Investment Analyst Views

1
Investment Analyst Views

• CIA General Meeting
• Chicago, Illinois
• October 19, 2006

2
Veritas Investment Research

• Independent Unbiased Research
• Rooted in Forensic Accounting
• Based on Business Fundamentals
• Long-term Investment Horizon

3
What do investors want to do?

• Measure earnings
• Evaluate risk
• Value the company
• Evaluate how well management is investing the
  companys capital

4
What tools do investors have?

• GAAP F/S
• Source of Earnings disclosures
• Embedded Value disclosures
• Notes to the F/S and MDA, e.g.
• CALM disclosures
• Reserve movements
• Fair values

5
What 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 PE analysis
• Forward PBV analysis

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Relative Price Earnings
Source BMO Nesbitt Burns
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Price Book Regression
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Why we dont use these techniques

• The market doesnt need a 15th EPS estimate
• Target PE 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

9
Veritas 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?

10
SOE Earnings Quality Concerns?
Source of Earnings, Common Size Q1-F06
Source Company reports and Veritas calculations.
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SOE - Returns on Surplus
Return on Assets Backing Surplus, 2001-2005
Source Company reports and Veritas
calculations Simple average of opening and
closing balances
12
SOE - Core earnings
13
How is shareholders money invested?
Assets Backing Capital
Asset 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

14
Allowances for future credit losses
Source Company reports and Veritas calculations.
IAG does not disclose this figure. Note
Amounts in millions of Canadian dollars

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

15
The Whole Portfolio
Invested Asset Composition, Q4-F04 vs. Q1-F06
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Bonds Only
Bond Portfolio Composition, Q4-F04 vs. Q1-F06
17
Policy Liabilities - the Rollforward

• Difficult to glean useful information

MFC Policy Liability Rollforward, 2005 (Amounts
in millions of Canadian dollars)
Source MFC 2005 annual report
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Assumption changes MFC 2005
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EV Valuation
MFC share price, EV/share, BV/share
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PEV Multiples
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VNB Multiples (Implied)
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Implied VNB Growth
23
VNB / Share Growth
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SLF 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

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EV Adjustments
MFC - black SLF - white
Note circles are annual summary squares are
individual components
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Investment Thesis
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VNB / Share Growth
V-LIST BUY Target 43.50
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Directly Forecasting EV

• Supplement with high level EV forecast
• Opening EV
• EV Accretion
• Value of New Business
• Capital Returned to Shareholders
• Closing EV

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3855 Whats My Number?

• Vanishing earnings
• Balance sheet volatility
• Gains / losses on assets backing surplus

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3855 Vanishing Earnings

• Forecasted EPS is affected
• Therefore, forecasted valuation is affected for
  those using PE approach
• BV will increase how does this affect those
  using PBV regression?
• Does the change adversely affect management
  decisions?

31
3855 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

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3855 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

33
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

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Other Requested Disclosures

• PfADs, reserve details
• VNB / segment
• SOE / segment
• Experience gains or losses by type
• Sensitivity to interest rates / equity markets

35
Questions and Answers
36
LifeCo Fair Values - Example
Fair Value of Assets Backing Equity, as at
December 31, 2005 (Amounts in billions of
Canadian dollars)
Source Company reports and Veritas
calculations. Includes goodwill and
intangibles.