MFC's primary operations are in Canada and the U.S. (following the 2003 acquisition of John Hancock for $11 billion). MFC also has a sizeable presence in various Asian markets, with operations in the Philippines, Hong Kong, China, Taiwan, Indonesia, Singapore, Vietnam, Malaysia and Thailand. Manulife Financial Corporation Second Quarter f2014 Earnings Release Insurance Surprise Increase to Dividend and Target Payout Range Signals New Era HIGHLIGHTS MFS reported fully-diluted EPS of $0.49, versus our estimate of $0.40/share. Core EPS (under NBF s definition) came in at $0.41, just missing our forecast of $0.43. Surprise increase to quarterly dividend and target payout range signals new era. MFC announced a quarterly dividend increase of 2.5 cents per share or 19% to 15.5 cents per share. Management also raised its target dividend payout range to 30%-40% from 25%-35%. These changes demarcate the front end of new era at MFC, one in which the company will focus less on building a fortress balance sheet and more on creating shareholder value. This viewpoint forms the basis of our Outperform thesis. Asia rebounds. MFC s Asia division exceeded our core earnings estimate (pre-tax) by 8% this quarter, reporting core earnings of US$271 million. The beat came from better-than-forecast expected profit, impact of new business and earnings on surplus. We view this as encouraging after three consecutive quarters of stagnant core earnings. Upcoming Reserve Charges Manageable. In the third quarter of each year, MFC undertakes an annual review of actuarial methods and assumptions. While its review is not complete, the impact should be near last year s outcome (a charge of $252 million). In addition, in the fourth quarter of f2014, MFC will implement new actuarial standards for economic reinvestment assumptions used in the valuation of insurance contract liabilities. Assuming June 30, 2014 interest rates (and other assumptions) hold, MFC estimates these revisions will result in a charge to net income of up to $200 million. EPS estimate changes: EPS falls to $1.60 from $1.76 in f2014, remains at $2.07 in f2015, and rises to $2.32 from $2.29 in f2016. NBF core EPS remains at $1.72 in f2014, falls to $1.91 from $1.93 in f2015, and declines to $2.11 from $2.14 in f2016. MFC remains at Outperform; price target increased to $26.00 from $ Our price target P/E multiple is 11.8x our NTM EPS one-year from today, a 1% discount to peers. MFC currently trades at 12.8x our forecasted EPS over the next twelve months (NTM). Stock Performance Peter Routledge - (416) peter.routledge@nbc.ca Associate: Parham Fini - (416) parham.fini@nbc.ca

2 Page 2 Remain at Outperform; Price Target Increased to $26.00 from $24.00 MFS reported fully-diluted EPS (excluding the conversion of capital trust securities in the fully diluted share count) of $0.49, versus our estimate of $0.40/share. MFC reported higher non-core investment gains than we forecasted and did not suffer in Q2 f2014 the hit to earnings from falling long-term interest rate as we predicted. Under management s definition of Core earnings, MFC reported Q2 f2014 Core EPS of $0.36, compared with our estimate of $0.40 and the consensus estimate of $0.39. Core EPS (under NBF s definition) came in at $0.41, just missing our forecast of $0.43 (please note, we define core earnings as the tax-affected sum of expected profit from operations, impact of new sales and earnings on surplus). Some investors and observers expressed concern about the core earnings miss. We would simply respond that the strength or weakness of MFC s quarter depends on one s definition of core. The miss to our core earnings forecast came via the most volatile component in the sources of earnings statement: Expected profit came in slightly higher than we anticipated (Cdn$968 million vs. NBF $964 million), Strain from new business written was a touch better than expected (loss of Cdn$75 million vs. NBF loss of Cdn$78 million) Earnings on Surplus was much lower than anticipated (Cdn $111 million vs. NBF Cdn$163 million) The latter category is notoriously volatile and management attributed the disappointing total to lower mark-to-market gains and the timing of dividend and interest income relative to the prior quarter. In short, we see nothing that suggests a systemic reduction in core earnings power and find ample reason to be optimistic of MFC s core performance: consistent growth in U.S. wealth sales, a solid core earnings beat to our expectations in Asia (see segment review below), and steady expected profit growth in the U.S. asset management segment. By focusing the market on its core earnings, we think MFC encourages investors to overlook the contribution of non-core investment gains, which may cause an understatement of prospective BVPS growth and, hence, valuation. Since Q1 f2011, MFC has averaged Cdn$227 million in quarterly non-core investment gains, or roughly Cdn$277 million including core investment gains (of Cdn$50 million per quarter). On the Q2 f2014 earnings conference call, management hinted that MFC may increase the amount of investment gains it systemically classifies as core in the quarter. As noted in the segment review below, we increased our forecast for core and non-core investment gains in future quarters. Changes in book value per share (BVPS) offer the analyst the best way of looking through the earnings noise. On that basis, we find that MFC missed our BVPS forecast of $15.17 by 1.6%, reporting Q2 f2014 BVPS of $ Higher unrealized foreign exchange gains ($0.9 billion vs. NBF $0.2 billion) than we anticipated drove the book value miss. Subsequent to quarter end, however, the Canadian dollar depreciated which should (if the current exchange rate holds) reverse some of these losses next quarter. Given that MFC has chosen to release its results on the same date as two of its peers, we reluctantly omit a deeper dive into the key takeaways for the quarters in order to cover all the results released today (GWO, MFC and SLF). We highlight the following key takeaways for the quarter: Surprise increase to the quarterly dividend and target payout range signals new era. MFC announced a quarterly dividend increase of 2.5 cents per share or 19% to 15.5 cents per share. Management also raised its target dividend payout range to 30%-40% from 25%-35%.

3 Page 3 These changes demarcate the front end of new era at MFC, one in which the company will focus less on building a fortress balance sheet and more on creating shareholder value. This viewpoint forms the basis of our Outperform thesis. One mechanism for creating shareholder value would be to employ MFC s excess capital more productively on behalf of shareholders. With an MCCSR ratio of 243% and a falling financial leverage ratio (down to 28% from 33% one year ago), MFC has ample capacity to repurchase common shares. Alternatively, MFC s robust capital and financial leverage metrics also gives the board and management team the flexibility to pursue accretive acquisitions. With the dividend increase this quarter and, more importantly, the increase to the target common share dividend payout range, MFC s board of directors has clearly signaled an intention to look at the aforementioned options more seriously than the company has in the recent past. Weakness in U.S. Insurance stands out as a concern. An earnings miss in the U.S. Insurance division (core earnings fell short of our expectations by 8%) mainly reflected lower expected profit than anticipated. This gives us some concern as we have observed volatility in expected profit over the past year for this unit, with figures ranging from US$154 million to US$188 million. We have dropped our f2015 estimate for this segment by 6% on the view that this quarter s result indicates the platform is weaker than we had thought. Asia rebounds. MFC s Asia division exceeded our core earnings estimate (pre-tax) by 8% this quarter, reporting core earnings of US$271 million. The beat came from better-than-forecast expected profit, impact of new business and earnings on surplus. We view this as encouraging after three consecutive quarters of stagnant core earnings. Upcoming Reserve Charges Manageable. In the third quarter of each year, MFC undertakes an annual review of actuarial methods and assumptions. In the Q2 f2014 earnings press release, management indicated that while its review is not complete, the impact could be up to an amount in the general range of the Q3 f2013 charge for changes in actuarial methods and assumptions (Cdn$252 million, after-tax). In addition, in the fourth quarter of f2014, MFC will implement new actuarial standards for economic reinvestment assumptions used in the valuation of insurance contract liabilities i.e., assumptions related to interest rates and credit spreads 20+ years into the future and to the use of non-fixed income backing fixed obligations. While the company noted the impact of these revisions will depend on interest rates and other assumptions at the time of implementation as well as investment-related experience, the company does not anticipate that the impact on net income would be significant. Applying interest rate levels, year-to-date investment-related experience and assumptions for the first half of f2014, MFC estimates these revisions will result in a charge to net income of up to $200 million. Dividend Outlook As a result of the surprise increase to the quarterly dividend and the increase in the target payout range, we changed our dividend forecast quite materially. We assume MFC holds its quarterly dividend at $0.155/share for the next three quarters, then bumps it up a further 2.5 cents to $0.18/share and thereafter increases the dividend every third quarter by $0.02/share. As a consequence, our f2015 dividend per share estimate rises to $0.70 for the full year from $0.56 while in f2016 our DPS estimate increases to $0.82 (again for the full year) from $0.64. By making these assumptions, we keep MFC s common share dividend payout ratio in the middle of its target range.

4 Page 4 MFC Common Dividend Payout Ratio - Forecast vs. No Increases 50% 45% 40% Upper Payout Ratio Target 35% 30% 25% Lower Payout Ratio Target 20% 15% Common Div. Payout Ratio (No Dividend Increases Assumed) Common Div. Payout Ratio (Actual / Forecast) 10% 4Q-12 1Q-13 2Q-13 3Q-13 4Q-13 1Q-14 2Q-14 3Q-14E 4Q-14E 1Q-15E 2Q-15E 3Q-15E 4Q-15E 1Q-16E 2Q-16E 3Q-16E 4Q-16E Note: The jump in the payout ratio in Q3 f2014 comes as a result of an anticipated Cdn$252 million charge that MFC will incur as part of its Q3 f2014 review of its actuarial assumptions. Valuation We now base our Outperform rating on the view that a new era has begun at MFC one in which shareholders will see capital flow back to them (a reversal from the financial crisis years) in the form of increasing dividends, common share repurchases and accretive acquisition. We think several key drivers underlie the new era: (1) ample financial flexibility via an unusually high MCCSR ratio at MFC s primary operating company and via a rapidly declining financial leverage ratio, (2) the strength of MFC s North American wealth management platforms, and (3) an attractive long-term growth opportunity in Asia which gives MFC s board of directors attractive opportunities for organically deploying its excess capital. In addition, we see MFC as one of the Canadian large-cap financial institutions most geared to an accelerating U.S. recovery half of its balance sheet and earnings are related to its U.S. businesses. Therefore, if the recovery in U.S. economic growth continues, this will likely trigger renewed market interest in MFC s stock. If, after the summer of f2014, we find ourselves with a U.S. economy growing at over 2.5% on a real basis, and the market starting to price in a rising Federal Funds rate, then we expect MFC would trade in the mid-20s (and common share repurchases could accelerate this process). We elected to raise our price target to $26 from $24. Our price target P/E multiple is 11.8x our NTM EPS one-year from today, a 1% discount to peers. MFC currently trades at 12.8x our forecasted EPS over the next twelve months (NTM). Meanwhile, our price target P/B multiple is 1.56x BVPS one year from today, versus a current P/B multiple of 1.45x.

5 Page 5 Segment Review and Estimate Revisions Core Earnings from Operations ($mln) 2Q-13A 1Q-14A 2Q-14A q/q y/y 2013A 2014E 2016E U.S. Insurance (6.1%) 7.0% 1,117 1,202 1,289 1,359 U.S. Wealth Management % (11.4%) ,056 1,166 Canadian Division (1.6%) 2.0% 1,179 1,283 1,427 1,556 Asia & Japan Division % 3.5% 1,083 1,157 1,257 1,382 Corporate & Other (221) (106) (114) nmf nmf (535) (395) (335) (312) Total Core Earnings from Ops. (pre-tax) $ 892 $ 1,003 $ 1, % 12.6% $ 3,824 $ 4,187 $ 4,695 $ 5,151 Taxes (at effective corporate tax rate) (187) (211) (211) nmf nmf (803) (863) (996) (1,091) Preferred Share Dividends (32) (34) (36) nmf nmf (131) (126) (110) (117) Total Core Earnings From Ops. (after-tax) $ 673 $ 758 $ 757 (0.2%) 12.6% $ 2,890 $ 3,199 $ 3,588 $ 3,944 MFC Core Earnings (before Prefs) $ 609 $ 719 $ 701 (2.5%) 15.1% $ 2,617 $ 3,052 $ 3,684 $ 4,150 EPS (Excl. MFCT Conversion) $0.12 $0.42 $ % 295.1% $1.44 $1.60 $2.07 $2.32 Book Value per Share $12.72 $14.96 $14.92 (0.3%) 17.3% $13.98 $15.56 $16.99 $18.29 Our estimated EPS falls to $1.60 from $1.76 in f2014, remains at $2.07 in f2015, and rises to $2.32 from $2.29 in f2016. NBF core EPS remains at $1.72 in f2014, falls to $1.91 from $1.93 in f2015, and declines to $2.11 from $2.14 in f2016. This quarter, we adjusted our overall assumptions for several items. We lowered consolidated earnings on surplus by 8% in f2015 and by 4% in f2016 because performance came in so far below our expectation this quarter. That said, this line item tends to be volatile, so we intend to take a conservative approach going forward. We also raised our estimates for investment gains. In particular, non-core investment gains have averaged Cdn$227 million (pre-tax) quarterly since Q1 f2011. We incorporated this into our estimates by increasing our non-core investment gain assumption to $75 million per quarter from $30 million per quarter for the balance of f2014. We also expect MFC to raise its core investment gains to $75 million per quarter (for f2015 and f2016) in f2015 from $50 million today (this could be higher but we prefer to remain conservative). In f2015 and f2016 non-core gains then fall to $5 million per quarter (again erring on the conservative side). In addition to the foregoing, we reduced our forecasted effective tax rate marginally based on better than expected performance over the past several quarters. Finally, we made adjustments to our forecasts for upcoming reserve charges. In particular, we add a $252 million charge for assumption changes reflecting the outcome of the annual review of actuarial methods (per company guidance) in Q3 f2014. In Q4 f2014, we include a $200 million after-tax charge for changes in economic reinvestment assumptions mandated by the Canadian Actuarial Standards Board, based on company guidance this quarter. We identify the main business line drivers of our other estimate revisions in the pages that follow. U.S. Insurance Key performance takeaways Core earnings (pre-tax) underperformed our estimate as a result of weaker expected profit relative to our forecast, partially offset by better earnings on surplus and impact of new business than anticipated. As noted above, we view the expected profit this quarter for the division with some caution, as we have observed volatility in this figure throughout the past year Sales rose US$7 million q/q as John Hancock Life saw a 20% q/q rise in sales, with management attributing the improvement to strong sales in Indexed universal life (UL) products and variable UL products. Meanwhile John Hancock Long-Term Care reported a q/q decline, with sales dropping to US$13 million from $23 million last quarter. This was underpinned by expected bi-annual inflation buy-up activity on the Federal LTC program in the prior quarter Implications for estimates We lowered f2015 expected profit by 6%, reflecting the 11% miss to our estimates this quarter

6 Page 6 Variance to Estimate: Over / (Under) Prior Revised U.S. INSURANCE 2Q-13A 1Q-14A 2Q-14E 2Q-14A Core Earnings Analysis (C$ Millions) Expected profit from in force business (22) Impact of new business Earnings on surplus Total Core Earnings from Ops (pre-tax) (17) 1,346 1,289 Key Drivers Assets Under Management (C$) 99, , , ,028 (1,117) 124, ,258 Total AUM - q/q Growth (2.67%) 2.91% 2.5% 3.69% 119 bps 2.2% 1.7% Expected Profit % AUM 0.171% 0.187% 0.180% 0.159% (2) bps 0.183% 0.168% Total Sales (C$) (4) Sales - q/q Growth (8.5%) (21.2%) 9.5% 6.5% (303) bps (0.6%) (1.3%) Impact New Business % Sales 20.8% 7.4% 8.06% 10.4% 238 bps 10.00% 10.50% U.S. Wealth Management Key performance takeaways U.S. Wealth Management reported core earnings of Cdn$231 million, below our forecast of Cdn$241 million, reflecting weaker earnings on surplus. This was partially offset by modestly better expected profit than anticipated and a smaller negative impact from new business relative to our estimate Sales missed our estimate by US$238 million, falling 1% q/q versus our forecast of a 2% q/q improvement (on a US$ basis). However, on a y/y basis, sales rose 7%. JH Investments saw sales rise 9% y/y which included a US$1 billion mandate from a large wirehouse firm. Meanwhile JH Retirement Plan Services saw sales decline 7% y/y to US$927 million Implications for estimates We raised expected profit by 3% in f2015, reflecting our expectation of strong wealth management sales Earnings on surplus drops materially, reflecting a combination of an assumed lower yield on surplus assets and a re-allocation of earnings on surplus across divisions Variance to Estimate: Over / (Under) Prior Revised U.S. WEALTH MGMT 2Q-13A 1Q-14A 2Q-14E 2Q-14A Core Earnings Analysis (C$ Millions) Expected profit from in force business ,058 1,093 Impact of new business (42) (45) (45) (43) 3 (196) (191) Earnings on surplus (14) Total Core Earnings from Ops (pre-tax) (10) 1,084 1,056 Key Drivers Assets Under Management (C$) 216, , , ,813 (6,451) 293, ,945 Total AUM - q/q Growth (USD basis) 0.2% 1.5% 4.0% 3.6% (41) bps 2.7% 2.5% Expected Profit % 2Qtr Avg. Total AUM 0.122% 0.095% 0.094% 0.095% 0 bps 0.095% 0.096% Total Sales (C$) 7,533 8,756 8,832 8,569 (263) 39,227 38,156 Sales - q/q Growth 5.2% 11.2% 2.0% (1.0%) (301) bps 2.0% 1.8% Impact New Business % Avg. Sales (0.56%) (0.52%) (0.51%) (0.50%) 1 bps (0.50%) (0.50%) Canada Key performance takeaways The Canada division reported core earnings of $305 million, falling short of our estimate of $323 million. The miss was primarily underpinned by a larger negative impact from new business than anticipated

7 Page 7 Sales of $2.8 billion represented a decline of 22.1% q/q and 23.9% y/y, falling below our forecast of $3.3 billion. AUM growth of 2.1% q/q was weaker than anticipated, reflecting a combination of business growth and market appreciation Implications for estimates No material changes to our estimates Variance to Estimate: Over / (Under) Prior Revised CANADA 2Q-13A 1Q-14A 2Q-14E 2Q-14A Core Earnings Analysis (C$ Millions) Expected profit from in force business (1) 1,241 1,241 Impact of new business (32) (28) (27) (42) (15) (110) (110) Earnings on surplus (2) Total Core Earnings from Ops (pre-tax) (18) 1,436 1,427 Key Drivers Assets Under Management (C$) 135, , , ,376 (3,648) 174, ,953 Total AUM - q/q Growth (0.5%) 3.5% 4.5% 2.1% (244) bps 1.7% 2.0% Expected Profit % 2Qtr Avg. Total AUM 0.195% 0.184% 0.184% 0.186% 0 bps 0.183% 0.186% Total Sales (C$) 3,619 3,535 3,332 2,754 (578) 13,247 12,581 Sales - q/q Growth 15.7% 8.2% (5.8%) (22.1%) (1,634) bps 0.2% 0.9% Impact New Business % Sales (0.88%) (0.79%) (0.80%) (1.53%) (73) bps (0.83%) (0.88%) Asia Key performance takeaways Core earnings of $296 million represented a material beat to our forecast of $269 million. Expected profit, impact of new business and earnings on surplus all outperformed our estimates Sales rose 29% q/q (on an US$ basis) compared with our forecast of 26% q/q growth. This figure reflects strength across geographies, particularly in wealth sales in the Indonesia and Other Asia markets. However, AUM growth (in US$) of 2.3% q/q missed our estimate of 3.5% growth q/q Implications for estimates We raised expected profit to reflect the strong beat relative to our estimates this quarter We also increased our earnings on surplus forecast due to a re-allocation of earnings on surplus across divisions Variance to Estimate: Over / (Under) Prior Revised ASIA 2Q-13A 1Q-14A 2Q-14E 2Q-14A Core Earnings Analysis (C$ Millions) Expected profit from in force business ,073 1,085 Impact of new business (24) (13) (16) (3) 13 (64) (63) Earnings on surplus Total Core Earnings from Ops (pre-tax) ,232 1,257 Key Drivers Assets Under Management (C$) 79,301 82,350 84,111 81,374 (2,737) 98,545 97,591 Total AUM - q/q Growth (2.7%) 3.5% 3.5% 2.3% (119) bps 3.2% 2.7% Expected Profit % 2Qtr Avg. Total AUM 0.332% 0.287% 0.287% 0.296% 1 bps 0.288% 0.292% Total Sales (C$) 3,358 1,905 2,367 2, ,224 9,511 Sales - q/q Growth 22.3% (7.3%) 25.7% 28.5% 282 bps 3.7% 4.0% Impact New Business % Avg. Sales (0.70%) (0.69%) (0.69%) (0.14%) 56 bps (0.69%) (0.67%)

8 Page 8 Manulife Financial Corporation Snapshot Prior Four Quarters Last Next Four Quarters Years Ending Core Earnings from Operations ($mln) 2Q-13A 3Q-13A 4Q-13A 1Q-14A 2Q-14A 3Q-14E 4Q-14E 1Q-15E 2Q-15E 2013A 2014E 2016E U.S. Insurance ,117 1,202 1,289 1,359 U.S. Wealth Management ,056 1,166 Canadian Division ,179 1,283 1,427 1,556 Asia & Japan Division ,083 1,157 1,257 1,382 Corporate & Other (221) (147) (59) (106) (114) (88) (87) (86) (85) (535) (395) (335) (312) Total Core Earnings from Ops. (pre-tax) $ 892 $ 936 $ 1,012 $ 1,003 $ 1,004 $ 1,075 $ 1,105 $ 1,129 $ 1,153 $ 3,824 $ 4,187 $ 4,695 $ 5,151 Taxes (at run-rate effective corporate tax rate) (187) (197) (212) (211) (211) (218) (224) (240) (245) (803) (863) (996) (1,091) Preferred Share Dividends (32) (33) (34) (34) (36) (28) (27) (27) (28) (131) (126) (110) (117) Total Core Earnings From Ops. (after-tax) $ 673 $ 706 $ 765 $ 758 $ 757 $ 829 $ 854 $ 861 $ 881 $ 2,890 $ 3,199 $ 3,588 $ 3,944 Core Investment Gains Macro Hedge Cost (128) (84) (53) (42) (49) (45) (40) (35) (30) (413) (176) (105) (40) Other (16) (3) (111) (81) (93) (62) (59) (56) (54) (190) (296) (209) (170) Reported MFC Core Earnings to Common $ 577 $ 671 $ 651 $ 685 $ 665 $ 772 $ 804 $ 845 $ 873 $ 2,486 $ 2,926 $ 3,574 $ 4,033 Reported MFC Core Earnings (before Prefs) $ 609 $ 704 $ 685 $ 719 $ 701 $ 800 $ 832 $ 872 $ 900 $ 2,617 $ 3,052 $ 3,684 $ 4,150 Prior Four Quarters Last Next Four Quarters Years Ending Enterprise Sources of Earnings Stmnt ($mln) 2Q-13A 3Q-13A 4Q-13A 1Q-14A 2Q-14A 3Q-14E 4Q-14E 1Q-15E 2Q-15E 2013A 2014E 2016E Expected profit from in-force bus ,010 1,036 1,057 3,691 3,874 4,272 4,631 Impact of new business (71) (55) (61) (79) (75) (56) (66) (76) (82) (263) (276) (311) (342) Experience gains (losses) (300) Manag. Actions & Change in Assum. (424) (593) 515 (88) (114) (447) (326) (44) (38) (799) (974) (133) (51) Earnings on surplus Other (12) (2) (22) Income before Income Taxes 156 1,206 1, , ,211 1,239 3,711 3,757 5,067 5,632 Income taxes 103 (172) (497) (133) (234) (111) (175) (258) (263) (581) (654) (1,075) (1,192) Net Income to Shareholders 259 1,034 1, ,130 3,103 3,992 4,439 Preferred Share Dividends (32) (33) (34) (34) (36) (28) (27) (27) (28) (131) (126) (110) (117) Net Income to Common 227 1,001 1, ,999 2,978 3,882 4,323 One-Time Items - - (350) (350) Operating Net Income $ 227 $ 1,001 $ 913 $ 784 $ 907 $ 563 $ 724 $ 926 $ 948 $ 2,649 $ 2,978 $ 3,882 $ 4,323 EPS (Excl. MFCT Conversion) - excl. one-timers $0.12 $0.54 $0.49 $0.42 $0.49 $0.30 $0.39 $0.49 $0.51 $1.44 $1.60 $2.07 $2.32 % Growth (55%) 340% (9%) (14%) 15% (38%) 28% 28% 2% 51% 11% 29% 12% IFRS EPS $0.12 $0.54 $0.68 $0.42 $0.49 $0.30 $0.38 $0.49 $0.50 $1.62 $1.60 $2.06 $2.32 % Growth (57%) 350% 26% (38%) 17% (39%) 28% 28% 2% 93% (2%) 29% 13% Core EPS $0.37 $0.38 $0.41 $0.41 $0.41 $0.45 $0.46 $0.46 $0.47 $1.57 $1.72 $1.91 $2.11 % Growth (10%) 5% 8% (1%) (0%) 9% 3% 1% 2% 7% 9% 11% 11% MFC Reported Core EPS to Common $0.31 $0.36 $0.35 $0.37 $0.36 $0.41 $0.43 $0.45 $0.47 $1.35 $1.57 $1.90 $2.16 % Growth (2%) 16% (3%) 5% (3%) 16% 4% 5% 3% 15% 16% 21% 14% Return on Equity (Annualized) 4% 17% 20% 12% 13% 8% 10% 13% 13% 13% 11% 13% 13% Effective Tax Rate (66%) 14% 28% 14% 20% 16% 19% 21% 21% 16% 17% 21% 21% Dividends / Share $0.13 $0.13 $0.13 $0.13 $0.13 $0.16 $0.16 $0.16 $0.18 $0.52 $0.57 $0.70 $0.82 Common Div. Payout Ratio 106% 24% 19% 27% 27% 51% 40% 31% 36% 32% 35% 34% 35% F/D Avg. Shares O/S (Excl. MFCT Conversion) 1,836 1,841 1,846 1,851 1,856 1,862 1,867 1,871 1,876 1,838 1,859 1,877 1,865 IFRS F/D Avg. Shares O/S 1,860 1,864 1,869 1,874 1,878 1,881 1,882 1,887 1,891 1,862 1,879 1,885 1,865 Reported Items of Note ($mln) (after-tax) Credit Impairments and Downgrades (6) Equity Market Impact on Earnings (226) (73) 55 (60) (78) - - Interest Rate Impact on Earnings 24 (149) (160) 6 14 (3) (6) 10 7 (538) Impact of Assumption Changes & Mngt Actions (incl. URR) (233) (399) (212) (107) (109) (322) (240) (35) (30) (1,158) (779) (106) (40) Hedging Ineffectiveness Investment Gains (Core & Non-core) (49) Other (incl. Goodwill Impairment) 24 (3) 594 (8) Total $ (407) $ 299 $ 609 $ 103 $ 237 $ (261) $ (121) $ 64 $ 67 $ 327 $ (42) $ 293 $ 378 Assets under Management ($bln) Expected Profit to Average AUM 0.68% 0.64% 0.60% 0.60% 0.61% 0.60% 0.60% 0.61% 0.60% 0.65% 0.60% 0.60% 0.60% Avg. AUM to Avg. Common S/E 24.3x 24.2x 23.7x 23.0x 22.9x 23.1x 23.3x 23.3x 23.3x 23.9x 23.1x 23.3x 23.6x Prem. and Deposits (excl. Corporate) 22,533 19,613 20,579 23,269 22,223 23,435 24,020 24,700 25,238 84,276 92, , ,337 Strain to Prem. & Deposits (excl. Corporate) (0.31%) (0.27%) (0.30%) (0.33%) (0.34%) (0.24%) (0.27%) (0.31%) (0.33%) (0.31%) (0.30%) (0.30%) (0.31%) Earnings on Surplus to Avg. Common S/E 0.28% 1.11% 2.85% 2.50% 1.61% 2.15% 2.22% 2.32% 2.37% 1.67% 2.12% 2.40% 2.63% Book Value per Share MCCSR Ratio 222% 229% 248% 255% 243% 239% 239% 238% 236% 248% 239% 226% 225% Note: Core earnings are the after-tax sum of expected profit, new business strain, and earnings on surplus.