Source of Earningsand Disclosure

Simon CurtisExecutive Vice President & Chief Actuary

September 2004

Source of Earnings at Manulife

We have used SOE internally for 10+ years A key management tool widely understood by management Used to help make and monitor business and risk management

decisions

We first started disclosing SOE externally in September 2002

We now disclose SOE quarterly in our SIP by Operating Division and follow CIA Education Note Guidelines

We have detailed internal standards for SOE and professional standards for SOE being developedin Canada

2

Manulife’s Source of EarningsDisclosure HistorySeptember 2002

December 2002

March 2003

June 2003

March 2004

3

• First disclosure of total company 5 year annual SOE (1998-2002)

• 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 Businesswithin Business Unit

Within Division

Categorized into25+ categories

4

External

By Division

Summarized to7 key categories

Key Challenges in Taking “Internal” SOE External

External disclosure requires consistency in classification/quantification of items over time and between businesses – rigorous internal policies and control infrastructure needed.

Ongoing refinements to SOE methodology are problematic Restatement vs. Go-forward only

(complex) (less over time consistency)

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

SOE requires strong documented practices on PfADsvs. expected reserves, good experience studies andgood control over investment analytics.

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.

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 profitfrom Inforce Business

Impact of New Business

Changes in ActuarialAssumptions & 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 Profitfrom 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

Assumptionsand 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 Profitfrom Inforce

Business

Strain on New Business

Experience Gains (Losses)

10

Look for strong core of stable and growingearnings as inforce grows

Modest strain consistent with conservative approach to reserving

Prudent approach to setting expected assumptionsand updating these for experience createsexperience gains (some level is almost core)

How to Interpret EBS- Manulife Philosophy (Contd)

Changein Assumptions

Earningson Surplus

Management Action

11

We do not systematically use valuation basischange capitalization to create current income

Source of core stable earnings

Generally unusual, non-recurring items

CONSOLIDATED SOURCE OF EARNINGS

(Canadian $ in millions, unaudited)

For the three months ended months endedSource of Earnings Mar 31 Dec 31 Sep 30 Jun 30 Mar 31

2004 2003 2003 2003 2003

Expected profit from in force business 307 318 301 304 306 1,229 Impact of new business (46) (38) (44) (44) (57) (183) Experience gains 163 170 102 88 8 368 Changes in actuarial methods and assumptions - (78) - - - (78) Earnings on surplus funds 150 119 131 165 156 571 Other (29) - - (45) - (45) Income before income taxes 545 491 490 468 413 1,862 Income taxes (117) (63) (94) (82) (77) (316) Net Income attributed to shareholders 428 428 396 386 336 1,546

Glossary

For the twelve

Dec 312003

Experience gains

Impact of new business

Capitalized value of future profits on non-fee income new business, less:

-PfADs in respect of non-fee income new business

-non-capitalized acquisition expenses on fee income business

-acquisition expense gaps

Expected profit from in force business

Earnings impact of any differences between actual experience in the current period relative to expected experience implicit in the actuarial liabilities, or differences in current period fee income due to equity market performance

Formula-driven release of PfADS (Provisions for Adverse Deviations) on the non-fee businesses and expected annual profit on fee businesses

Other

Changes in actuarial methods and future assumptions that impact current period actuarial liabilities and income

Actual investment returns on the Company's surplus (shareholders' equity)

Earnings impact of actions outside the normal operation of the business

Changes in actuarial methods and assumptions

Earnings on surplus funds

Income taxes Tax charges to income, consistent with the amount on the statement of operations

12

DIVISIONAL SUMMARY - SOURCE OF EARNINGS

(Canadian $ in millions, unaudited)

For the three months ended March 31, 2004 U.S. Canadian Asian Japan Reinsurance Corp. and OtherExpected profit from in force business 110 69 56 30 42 - 307 Impact of new business (18) (8) (1) 1 (20) - (46) Experience gains (losses) 56 78 15 10 5 (1) 163 Earnings on surplus funds 52 52 11 8 17 10 150 Other (7) (22) - - - - (29) Income before income taxes 193 169 81 49 44 9 545 Income taxes (60) (39) (8) (7) (7) 4 (117) Net income attributed to shareholders 133 130 73 42 37 13 428

For the three months ended December 31, 2003Expected profit from in force business 104 64 63 26 61 - 318 Impact of new business (5) (16) 5 (3) (19) - (38) Experience gains (losses) 27 88 24 2 20 9 170 Changes in actuarial methods and assumptions - - - - - (78) (78) Earnings on surplus funds 42 60 13 7 23 (26) 119 Income (loss) before income taxes 168 196 105 32 85 (95) 491 Income taxes (51) (49) (5) (4) (18) 64 (63) Net income (loss) attributed to shareholders 117 147 100 28 67 (31) 428

For the three months ended September 30, 2003Expected profit from in force business 100 69 62 26 44 - 301 Impact of new business (21) (15) 4 (6) (6) - (44) Experience gains (losses) 43 61 13 7 (9) (13) 102 Earnings on surplus funds 45 61 14 8 23 (20) 131 Income (loss) before income taxes 167 176 93 35 52 (33) 490 Income taxes (47) (45) (5) (7) (11) 21 (94) Net income (loss) attributed to shareholders 120 131 88 28 41 (12) 396

Total

13

“User” Reaction to SOE

Internal management has always been a strong supporter of SOE analysis – we have used for 10+ years as key earnings analysis tool

SOE is key link that brings together financial impact of: Business activities Valuation methods and assumptions Risk management activities (ALM)

It is this “linkage” through SOE that is the foundation of our financial management platform

14

Internal

“User” Reaction to SOE

Investment analysts have been primary external audience for SOE disclosure, and it has gained immediate acceptance

Analysts focus on reported GAAP earnings, and SOE is a powerful tool to understand these

Quarterly SOE disclosure allows analysts to invest time and effort into understanding the measure and building it intotheir analytic package

Analyst issues with disclosure Misunderstanding of experience gains – are they sustainable? Confusion on treatment of full term vs. limited term (DAC)

businesses Desire for more details – particularly components of experience

gains15

External

Investment Analyst Reaction SOE

• Supplemental but directly linked to financial statements earnings

• Conceptually straightforward

– Demystifies the black box

• Quarterly16

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?

Increases visibility and importance of actuary role in external disclosure

SOE questions always come up on analyst call and actuary isthe “expert”

Increases transparency of impact of valuation on earnings New business strain Experience gains (conservatism in assumption) Valuation basis changes

Increases internal discipline on actuarial valuation practices because of visibility of impact on SOE

SOE takes up as much time as valuation in day-to-day work

17

OSFI Draft Guideline D-9(SOE Disclosure)

Requires SOE disclosure annually for all federally regulated Canadian Lifecos

Disclosure required by Financial Statement Segmentusing “7” categories

Disclosure expected to be in Financial Statement Notesor MD&A

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)

Requirement for disclosure to be in Financial Statement Notes or MD&A is not practical

Audit and SOX certification issues SIP disclosure for public company is reasonable, practical alternative

Changes in asset mix within investment policy – OSFI Guideline

suggests these are management actions, not experience gains Practical and principle issues to isolate from impact of market

movement

19

Key Concerns

Definition of basis changes too broad All error correction All changes in non formula bulk actuarial liabilities All changes in MfAD levels, including CTE levels Changes in non policy liability accounting provisions

including asset provisions

Open Issues on SOE It is important to realize that SOE is management analysis

of earnings – format should not be over-prescribed

Need to maintain balance of

If we evolve to “cookbook” prescribed disclosure, coreusefulness as real management analysis of earningswill disappear20

Flexibility toexplain earnings

logically

Rulesfor generalconsistency

Open Issues on SOE

SOE has crystallized need for: More consensus on what is PfAD vs. expected reserve More consensus on what is change in valuation method

and assumptions vs. regular valuation movement More consensus/literature on methods and frequency for updating

expected assumptions

Other SOE issues: Treatment of currency gains/losses

SOE disclosure will bring differences in valuation practices between companies into public view:

Aggressiveness/conservatism in expected valuation assumptions Income generation from valuation basis changes Expect pressure to “explain” intercompany inconsistencies

21