Manulife Financial (MFC-TSX; MFC-NYSE)

Transcription

1 (MFC-TSX; MFC-NYSE) Stock Rating: Outperform Industry Rating: Market Perform November 5, 21 Research Comment Toronto, Ontario Tom MacKinnon, FSA, FCIA BMO Nesbitt Burns Inc. (416) Assoc: Ryan Penton, CFA Strong Q3, MFC Starting to Turn the Corner, Upgrading to Outperform Price (4-Nov) $ Week High $21.12 Target Price $ Week Low $11.27 Corp. (MFC) Price: High,Low,Close Earnings/Share 3 Event In conjunction with MFC reporting a strong Q3/1, beating our estimates and consensus, we are upgrading the stock to Outperform with an $18 target price Impact Positive. Forecasts We are maintaining our 211 EPS estimate of $1.75. Our 21 EPS estimate has increased to reflect the beat in the quarter. Valuation We are increasing our target price to $18 from $17, reflecting 1.25x 12/31/11E BVPS (was 1.1x 9/3/11E BVPS) and 11.5x 211E EPS (was 1x 211E EPS). Recommendation For a "show me" story, MFC is to starting to show us it can. With much better underlying EPS, MFC is proving it can execute on its strategy of transitioning its business into higher ROE and lower new business strain growth areas and with a strong global brand and exceptionally strong Asian business, which accounts for 33% of underlying EPS with an estimated 3%-plus growth in underlying EPS, MFC appears well positioned. While the macro environment is still a risk, MFC s capital is strong with an MCCSR ratio of 234%, a ratio that will remain above 2% even with a 2% drop in equity markets and a 5 bp drop in interest rates. MFC significantly reduced its interest rate sensitivity in the quarter, and continued efforts to take the downside risk off the table should help increase the multiple. We consider valuation compelling, and with an estimated 13% 211E ROE, we believe MFC stock should trade in the x P/BV range Volume (mln) MFC Relative to S&P/TSX Comp Last Data Point: November 3, 21 (FY-Dec.) 28A 29A 21E 211E EPS $.32 $.82 -$.89 $1.75 P/E na 8.1x BVPS $16.62 $15.59 $14.7 $14.5 P/BVPS 1.x 1.x ROE 1.9% 5.1% -6.% 13.% Payout Ratio 313% 96% na 3% Quarterly EPS Q1 Q2 Q3 Q4 28A $.57 $.66 $.33 -$ A -$.67 $1.9 -$.12 $.51 21E $.64a -$1.36a -$.55a $.38 Dividend $.52 Yield 3.7% Book Value $13.82 Price/Book 1.x Shares O/S (mm) 1,772. Mkt. Cap ($mm) $25,3 Float O/S (mm) 1,772. Float Cap ($mm) $25,3 Wkly Vol (s) 38,991 Wkly $ Vol (mm) $645.7 Net Debt ($mm) na Next Rep. Date 1-Feb (E) Notes: All values in C$; MCCSR ratio for the most recently reported quarter is 234% Major Shareholders: Widely held First Call Mean Estimates: MANULIFE FINANCIAL CORP (C$) 21E: na; 211E: $ Changes Annual EPS Annual BVPS Target 21E -$1.23 to -$.89 21E $14.13 to $14.7 $17. to $ E $15.36 to $14.5 Rating Mkt to OP This report was prepared by an analyst(s) employed by BMO Nesbitt Burns Inc., and who is (are) not registered as a research analyst(s) under FINRA rules. For disclosure statements, including the Analyst's Certification, please refer to pages 11 to 14.

2 Details & Analysis Upgrading to Outperform, with an $18 share price target. We believe MFC is showing signs that it is starting to turn the corner. With Q3/1 underlying EPS at $.41, ahead of our $.36 estimate, we believe MFC is proving it can execute its strategy of transitioning its business into the targeted growth areas (businesses with a higher ROE, less new business strain, and lower capital requirements, i.e. all business except VA/seg fund, U.S. no lapse guarantee UL and U.S. long-term care) and with exceptional top- and bottom-line growth from the company s fast growing and profitable Asian business, which makes up 33% of MFC s underlying EPS with an estimated 3%-plus growth in underlying EPS YTD/1, we believe MFC is well positioned. While there is always the prospect of an uncooperative macro environment, MFC s capital position is much stronger, with an MCCSR of 234%, a ratio that could climb to 242% in Q4/1 if markets remain unchanged. We estimate that the MCCSR ratio will remain above 2% even with a 25% correction in equity markets from current levels and a 5 bp decline in interest rates. We believe efforts to take downside risk off the table will serve to increase both earnings visibility as well as the overall multiple. We see MFC s valuation as compelling, and with macro environment tailwinds in the quarter (which could boost EPS by $.4) and continued execution of its strategy, we believe there is the possibility that MFC could be a $2 stock in the next months. Compelling valuation. With a BVPS of $13.82, or $12.57 including the upcoming Jan 1, 211 $1.25 goodwill hit, and a 211 ROE of 13%, we believe MFC should trade in the 1.3x P/BV range given the current regression line. The Q3/1 underlying EPS of $.41 certainly makes our 211 EPS estimate seem not so unreasonable. We believe the stock should grow into this valuation as it continues to deliver in terms of improved earnings visibility and improved earnings quality, as well as continue to take downside risk off the table. Although we don t prescribe to USGAAP, nor does the company manage to it, MFC s USGAAP BVPS is an estimated $18.9, significantly higher than its CGAAP BVPS of $ Better-than-expected underlying EPS focusing on targeted for growth businesses (higher ROE, lower new business strain) contributes to beat. Adjusted earnings from operations less the currency impact was $.42 EPS, with a slightly higher level of earnings on surplus due to $55 million in AFS equity gains in the quarter, about $15 million higher than the run-rate. Adjusting for this we peg underlying EPS at $.41, above our $.36 estimate. We attribute the beat to stronger-than-expected growth and profitability in the MFC s targeted for growth businesses (generally all businesses except variable annuity/seg fund, U.S. no lapse guarantee universal life and long-term care); businesses that have higher ROE, lower capital requirements and lower new business strain, as well as better execution of MFC s overall strategy of transitioning its business away into these targeted for growth areas. After modestly missing our underlying EPS in Q2/1 (actual was $.35 vs. our $.38 estimate) and Q1/1 (actual was $.35 vs. our $.36 estimate), the Q3/1 results, in our opinion, suggest that MFC is starting to turn the corner, and with continued execution of its strategy of growing the targeted businesses, we expect this favourable trend to continue. Page 2 November 5, 21

3 Better-than-expected reported EPS. The reported loss of $.55 per share, was better than our estimate for a loss of $.89 and consensus (a loss of $.73 EPS) in part due to lower-thanexpected interest rate hit as MFC took action in the quarter to reduce the interest rate sensitivity, including realizing gains on the sale of bonds in its surplus segment, the proceeds which were used in part to help lengthen the duration of the asset portfolio backing liabilities. Details are outlined in Exhibit 1. Exhibit 1 - MFC Q3/1 EPS Reconciliation BMO Estimate Actual Equity Markets $.31 $.46 Interest Rates ($.57) ($.2) Gain on AFS bonds sold to offset interest rate hit $. $.32 Total impact of equity markets and interest rates ($.26) $.58 Long term care hit ($.6) ($.43) VA volatility reserve hit ($.22) ($.38) URR reserve hit ($.17) ($.17) Lapse reserve hit $. ($.27) Other reserve hits $. $.1 Total charges in actuarial reserve methods/assumptions ($.99) ($1.15) No change in EPS estimates ($1.75 EPS in 211) but Q4/1 could be very strong helped by favourable equity markets and increases in 3-year government yields QTD - if we see no change in equity markets or interest rates from current levels through December 31, 21, we expect Q4/1 EPS could be $.78, including $.4 due to favourable Goodwill impairment related to $. ($.59) U.S. insurance Other favourable experience $. $.21 Credit $. ($.1) Losses on hedged portfolio of $. ($.8) VA book Tax gains $. $.7 Total ($1.25) ($.97) Reported EPS ($.89) ($.55) Underlying EPS $.36 $.42 Source: Company reports, BMO Capital Markets estimates equity markets and interest rates. Our estimate is detailed in Exhibit 2. Potentially benefiting Q4/1 is the increase in U.S. 3-year government yields, up 39 bps since September 3. MFC s Q3/1 actions to lengthen the portfolio such that the 3-year rate is the key driver are certainly beneficial to EPS in Q4/1. Also helping are buoyant equity markets, with the S&P5 up 7% QTD. We think there is the possibility that MFC could be a $2 stock in the next months. Our $ EPS estimate translates into a 13% 211 ROE (or 12% excluding the $1.25 January 1, 211 goodwill hit to opening BVPS). Assuming 12% EPS growth in 212, consistent with continued execution of MFCs s strategy of allocating capital to the targeted growth businesses, we could see 212 ROE increasing 4 bps to 13.4% and EPS climbing to $1.96. Thus, under this scenario, we could see BVPS, which is currently $13.82 or $12.57 with the Jan 1, 211 goodwill hit, climbing to $14.5 at the end of 211 and $15.49 at the end of 212. Adding the $.4 in additional EPS from the current levels of equity markets and interest rates QTD in Q4/1, we could see 211 BVPS at $14.45 and 212 BVPS at $ Multiplying these BVPS by 1.3x, which is what the market currently pays for a 13% ROE, translates into a $19 market value at the end of 211 and a $21 market value at the end of 212. Suffice to say, we believe MFC could be a $2 stock in the next months. Significantly strengthened capital levels with a significant buffer we estimate the MCCSR, which is 234% at Q3/1, would not fall below 2% unless equity markets fell 2% from September 3 21 levels and interest rate fell 5 bps. The MCCSR climbed to 234% from 221% at Q2/1, higher than our 219% estimate in part due to the EPS beat and in part due to the investment gains in the quarter. Page 3 November 5, 21

4 De-risking portfolio MFC significantly reduces its interest rate sensitivity for a 1 bp decline in interest rates QOQ from $2.7B or $1.53 EPS at Q2/1 to $2.2B or $1.25 EPS at Q3/1 by lengthening the duration of the portfolio of assets supporting policy liabilities through trading activities involving selling bonds in the corporate/surplus segment (and realizing a gain) and reinvesting some of the proceeds into longer duration bonds supporting policy liabilities. In doing so, it lengthened the duration of the assets supporting liabilities and helped immunize the interest rate risk. MFC also purchased $4.7B in notional forward starting interest rate swaps in its highly interest rate sensitive U.S. individual insurance segment, in order to lengthen the asset duration and thus further immunize the interest rate risk. As well, to the extent the gains realized in the corporate/surplus segment from bond sales were not reinvested into the liability segments, their proceeds were used to purchase longer bonds in the Corporate/surplus segment. If long rates drop, which could hurt EPS, MFC would have at its disposal these long-term bonds in its corporate segment, bonds which could be sold at a gain to help offset the loss. Going forward MFC plans to continue these actions, including lengthening the duration of its assets backing liabilities and potentially selling bonds in the surplus segment to help offset interest rate hits, to further reduce its interest rate exposure. Plans are to reduce it by 25% (i.e., from $1.25 EPS to $.94 EPS for the impact of a 1 bp decline in interest rates) by the end of 212, and by 5% (i.e., to $.63 EPS for a 1bp decline in interest rates) by the end of 214. With over $14B in bonds in the surplus segment at its disposal, we believe MFC has ample opportunity to effectively continue this de-risking strategy, especially to the extent it involves a sale and transfer of proceeds to a segment backing liabilities. Significantly reducing equity market sensitivity and only at a very minor annual cost of $.5 EPS annually by the end of 212 and $.12 EPS annually by the end of 214. MFC increased its VA hedge from 51% to 54% in quarter, and highlighted plans to execute additional hedges such that 6% of underlying EPS equity market sensitivity will be hedged by the end of 212 (i.e., the EPS impact of a 1% decline in equity markets will decline from $.74 EPS to $.44 EPS), with approximately 75% of underlying EPS hedged by the end of 214. MFC plans on doing this through both opportunistic hedging and time-scheduled actions. Costs per management are immaterial, and are annually $.5 by the end of 212 and $.12 EPS annually by the end of 214. Good sales growth in the targeted growth products. The targeted growth products include essentially all businesses outside of variable annuities/segregated funds, U.S. book value fixed deferred annuities, U.S. Universal life with no lapse guarantee and U.S. long-term care. Insurance sales globally were up 24% YOY, with Asian sales particularly strong, Japan sales doubling, Canadian individual insurance sales up 5% and U.S. individual insurance sales up 3%. Wealth management sales in target markets were up 11% globally, with Asian wealth sales up 6%, Canadian mutual fund sales up 181%, Manulife Bank volumes up 13%, U.S. mutual fund sales up 26% and U.S. retirement plan services sales down 7% over a strong Q3/9. U.S. retirement plan services funds under management reached a record $59.2B, based on solid net flows YTD. And for business, MFC may not necessarily target, and is de-emphasizing, like U.S. no lapse guarantee universal life, and to some extent U.S. long-term care, MFC is still increasing pricing, bumping prices on these products 13% and 24%, respectively. Naturally the story is not without its risks by far the largest we believe is the macro environment but we believe MFC s capital position is more than ample to withstand any potential shocks. MFC is obviously sensitive to the equity markets and interest rates, and the Page 4 November 5, 21

5 prospect of a 15% decline in equity markets from September 3, 21 though September 3, 211 (or a 2% decline from current levels), with essentially, with no change in interest rates, or a 1% decline in equity markets from September 3, 21 through September 3, 211 (or a 15% decline from current levels) and a 25 bp decline in interest rates from September 3 levels could wipe out NTM of EPS. That said, we believe the risk with respect to MFC and the macro environment lies more with its capital position, and with an MCCSR of 234% at Q3/1, or possibly 242% at Q4/1 if markets remain unchanged between now and December 31, 21 we believe MFC has an ample buffer, enough to absorb a 2% decline in equity markets and a 5 bp drop in interest rates. Other risks we see as potential but perhaps not necessarily significant. The long-term care reserve hit, at $.43 EPS was less than our $.6 EPS estimate, but we believe that MFC will likely get approval in virtually all states for its rate hikes (remember some states don t require approval), and that in many of the cases, the policyholder will dial-down the benefit such that there will be no EPS impact to MFC over and above the $.43 EPS reserve hit taken. The very unlikely outside chance that one-half of the states say allow for only half the rate hike that MFC is applying for, would result in an additional $.25 EPS long-term care reserve hit, we estimate. Other potential risks such as the adverse lapse experience in either MFC VA business or its U.S. long term individual insurance business are mitigated somewhat by the fact that MFC in some sense has already addressed this, increasing reserves for adverse lapse in the VA book by $.19 EPS in Q3/1 and we estimate $.2-$.25 EPS in 29, and increasing reserves for lapse risk on long-term US individual insurance business substantially in 29 with an ultimate lapse rate assumption of a very low 1%. Page 5 November 5, 21

6 Exhibit 2 - Manulife - Sensitivity Analysis Model Equity Markets: SPX TOPIX TSX Equity Market EPS 3-Jun 1, ,294 QTD Change Impact 3-Sep 1, , % $.32 4-Nov 1, , % $.15 Interest Rates: U.S. 3-Year Rates EPS Impact Treasury Corp A Spread Swap Spread Treasury Corp A Spread Swap Spread Total 3-Jun 3.89% 1.73% -.19% 3-Sep 3.68% 1.68% -.34% ($.34) ($.4) $.6 ($.33) 4-Nov 4.7% 1.69% -.36% $.26 $.1 ($.1) $.26 U.S. 1-Year Rates Treasury Corp A Spread Swap Spread 3-Jun 2.93% 1.76%.7% 3-Sep 2.51% 1.69%.6% 4-Nov 2.49% 1.71%.14% Annual Dividend $.52 Jan IFRS Goodwill hit $1.25 Q4/1E EPS (if markets frozen from today until 12/31/1) Q4/1E EPS: BVPS Q3/1 $13.82 Total Equity + Interest EPS impact $.4 BVPS Q3/1 (with IFRS goodwill hit) $12.57 Q4/1E Underlying EPS $.38 BVPS Q4/1E (with IFRS goodwill hit) $13.22 Q4/1E EPS $ E Underlying EPS $ E EPS $1.75 Q4/1E MCCSR Q3/1 MCCSR Q4/1E Available Capital ($M) 28,748 Q3/1 Available Capital ($M) 27,592 (Q3/1E available capital + earnings - dividends) Q3/1 Required Capital($M) 11,78 Q4/1E Required Capital($M) 11,898 Q3/1 MCCSR 234% (Q3/1E level modestly increased for increase in liabilities) Q4/1E MCCSR 242% Movement in (%): orporate Spreads. Swap Spreads. 211 SENSITIVITY ANALYSIS Interest Rate Movement in 211 (%) Equity Market Movement in 211 From September 3, 21 Levels 211EPS 15% 1% 8% % -1% -2% -3%.75 $2.91 $2.63 $2.51 $1.93 $1.19 $.3 ($.78).5 $2.66 $2.37 $2.26 $1.67 $.94 $.4 ($1.4).25 $2.4 $2.12 $2. $1.42 $.68 ($.21) ($1.29). $2.15 $1.86 $1.75 $1.16 $.43 ($.47) ($1.55) -.25 $1.83 $1.55 $1.44 $.85 $.11 ($.78) ($1.86) -.5 $1.52 $1.24 $1.13 $.54 ($.2) ($ 1.9) ($2.17) Interest Rate Movement in 211 (%) Interest Rate Movement in 211 (%) Interest Rate Movement in 211 (%) Equity Market Movement in 211 From September 3, 21 Levels 211E BVPS 15% 1% 8% % -1% -2% -3%.75 $15.61 $15.33 $15.22 $14.63 $13.89 $13. $ $15.36 $15.8 $14.96 $14.38 $13.64 $12.75 $ $15.11 $14.82 $14.71 $14.12 $13.38 $12.49 $ $14.85 $14.57 $14.45 $13.87 $13.13 $12.24 $ $14.54 $14.26 $14.14 $13.55 $12.82 $11.92 $ $14.23 $13.95 $13.83 $13.24 $12.51 $11.61 $1.53 *$14.45 includes $1.25 goodwill hit; excluding the goodwill hit it would be $15.7 Equity Market Movement in 211 From September 3, 21 Levels 211E ROE 15% 1% 8% % -1% -2% -3% % 18.4% 17.7% 13.8% 8.8% 2.3% -6.2% % 16.8% 16.% 12.1% 7.%.3% -8.3% % 15.1% 14.4% 1.4% 5.1% -1.7% -1.5%. 15.3% 13.4% 12.6% 8.6% 3.2% -3.7% -12.7% % 11.3% 1.5% 6.3%.9% -6. 2% -15.4% % 9.1% 8.3% 4.1% -1.5% -8.8% -18.3% *12.6% includes $1.25 goodwill hit to book value; excluding the goodwill hit it would be 11.6% Equity Market Movement in 211 From September 3, 21 Levels 211E MCCSR 15% 1% 8% % -1% -2% -3%.75 26% 255% 253% 245% 234% 222% 25%.5 256% 251% 25% 242% 23% 218% 21% % 248% 246% 238% 227% 215% 198%. 249% 244% 243% 235% 223% 211% 194% % 24% 239% 23% 219% 27% 19% % 236% 234% 226% 215% 23% 186% Source: Bloomberg, Company reports, BMO Capital Markets estimates Page 6 November 5, 21

7 Quarterly Results by Segment Q3/1 Q2/1 Q3/9 Q/Q Y/Y Comments U.S. Insurance (US$mm) Sales (1) : JH Life % -39% Y/Y: largely due to lower sales for UL no-lapse guarantee and guaranteed non-par whole life products (consistent with management's strategy) JH LTC % 2% Y/Y: Attributed to increased sales in advance of price increases, offset by suspended new group sales. LTC sales expected to slow in Q4/1 Net Income 199 (71) (547) -128% -136% Y/Y: Gains for improved equity and interest rate markets, lower strain, favourable JH Life claims experience and JH LTC experience following the annual LTC review Premiums & Deposits 1,741 1,727 1,838 1% -5% Y/Y: Primarily due lower levels of UL sales, partially offset by higher Federal Long Term Care Insurance Program deposits (JH sole carrier) AUM 75,11 71,3 61,832 6% 21% Y/Y: Business growth and increase in market value of assets, and the deposit received for Federal Long Term Care Insurance Program in Q4/9 U.S. Wealth Management (US$mm) Net Flows: JH VA (393) (335) (64) 17% 514% Y/Y: Lower gross sales (down 22%) due to on-going risk management initiatives JH RPS % -36% Y/Y: Higher gross sales (up 1%), due to a mid case acquisition and equity market recovery, but more than offset by higher redemptions JH Mutual Funds % 7% Y/Y: Higher gross sales (up 26%), due to equity market recovery and broad offering of funds, partially offset by lower redemptions JH Fixed (92) (429) 224 nmf -511% Y/Y: Lower gross sales (down 57%) due significant risk management initiatives Net Income 328 (49) % -39% Y/Y: Experience gains for equity, interest rate, credit and other non-fixed income returns differing from policy liability assumptions, higher fee income, offset by costs associated with hedging Premiums & Deposits 6,21 6,674 6,531-7% -5% Y/Y: Higher mutual fund and RPS sales, more than offset by lower VA and FA sales from on-going risk management initiatives AUM 181,29 168,5 164,645 8% 1% Y/Y: Driven by past 12-month market performance and positive net cash flows Canada (C$mm) Sales (1) : Individual Insurance (2) % 5% Y/Y: Strong sales due to a return to larger estate planning cases Wealth Management (3) 2,224 2,169 2,182 3% 2% Y/Y: Lower variable annuity sales, more than offset by increase in mutual fund deposits, and increased sales for Manulife Bank Group (4) % -58% Y/Y: Largely attributed to a decline in single premium sales in GRS Net Income 358 (344) % 217% Y/Y: Experience gains for equity, interest rate, credit and other non-fixed income returns differing from policy liability assumptions, positive impacts from growth in wealth management and Manulife Bank, was partially offset by higher strain and costs associated with hedging Premiums & Deposits 3,812 3,991 4,75-4% -6% Y/Y: Strong retail mutual fund deposits, more than offset by lower VA sales, fixed rate wealth products sales and lower group retirement plans sales AUM 19,228 14,116 11,79 5% 8% Y/Y: Favourable impact of market appreciation over past 12 months, and the decline in interest rates on reported asset values, and positive net sales in wealth products Asia & Japan (US$mm, except for agent count) Sales (1) : Individual Insurance Hong Kong % 7% Y/Y: Expansion of agency channel, marketing activities and enhanced productivity Japan % 124% Y/Y: Record sales driven by new products across all channels Other Asia % 15% Y/Y: Record sales in Indonesia, the Philippines, and Taiwan, partially offset by lower sales in Singapore Wealth Management (3) Hong Kong % 5% Y/Y: Attributed to increased consumer confidence in equity markets Japan % -13% Y/Y: Lower VA sales due to on-going risk management initiatives, offset by FA product launch Other Asia % 97% Y/Y: Strong sales in Indonesia, the Philippines, and Taiwan, Manulife TEDA contributed US$12M, and MFC GIM launched funds targeting China equity/bonds Net Income: Hong Kong % 9% Y/Y: Experience gains for equity, interest rate, credit and other non-fixed income returns differing from policy liability assumptions and higher fee income, partially offset by higher strain Japan 389 (75) 284 nmf nmf Y/Y: Primarily due to experience gains for equity, interest rate, credit and other nonfixed income returns differing from policy liability assumptions Other Asia 41 (16) (1) nmf nmf Y/Y: Primarily due to experience gains for equity, interest rate, credit and other nonfixed income returns differing from policy liability assumptions and higher fee income Total 546 (693) % 44% Premiums & Deposits 2,184 2,285 1,775-4% 23% AUM 65,15 58,224 54,471 12% 19% Agent Count 4,17 38,373 33,558 5% 2% Reinsurance (US$mm) Net Income % -41% Corporate & Other (C$mm) Net Income (2,454) (14) (759) nmf nmf Y/Y: Driven by experience gains for equity, interest rate, credit and other non-fixed income returns differing from policy liability assumptions, and new business and inforce growth in Japan and Indonesia. Y/Y: Strong insurance sales in all territories, from broadening distribution and new products launched, Manulife TEDA contribution, and higher mutual find sales in Taiwan and Hong Kong, offset by lower VA sales. Y/Y: Strong net flows and improved market performance over last 12-months across the territories, and including Manulife TEDA AUM's Y/Y: Gains from equity and interest rate markets more than offset by unfavourable claims experience Y/Y: Current quarter includes $2,31 million hit for changes in actuarial methods and assumption, $1,39 million goodwill hit, offset by $569 million on sale on bonds. Prior year includes $783 million in actual methods and assumptions - excluding these items, Q3/1 was in-line with Q3/9 (1) Unless otherw ise indicated, sales of insurance products are represented by new annualized premiums w hile w ealth management sales are represented by net flow s. (2) Sales are defined as 1% of minimum premiums and 1% of excess premiums, similar to LIMRA industry standards. Includes sales from Affinity Markets. (3) Wealth management sales are represented by premiums and deposits (including mutual & segregated fund deposits). Sales for Manulife Bank in Canada are represented by bank loan volumes. (4) Group sales include group benefits (new annualized premiums +single premium sales + ASO equivalents) and group pensions (new annualized premiums + single premium sales). Source: Company reports, BMO Capital Markets estimates Page 7 November 5, 21

8 Consolidated Source of Earnings C$mm Q3/1 Q2/1 Q3/9 Q/Q Y/Y Comments Expected Profit on Inforce % % Y/Y: In-line with last year Outlook: Currency and hedging VA business will be headwind Impact of New Business (13) (158) (143) -18% -9% Experience Gains/(Losses) 861 (4,155) (572) nmf nmf Mgmt Actions & Assumption Chgs (3,119) 94 (1,81) nmf nmf Earnings on Surplus Funds nmf -1% Other (13) % -145% Pre Tax Earnings (1,384) (3,349) (735) nmf nmf Income Taxes nmf nmf After Tax Earnings (947) (2,378) (172) nmf nmf Preferred Dividends (19) (2) (21) nmf nmf Earnings to Common (966) (2,398) (193) nmf nmf EPS - fd ($.55) ($1.36) ($.12) nmf nmf Source: Company reports, BMO Capital Markets estimates Y/Y: Lower strain attributed to price increases, favourable product mix and lower sales volumes in U.S., offset by higher strain in Canada individual insurance resulting from decline in interest rates, and Japan due to updated lapse assumptions. Y/Y: Gains related to improving equity markets, offset by lower interest rates Outlook: Remain sensitive to events in the equity (1% decline in market hurts EPS by $.74) and interest rate markets (1% decline hurts EPS by $1.25) Y/Y: Q3/1 includes $2.8B actuarial reserves adjustments and $1B in goodwill impairment. Y/Y: Increase in AFS gains on equities Outlook: Remain sensitive to credit and equity markets conditions Y/Y: Tax rate above guidance of 2-25% Outlook: MFC guides more to the 2-25% range as opposed to the 32% rate in Q3/1 Page 8 November 5, 21

9 North American Comparables CANADIAN LIFE INSURANCE - NORTH AMERICAN COMPARABLES Size Assets Common % Assets in Key Statistics Pricing Under Equity Mutual/Seg EPS CAGR Recent P/BV P/BV Ticker Mgmt (BV) Market Variable E Dividend Price Percentage Change P/E Multiples ex- with Company 2 Symbol 12/31/9 Recent Float Business E ROE Yield 11/4/1 1 Mo. 3 Mos. 12 Mos. YTD 21E 211E P/EmV AOCI AOCI U.S. Lifecos (US$M) Aflac AFL 73,192 1,534 27,237 % 18% 13% 2.% 2.1% $ % 12.8% 35.9% 25.1% 1.4x 9.4x 2.59x 2.45x Ameriprise Financial AMP 325,8 9,919 13,489 45% -2% 28% 1.8% 1.3% $ % 23.8% 44.3% 38.4% 12.4x 1.5x 1.36x 1.24x Genworth Financial GNW 18,865 12,519 5,998 8% -35% 76% 4.%.% $ % -7.5% 14.9% 7.9% 15.5x 9.x.48x.4x Lincoln National Corp LNC 141,3 11,89 7,887 58% -1% 7% 6.3%.2% $24.9.8% -.3% 8.3%.1% 7.6x 6.8x.66x.58x MetLife MET 539,314 4,339 38,96 31% -1% 33% 9.1% 1.7% $ % 2.5% 26.9% 21.4% 1.x 8.4x.96x.88x Principal Financial Group PFG 284,7 8,876 9,478 56% -1% 2% 8.5% 1.9% $ % 2.5% 16.3% 23.1% 11.3x 1.5x 1.7x 1.1x Protective Life Corp PL 29,548 2,969 2,15 1% 2% -12% 6.7% 2.3% $ % 1.3% 55.5% 48.5% 9.x 8.x.71x.59x Prudential Financial PRU 667, 27,12 25,849 74% 4% 8% 1.4% 1.3% $ % -4.2% 24.5% 11.7% 9.2x 8.6x.96x.82x Torchmark Corp TMK 11,3 3,873 4,782 2% 7% 7% 12.% 1.1% $ % 1.9% 43.1% 34.6% 9.4x 8.6x 1.23x 1.12x Mkt. Cap. Wtd. Avg. 135,731 31%.4% 21.6% 11.3% 1.5% 6.8% 6.5% 24.2% 21.1% 1.3x 8.9x 1.3x 1.19x Mkt. Cap. Wtd. Avg. ex-afl 18, % 9.2% 1.4% 6.1% 4.9% 21.3% 2.2% 1.3x 8.8x.98x.88x Canadian Lifecos (C$M) Great-West Lifeco GWO 339,368 1,881 7,9 62% -5% 16% 17.6% 4.6% $ % 7.5% 12.5% -.5% 13.8x 11.6x n.a. 2.2x 2.17x Industrial-Alliance IAG 36,256 1,958 2,683 5% 4% 12% 12.4% 3.1% $ % -.9% 6.% -.5% 1.9x 1.x.87x 1.32x 1.28x Manulife MFC 439,617 23,845 25,3 5% -27% 46% 11.9% 3.7% $ % -.6% -29.% -27.% -15.9x 8.1x.61x 1.4x 1.2x Sun Life SLF 432,631 15,47 16,677 72% -34% 74% 1.% 4.9% $ % 6.9% 3.6% -3.6% 11.5x 1.3x.93x 1.5x 1.2x Mkt. Cap. Wtd. Avg. 51, % -24.5% 49% 12.1% 4.2% 7.8% 2.9% -1.9% -14.4% -1.5x 9.4x.75x 1.22x 1.19x 1 As a % of S&P/TSX: 3.39% 2 Bloomberg estimates for AFL, AMP, GNW, LNC, MET, PFG, PL, PRU, TMK Source: Bloomberg, Reuters, Company reports, BMO Capital Markets estimates Page 9 November 5, 21

10 CANADIAN LIFE INSURANCE - PERTINENT STOCK INFORMATION Price S&P/TSX Excluding AOCI Including AOCI Assuming Share Market Composite Ticker Price Recent Recent Goodwill Tangible Return on Equity P/B vs. Premium/ Float Float Index Company Symbol 11/4/1 BVPS P/BV BVPS P/BV $ /Share BVPS E 211E 11E ROE Discount O/S (M) ($M) Weight Great-West Lifeco GWO $26.75 $ x $ x $8,631M $9.11 $ % 13.8% 15.8% 17.6% $ % 262. $7,9.47% Ind. Alliance IAG $32.5 $ x $ x $521M $6.22 $ % 11.6% 12.3% 12.4% $ % 83.7 $2,683.19% Manulife MFC $14.11 $ x $ x $8,21M $4.53 $ % 5.1% -6.% 13.% $ % $25,3 1.58% Sun Life SLF $29.16 $ x $ x $7,278M $12.73 $ % 3.2% 9.2% 1.% $ % $16, % Mkt. Cap. Wtd. Avg. 1.22x 1.19x 3.7% 6.% 2.9% 12.6% $51, % Cdn. Banks 1, x 12.4% 12.9% 16.8% 17.2% U.S. Lifecos (ex-afl).98x.88x 7.1% 7.5% 8.7% 9.2% Ticker Dividend Cash Operating Earnings per Share EPS CAGR Cash P/E Cash P/E Rel. to Bank s PEG Company Symbol Ind. Yield RBY E 211E 8/7 9/8 1E/9 11E/1E 21E 211E 21E 211E Ratio 1 Great-West Lifeco GWO $ % 163.6% $2.41 $2.26 $1.72 $1.94 $2.3-6% -24% 13% 19% 13.8x 11.6x 14% 98% -8% Ind. Alliance IAG $ % 18.8% $2.99 $.82 $2.55 $2.94 $3.2-73% 211% 15% 9% 1.9x 1.x 82% 84% -135% Manulife 5 MFC $ % 131.2% $2.82 $.32 $.82 -$.89 $ % 156% -29% -297% -15.9x 8.1x -119% 68% -43% Sun Life SLF $ % 175.7% $3.98 -$.1 $.94 $2.54 $ % 84% 17% 12% 11.5x 1.3x 86% 86% -2% Mkt. Cap. Wtd. Avg. 4.18% 148.9% -81% 356% -44% -138% -1.5x 9.4x -12% 2 79% -45% Cdn. Banks % 134.% $166 $13 $114 $155 $177-38% 1% 36% 14% 13.3x 11.9x 1% 1% U.S. Lifecos (ex-afl) 1.35% -42% 16% 32% 17% 1.3x 8.8x 118% 92% U.S. Banks -39% 34% 123% -9% 8.7x 9.6x Embedded Value Analysis Ticker 29 Reported EmV / P/EmV Implied CAGR (per share) Target ROR Company Symbol EmV VNB BV 29 NB multiple EmV VNB BV EPS ROE Rating 4 Price Target Rationale for Target Great-West Lifeco GWO n.a. n.a. n.a. n.a. n.a. n.a n.a 11% 1% -33bp OP $29. 13% 2.2x 9/3/11E BVPS & 12.2x 211E EPS Ind. Alliance IAG $36.89 $ x.87x -3.2x 8% 7% 1% -7% -129bp Mkt $35. 12% 1.3x 12/31/11E BVPS & 11.x 211E EPS Manulife MFC $23.2 $ x.61x -6.5x 6% 11% 6% -16% -178bp OP $18. 31% 1.25x 12/31/11E BVPS & 11.5x 211E EPS Sun Life 3 SLF $31.31 $ x.93x -2.2x 2% -3% 6% -32% -166bp Mkt $3. 8% 1.1x 12/3/11E BVPS & 1x 211E EPS Mkt. Cap. Wtd. Avg. 1.48x.75x -4.7x Notes: BVPS = book value per share. RBY = relative to 1-year Canadian gov't bond yield = 2.81% EmV = embedded value per share. VNB = value of new business month forw ard P/E divided by estimated earnings grow th rate from Using BMO Capital Markets estimates; -12% 81% using Bloomberg BEst estimates for 21E and 211E, respectively. 3 For Sun Life, includes embedded value of MFS, w hich Sun Life reported as 12/31/4 12/31/3). SLF has not disclosed the embedded value of MFS as at 12/31/5 or 12/31/6. 4 Investment ratings: Outperform-OP; Market Perform-Mkt; Underperform-Und; Restricted-R. 5 Manulife's EPS excludes $.13/share after-tax losses due to Hurricane Katrina in 25 and tax gains of $.4/share. Including these one-timers, the CAGRs w ere 8% (5/4) and 25% (6/5). Source: Reuters, Bloomberg, Company reports, BMO Capital Markets estimates Page 1 November 5, 21

11 Corp. (MFC) Quarterly Price 5 Target Price Share Price ) OP 2) Mkt ) OP MFC Relative to S&P/TSX Comp. MFC Relative to Insurance MFC Relative to S&P/TSX Comp. MFC Relative to Insurance Revenue / Share Price / Revenue 4 BMO 21FY EPS ( Oct 1 = ) IBES 21FY Cons.EPS ( Oct 1 = ) EPS (4 Qtr Trailing) Price / Earnings BMO 211FY EPS ( Oct 1 = 1.75 ) IBES 211FY Cons.EPS ( Oct 1 = 1.71 ) FYE EPS P/E DPS Yield Payout BV P/B ROE (Dec.) $ $ % % $ % nm > Current* -.33 nm > nm Average: Growth(%): 5 Year: nm Year: nm * Current EPS is the 4 Quarter Trailing to Q2/21. MFC - Rating as of 23-Nov-7 = Mkt Date Rating Change Share Price 1 14-Feb-8 Mkt to OP $ Oct-8 OP to Mkt $ Jan-1 Mkt to OP $19.33 Last Daily Data Point: November 3, 21 Page 11 November 5, 21

12 IMPORTANT DISCLOSURES Analyst's Certification I, Tom MacKinnon, FSA, FCIA, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. Analysts who prepared this report are compensated based upon (among other factors) the overall profitability of BMO Capital Markets and their affiliates, which includes the overall profitability of investment banking services. Compensation for research is based on effectiveness in generating new ideas and in communication of ideas to clients, performance of recommendations, accuracy of earnings estimates, and service to clients. Company Specific Disclosure Disclosure 1: BMO Capital Markets has undertaken an underwriting liability with respect to this issuer within the past 12 months. Disclosure 2: BMO Capital Markets has provided investment banking services with respect to this issuer within the past 12 months. Disclosure 4: BMO Capital Markets or an affiliate has received compensation for investment banking services from this issuer within the past 12 months. Disclosure 5: BMO Capital Markets or an affiliate received compensation for products or services other than investment banking services within the past 12 months. Disclosure 6: This issuer is a client (or was a client) of BMO NB, BMO Capital Markets Corp., BMO CM Ltd. or an affiliate within the past 12 months: Investment Banking Services & Non-Securities Related Services. Disclosure 8: BMO Capital Markets or an affiliate has a financial interest in 1% or more of any class of the equity securities of this issuer. Methodology and Risks to Price Target/Valuation Methodology: Our target price is 1.25x 12/31/11E BVPS and 11.5x 211E EPS. Risks: Key risks include: 1) more onerous regulatory capital requirements, 2) credit impairments, 3) low long term interest rates, 4) equity market volatility, 5) adverse policyholder behaviour and 6) appreciation in C$. Distribution of Ratings (September 3, 21) Rating Category BMO Rating BMOCM US Universe* BMOCM US IB Clients** BMOCM US IB Clients*** BMOCM Universe**** BMOCM IB Clients***** Starmine Universe Buy Outperform 36.5% 13.6% 4.7% 4.4% 49.1% 55.4% Hold Market Perform 6.2% 11.3% 55.9% 55.6% 49.1% 39.7% Sell Underperform 3.3% 12.5% 3.4% 4.% 1.9% 4.8% * Reflects rating distribution of all companies covered by BMO Capital Markets Corp. equity research analysts. ** Reflects rating distribution of all companies from which BMO Capital Markets Corp. has received compensation for Investment Banking services as percentage within ratings category. *** Reflects rating distribution of all companies from which BMO Capital Markets Corp. has received compensation for Investment Banking services as percentage of Investment Banking clients. **** Reflects rating distribution of all companies covered by BMO Capital Markets equity research analysts. ***** Reflects rating distribution of all companies from which BMO Capital Markets has received compensation for Investment Banking services as percentage of Investment Banking clients. Ratings and Sector Key We use the following ratings system definitions: OP = Outperform - Forecast to outperform the market; Mkt = Market Perform - Forecast to perform roughly in line with the market; Und = Underperform - Forecast to underperform the market; (S) = speculative investment; NR = No rating at this time; R = Restricted Dissemination of research is currently restricted. Market performance is measured by a benchmark index such as the S&P/TSX Composite Index, S&P 5, Nasdaq Composite, as appropriate for each company. BMO Capital Markets eight Top 15 lists guide investors to our best ideas according to different objectives (Canadian large, small, growth, value, income, quantitative; and US large, US small) have replaced the Top Pick rating. Page 12 November 5, 21

13 Other Important Disclosures For Other Important Disclosures on the stocks discussed in this report, please go to Public.asp or write to Editorial Department, BMO Capital Markets, 3 Times Square, New York, NY 136 or Editorial Department, BMO Capital Markets, 1 First Canadian Place, Toronto, Ontario, M5X 1H3. Prior BMO Capital Markets Ratings Systems Dissemination of Research Our research publications are available via our web site Institutional clients may also receive our research via FIRST CALL, FIRST CALL Research Direct, Reuters, Bloomberg, FactSet, Capital IQ, and TheMarkets.com. All of our research is made widely available at the same time to all BMO Capital Markets client groups entitled to our research. Additional dissemination may occur via or regular mail. Please contact your investment advisor or institutional salesperson for more information. Conflict Statement A general description of how BMO Financial Group identifies and manages conflicts of interest is contained in our public facing policy for managing conflicts of interest in connection with investment research which is available at Public.asp. General Disclaimer BMO Capital Markets is a trade name used by the BMO Investment Banking Group, which includes the wholesale arm of Bank of Montreal and its subsidiaries BMO Nesbitt Burns Inc. and BMO Nesbitt Burns Ltée./Ltd., BMO Capital Markets Ltd. in the U.K. and BMO Capital Markets Corp. in the U.S. BMO Nesbitt Burns Inc., BMO Capital Markets Ltd. and BMO Capital Markets Corp are affiliates. Bank of Montreal or its subsidiaries ( BMO Financial Group ) has lending arrangements with, or provide other remunerated services to, many issuers covered by BMO Capital Markets. 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To U.K. Residents: In the UK this document is published by BMO Capital Markets Limited which is authorised and regulated by the Financial Services Authority. The contents hereof are intended solely for the use of, and may only be issued or passed on to, (I) persons who have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2 (Financial Promotion) Order 25 (the Order ) or (II) high net worth entities falling within Article 49(2)(a) to (d) of the Order (all such persons together referred to as relevant persons ). The contents hereof are not intended for the use of and may not be issued or passed on to, retail clients. Page 13 November 5, 21

14 ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST BMO Financial Group (NYSE, TSX: BMO) is an integrated financial services provider offering a range of retail banking, wealth management, and investment and corporate banking products. BMO serves Canadian retail clients through BMO Bank of Montreal and BMO Nesbitt Burns. In the United States, retail clients are served through Harris N.A. Investment and corporate banking services are provided in Canada and the US through BMO Capital Markets. BMO Capital Markets is a trade name used by BMO Financial Group for the wholesale banking businesses of Bank of Montreal, Harris N.A. and BMO Ireland Plc, and the institutional broker dealer businesses of BMO Capital Markets Corp. (Member SIPC), BMO Nesbitt Burns Trading Corp. and BMO Capital Markets GKST Inc. (Member SIPC) in the U.S., BMO Nesbitt Burns Inc. (Member CIPF) in Canada, Europe and Asia, BMO Nesbitt Burns Securities Limited (U.S. registered and member of FINRA), and BMO Nesbitt Burns Ltée/Ltd. (Member CIPF) in Canada, and BMO Capital Markets Limited in Europe and Australia. Nesbitt Burns is a registered trademark of BMO Nesbitt Burns Corporation Limited, used under license. BMO Capital Markets is a trademark of Bank of Montreal, used under license. "BMO (M-Bar roundel symbol)" is a registered trademark of Bank of Montreal, used under license. Registered trademark of Bank of Montreal in the United States, Canada and elsewhere. TM Trademark Bank of Montreal COPYRIGHT 21 BMO CAPITAL MARKETS CORP. A member of BMO Financial Group Page 14 November 5, 21