METHOD OF ANALYSISDEMUTUALIZATION OF LIFE INSURERS
COMMENTS ON THE PERFORMANCE OF
DEMUTUALIZED LIFE INSURERS AND DISCUSSION OF
THE FACTORS THAT HAVE AFFECTED THEIR
FIINANCIAL RESULTS

 Review of 20 companies in 5 countries that have fairly
mature insurance markets
 Basis of Review:

Presentation to the Institute of Actuaries of Japan–Financial performance, from an investor’s point of view–

My observations, and those of my colleagues, on actions andstrategies of the companies, before and after their demutualization

byDaniel J. McCarthy, FSA, MAAA
February 5, 200812

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THE COMPANIES AND THE COUNTRIESCOMPOUND ANNUAL INVESTOR RETURN(through 12/31/07 or earlier acquisition)

UNITED STATESAllmerica, AmerUs, Equitable, John Hancock, MetLife,MONY, Phoenix, Principal, Provident, Prudential,
StanCorp, UNUMCANADA

Manulife, Sun LifeU.K.

AVIVA, Friends Provident, Standard Life

 NEGATIVE: AMP, AVIVA*, Friends Provident, Phoenix

AUSTRALIA

AMP, National Mutual

 Not included: Standard Life (too new)、Provident (no IPO)
* Measured from CGNU merger in 2000

SOUTH AFRICA

Old Mutual STRONG POSITIVE(15% or more): 11 companies
 WEAK POSITIVE (9% or less): Allmerica, MONY, UNUM

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TIMING OF DEMUTUALIZATION

 Very few were “distress” situations, although several did
need more capital

STRATEGIC THEMES Often, best results occurred when strategic moves had been
made before demutualization

 Sometimes, fast is best (example: MetLife) Getting out of small or non-core lines of business is quitecommon

 Sometimes, slow is best (example: Prudential)

 Having too much money to spend is not always a good thing Timing can affect both policyholders and investors

 Very few companies have continued to sell traditional
dividend-paying policies

 (examples: Provident and Equitable)

 Most (but not all) successful companies have become
diversified financial services companies
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STRATEGIC THEMES (continued)

DIFFERENCES BY COMPANY SIZE Management of the ratings position (Moodys, S&P) is very
important, but top ratings are NOT usually important For the large companies, it seems essential to beinternational in order to achieve strong growth The top publicly held insurance companies in the U.S.
tend to have ratings that are one to two steps below the
top mutual companies

 For smaller companies, international is not as important –increasing market share in core lines of business canachieve growth Management of the balance sheet (e.g., securitizing cash
flows, reducing capital requirements) is much more
important for public companies than for the top mutualcompanies

 Some of the poorest performers have been medium-sizedcompanies with no distinct niche . Demutualization did not
improve their situation.

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2COMPANY ANALYSIS: MetLife
 DATE OF DEMUTUALIZATION: April 2000

COMPANY ANALYSIS: MetLife (continued)
 STRATEGIC ACTIONS PRIOR TO DEMUTUALIZATION:

 COMPANY CHARACTERISTICS:–LARGE LIFE INSURER WITH BOTH INDIVIDUAL AND INSTITUTIONAL
BUSINESSES–HISTORICALLY, THE INDIVIDUAL BUSINESS WAS LOW TO MID
MARKET–MAJOR REAL ESTATE INVESTOR–ACQUIRED NEW ENGLAND LIFE (entry into upscale market)–ACQUIRED GENERAL AMERICAN LIFE (entry into reinsurance market)–DIVESTED GROUP MEDICAL BUSINESS–GREW GROUP DENTAL BUSINESS STRATEGIC ACTIONS SINCE DEMUTUALIZATION:

 ANNUAL INVESTOR RETURN SINCE IPO: 30%–ESTABLISHED A BANK–BUILT INTERNATIONAL OPERATIONS–BECAME A MAJOR ADVERTIZER (Snoopy)

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COMPANY ANALYSIS: MetLife (continued)
 STRATEGIC ACTIONS SINCE DEMUTUALIZATION:–EXPANDED INSURANCE BROKERAGE OPERATIONSCOMPANY ANALYSIS: UNUM

 DATE OF DEMUTUALIZATION: November 1986
 COMPANY CHARACTERISTICS:

 FINANCIAL AND OPERATIONAL ACTIONS:–MEDIUM-SIZED SPECIALTY INSURER (Disability Insurance)–MAJOR COST-CUTTING (including sale of Home Office building)–SMALL PRESENCE IN MANY LINES OF BUSINESS–REINSURED THE MORTALITY RISK IN THE “CLOSED BLOCK” (toreduce capital requirements)–EXCELLENT FINANCIAL RESULTS PRIOR TO DEMUTUALIZATION OTHER COMMENTS:–CONSISTENT GROWTH IN SALES AND EARNINGS–GROWTH IS CONTINUING UNDER NEW CEO

 ANNUAL INVESTOR RETURN SINCE IPO: 9%1112

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3COMPANY ANALYSIS: UNUM (continued)
 STRATEGIC ACTIONS PRIOR TO DEMUTUALIZATION:–COMPANY ANALYSIS: UNUM (continued)
 FINANCIAL AND OPERATIONAL ACTIONS:STOPPED SELLING INDIVIDUAL LIFE INSURANCE STRATEGIC ACTIONS SINCE DEMUTUALIZATION:–INITIALLY, EXPANDED CORPORATE STAFF AND HEADQUARTERS,EXPECTING GROWTH–LATER, REDUCED CORPORATE OPERATIONS–SOLD OFF THE ANNUITY BUSINESS–EXITED THE REINSURANCE BUSINESS–PURCHASED A U.K. COMPANY (later sold it at a loss)–REDUCED (later stopped) SELLING INDIVIDUAL DISABILITY
INSURANCE–BECAME INVOLVED IN MAJOR LITIGATION CONCERNINGSETTLEMENT OF DISABILITY CLAIMS–MERGED WITH ANOTHER STOCK INSURER–ALSO BECAME INVOLVED IN SECURITIES LITIGATION–EXPANDED THE SALE OF GROUP LIFE AND DISABILITY
INSURANCE–FINANCIAL RESULTS HAVE BEEN UP-AND-DOWN

 OTHER COMMENTS:1314

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COMPANY ANALYSIS: Old Mutual DATE OF DEMUTUALIZATION: July 1999

COMPANY ANALYSIS: Old Mutual (continued)
 STRATEGIC ACTIONS SINCE DEMUTUALIZATION:

 COMPANY CHARACTERISTICS:––LARGEST MUTUAL LIFE INSUER IN AFRICAOPERATIONS IN MANY AFRICAN COUNTRIES, OFTEN WITH SMALL
POLICIES–SOME CONSOLIDATION OF OPERATIONS BECAUSE OF FINANCIALDIFFICULTIES IN SOME COUNTRIESRETAINED THE NAME “OLD MUTUAL” AS ITS BRAND NAME–EXPANDED OUTSIDE AFRICA (especially U.K. and U.S.)–EXPANDED BEYOND INSURANCE FINANCIAL AND OPERATIONAL ACTIONS:

 ANNUAL INVESTOR RETURN SINCE IPO: 15%
 STRATEGIC ACTIONS PRIOR TO DEMUTUALIZATION:––TRADING OF ITS STOCK ON THE LONDON EXCHANGE (as well asJohannesburg) AIDS ITS INTERNATIONAL FOCUS

 OTHER COMMENTS:–BASED ON ITS ORIGINS, A REMARKABLE SUCCESS STORY15162008年2月5日

2008年2月5日4COMPANY ANALYSIS: Manulife
 DATE OF DEMUTUALIZATION: September 1999

COMPANY ANALYSIS: Manulife (continued)
 STRATEGIC ACTIONS PRIOR TO DEMUTUALIZATION: COMPANY CHARACTERISTICS:–LARGEST MUTUAL LIFE INSURER IN CANADA–ALSO HAD MAJOR OPERATIONS IN THE U.S.

–PRIMARY FOCUS WAS THE UPSCALE INDIVIDUAL MARKET ANNUAL INVESTOR RETURN SINCE IPO: 22%–CEASED OPERATIONS IN MANY COUNTRIES (U.K. and Caribbeancountries)–ACQUIRED NORTH AMERICAN LIFE BY MERGER–CONVERTED NON-CANADA BRANCHES TO SUBSIDIARIES (toincrease flexibility)

 STRATEGIC ACTIONS SINCE DEMUTUALIZATION:–ACQUIRED JOHN HANCOCK (largest acquisition made by ademutualized company)–EXPANDED INTERNATIONALLY BEYOND U.S.

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COMPANY ANALYSIS: Manulife (continued)
 FINANCIAL AND OPERATIONAL ACTIONS:–REINSURED ITS CLOSED BLOCK (to reduce capital requirements)–PUBLISHED EMBEDDED VALUE FINANCIAL ANALYSISCOMPANY ANALYSIS: Prudential
 DATE OF DEMUTUALIZATION: December 2001
 COMPANY CHARACTERISTICS:–LARGE LIFE INSURER WITH BOTH INDIVIDUAL AND INSTITUTIONAL
BUSINESSES–HISTORICALLY, THE INDIVIDUAL BUSINESS WAS LOW TO MID
MARKET–MAJOR REAL ESTATE INVESTOR OTHER COMMENTS:–STILL HAS NEARLY HALF OF ITS BUSINESS IN CANADA(consolidation of the Canadian market means that further expansion
outside Canada will continue to be important)–BOTH OF THE MAJOR CANADIAN DEMUTUALIZATIONS HAVE BEEN
FINANCIALLY SUCCCESSFUL ANNUAL INVESTOR RETURN SINCE IPO: 23%

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5COMPANY ANALYSIS: Prudential (continued)

COMPANY ANALYSIS: Prudential (continued)

 STRATEGIC ACTIONS PRIOR TO DEMUTUALIZATION:

 FINANCIAL AND OPERATIONAL ACTIONS:–ESTABLISHED OPERATIONS IN JAPAN–EXITED FROM THE GROUP MEDICAL BUSINESS–REDUCED SECURITIES BROEKRAGE OPERATIONS STRATEGIC ACTIONS SINCE DEMUTUALIZATION:–ACQUIRED AN ANNUITY INSUER (Skandia)–ACQUIRED A LARGE BLOCK OF INSTITUTIONAL PENSION
BUSINESS (from CIGNA)–EXPANDED OPERATIONS IN JAPAN–EXITED THE PROPERTY/CASUALTY BUSINESS–SECURITIZED CASH FLOWS FROM “CLOSED BLOCK”–MAJOR COST-CUTTING OTHER COMMENTS:–PRUDENTIAL DELAYED ITS DEMUTUALIZATION UNTIL MAJOR‘MARKET CONDUCT’ LITIGATION WAS CONCLUDED–DESPITE THREE MAJOR PRE-DEMUTUALIZATION LOSSES (PruSecurities, Hurricane Andrew, market conduct) the company was solid
financially at the time of demutualization2122

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BRIEF ANALYSIS: Friends Provident
 Demutualized July 2001

BRIEF ANALYSIS: AVIVA Medium-sized life insurer

 Norwich Union merged (after demutualization) with CGNU
in 2000, acquired AmerUs (United States) in 2006.

 Annual investor return: -6%

 Annual investor performance: - 3%

 After negative stock performance in 2002, the company
had reasonably successful operations and stock pricemovement through 2006. Management felt that thecompany needed to become larger. Efforts to acquire
another company failed, and during this time – in 2007 –the stock price fell 25%.

 The company has, since the CGNU merger, struggled to
expand operations. Until the acquisition of AmerUs, its
US operations were quite small. It is unclear whether thisacquisition and other recent actions will improve
performance.

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6A SPECIAL CASE: AXA
 AXA HAS ACQUIRED AN INTEREST IN THREE OF THE
DEMUTUALIZED COMPANIES – EQUITABLE,NATIONAL MUTUAL, AND MONY.
 IN TWO CASES – EQUITABLE AND NATIONAL
MUTUAL – AXA MADE AN INVESTMENT AT THE TIME
OF DEMUTUALIZATION
 ANNUAL INVESTOR RETURNS:–EQUITABLE: (acquired in distress) 35% from July 1992 until November
2000.

–NATIONAL MUTUAL: 15% from Oct 1996 until December 2007

–MONY: 7% from November 1998 until July 2004

BRIEF ANALYSIS: Phoenix
 Demutualized in June 2000.
 Medium-sized life insurer with largely traditional business Annual investor return: - 4%
 Like many medium-sized companies with traditional
businesses, the company has relatively high expenses
and is weighed down by its pre-demutualization business.
Companies of this type that cannot grow seem unable toobtain an acceptable ROE.

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BRIEF ANALYSIS: AMP

BRIEF ANALYSIS: Standard Life

 DEMUTUALIZED June 1998.

 DEMUTUALIZED July 2006

 The largest life insurer in Australia

 For many years, Standard Life remained mutual and did
not intent to convert. It then concluded that it did not haveenough capital to continue to grow as a mutual life insurer.

 Annual investor return: - 3%
 Investment difficulties after demutualization caused majorlosses Annual investor return: 3%2728

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 NOTE that the period since demutualization is quite brief,and Standard has had positive performance during thatperiod while competitors have been negative.

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BRIEF ANALYSIS: Sun Life
 Demutualized March 2000
 Major Canadian insurer with very substantial operations inthe U.S. and a major mutual fund operation(Massachusetts Financial).

BRIEF ANALYSIS: Principal Financial Demutualized October 2001 (formed Mutual Holding
Company two years before) A fast-growing company dominated by institutional
pension business Annual investor return: 35%

 Annual investor return: 23%

 Has expanded operations beyond US-Canada, whilebuilding distribution of insurance and financial products inUS-Canada as well.

 A post-demutualization effort to expand in Australia failed;Principal is now again expanding internationally.

 Future success will depend in part on operations beyond
US and Canada.

 Unlike MetLife and Prudential, Principal has grownorganically, with no major domestic acquisitions

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BRIEF ANALYSIS: John Hancock Demutualized January 2000
 Historically, like MetLife and Pru, a company with bothindividual and institutional businesses; in the years prior to
demutualization, it had converted its individual business toa more up-market business The acquisition by Manulife in 2003 provided economies
of scale and strengthened U.S. distribution
 Annual investor return (until acquisition): 24%

BRIEF ANALYSIS: Stancorp
 Demutualized April 1999
 Stancorp was a medium-sized company specializing ininstitutional life and disability business for small to midsized employers. Since demutualization, it has expanded
this business while exiting from individual life insurance.
Recently, it has expanded its corporate pension business.
 Annual investor return: 20%
 It illustrates that a medium-sized company with a special
strength can build on it successfully.

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8BRIEF ANALYSIS: Allmerica

BRIEF ANALYSIS: AmerUs

 Demutualized October 1995.

 Demutualized January 1997 (four years prior, it formed amutual holding company and had an IPO in that form).

 Historically a medium-sized life insurer that also owned acontrolling interest in a property-casualty company(Hanover). After demutualization, it expanded its annuity
business but did not succeed financially. It has sinceexited that business. However, the property-casualty
business has been moderately successful. It is now renamed Hanover.

 AmerUs was a rather small company that had been
formed by the merger of 3 mutual companies. It operated
in the individual life insurance and annuity markets. After
demutualization, it demutualized and acquired
Indianapolis Life. A well-run company, it faced larger
competitors, and was rumored to be for sale for sometime until AVIVA acquired it in October 2006.

 Annual investor return: 6%

 Annual investor return (until acquired): 15%3334

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BRIEF ANALYSIS: Provident Mutual
 Demutualized October 2002; sponsored (acquired) byNationwide, so there was no IPO.
 Provident, having exited from its group insurance
business, had a traditional individual life business, withstrong variable life products.

Thank you The Nationwide acquisition was keyed to the price of
Nationwide stock. The transaction took place during atime of poor stock performance. Had it taken place 3months earlier, Provident policyholders would havereceived 26% more value.
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