Great-West Lifeco reports third quarter 2009 results
Readers are referred to the cautionary note regarding Forward-Looking
Information and Non-GAAP Financial Measures at the end of this Release.
TSX:GWO
WINNIPEG, Nov. 5, 2009 /CNW/ - Great-West Lifeco Inc. (Lifeco) has reported net income attributable to common shareholders of $445 million for the three months ended September 30, 2009, compared to $436 million in 2008. On a per common share basis, this represents $0.471 per common share for the three months ended September 30, 2009, compared to $0.487 per common share for 2008.
For the nine months ended September 30, 2009, net income attributable to common shareholders was $1,184 million, compared to $1,493 million a year ago. On a per common share basis, this represents $1.254 per common share for the nine months ended September 30, 2009, compared to $1.717 per common share for 2008.
Net income of $1,493 million for the nine months ended September 30, 2008 represents adjusted net income from continuing operations and, as such, excludes certain items as described in the United States section of this Release. Net income attributable to common shareholders, as reported, was $2,303 million, or $2.575 per common share for the nine months ended September 30, 2008.
Although conditions have generally improved in 2009, the 2009 results compared to 2008 reflect the weaker global equity and credit market environment that has existed since 2007. A decline in the value of publicly traded and other investment securities through September 30, 2009, compared to 2008, has lowered the aggregate market value of assets invested in the Company's segregated and mutual funds. In the third quarter of 2009, the impact of lower equity markets on fee income and actuarial liabilities was modest, resulting in a decrease in net income attributable to common shareholders of $0.01 per common share compared to the third quarter of 2008. Great-West Life did not need to establish any actuarial reserves with respect to segregated fund guarantees at September 30, 2009.
At September 30, 2009, provisions for future credit losses in actuarial liabilities totaled $2,492 million, compared to $2,514 million at June 30, 2009. In the quarter, the Company increased provisions by $112 million almost entirely as a result of credit rating downgrade activity in the quarter. This reduced net income attributable to common shareholders by $86 million after-tax, or $0.09 per common share after adjusting for pass-through features and minority interests.
At September 30, 2009, consolidated invested assets were $103.7 billion. The gross book value of impaired investments at that date was $400 million, against which the Company had recorded cumulative impairment provisions of $243 million. The aggregate of the $243 million impairment provisions against invested assets and the $2,492 million provision for future credit losses in actuarial liabilities represented 2.9% of bond and mortgage assets at September 30, 2009.
Consolidated assets under administration at September 30, 2009 were $454.9 billion, up $12.9 billion from December 31, 2008.
Highlights
- Sales in Canada of individual life insurance products in the quarter
were 15% higher than 2008 owing to a 29% increase in sales of
participating whole life insurance.
- In Canada, the Company launched new segregated fund products in
October, including a Guaranteed Minimum Withdrawal Benefit (GMWB)
product.
- The Company completed the transfer of assets from the Fidelity
Investments Canada group retirement services business which it
acquired in September, 2009. The total assets transferred from
Fidelity were $1.4 billion.
- Sales in the U.S. Financial Services business increased 25% in the
third quarter compared to 2008. Sales of public/non-profit plans were
very strong in the quarter.
- In Putnam, net asset flows in the third quarter improved by
US$1.5 billion compared to 2008.
- The Company declared a quarterly common dividend of $0.3075 per
common share payable December 31, 2009, unchanged from the previous
quarter. Dividends paid on common shares for the nine months ended
September 30, 2009 were 3.4% higher than a year ago.
- The Company's capital position remains very strong. Lifeco's
Canadian operating subsidiary, Great-West Life, reported a Minimum
Continuing Capital and Surplus (MCCSR) ratio of 200% at September 30,
2009, which did not include any benefit from the $1,230 million of
common and preferred share capital that was raised by Lifeco in the
fourth quarter of 2008, or the $170 million of perpetual preferred
share capital issued in October 2009.
OPERATING RESULTS
Consolidated net income for Lifeco is comprised of the net income of The Great-West Life Assurance Company (Great-West Life), Canada Life Financial Corporation (CLFC), London Life Insurance Company (London Life), Great-West Life & Annuity Insurance Company (GWL&A), and Putnam Investments, LLC (Putnam), together with Lifeco's corporate results.
CANADA
Net income attributable to common shareholders for the third quarter of 2009 was $212 million compared to $251 million in 2008. Included in the third quarter results in 2009 was the mark to market adjustment on the Company's preferred shares Series D and Series E, which reduced net income attributable to common shareholders by $15 million. For the nine months ended September 30, 2009, net income attributable to common shareholders was $637 million compared to $775 million in 2008.
Investment impairment charges and provisions for future credit losses reduced net income attributable to common shareholders by $5 million in the quarter.
Total sales for the nine months ended September 30, 2009 were $6,610 million compared to $6,148 million in 2008. Sales of protection products increased over the nine months ended September 30, 2008 with Individual Life sales up 10%, while sales of Group insurance products decreased 11% over 2008.
Total assets under administration at September 30, 2009 were $113.4 billion, compared to $103.9 billion at December 31, 2008.
UNITED STATES
Net income attributable to common shareholders for the third quarter of 2009 was $68 million compared to $43 million in 2008. For the nine months ended September 30, 2009, net income attributable to common shareholders was $192 million compared to $227 million in 2008.
Investment impairment charges and provisions for future credit losses reduced net income attributable to common shareholders by $9 million in the quarter.
Net income of $227 million for the nine months ended September 30, 2008 excludes the gain on sale of GWL&A's health care business of $649 million and income from discontinued operations of $43 million as well as two non-recurring items that contributed $118 million to earnings during the first quarter of 2008.
Total sales for the nine months ended September 30, 2009 were $22.9 billion compared to $34.3 billion in 2008.
Total assets under administration at September 30, 2009 were $274.1 billion compared to $271.1 billion at December 31, 2008. Included in assets under administration at September 30, 2009 were $121.5 billion of mutual fund and institutional account assets managed by Putnam, compared to $129.0 billion at December 31, 2008.
EUROPE
Net income attributable to common shareholders for the third quarter of 2009 was $167 million compared to $140 million in 2008. For the nine months ended September 30, 2009, net income attributable to common shareholders was $364 million compared to $502 million in 2008.
Investment impairment charges and provisions for future credit losses reduced net income attributable to common shareholders by $72 million in the quarter.
Total sales for the nine months ended September 30, 2009 were $2,986 million compared to $3,655 million in 2008.
Total assets under administration at September 30, 2009 were $67.4 billion, compared to $67.0 billion at December 31, 2008.
CORPORATE
Corporate net income for Lifeco attributable to common shareholders was a charge of $2 million for the third quarter of 2009 and a charge of $9 million for the nine months ended September 30, 2009, compared to net income of $2 million for the third quarter of 2008 and a charge of $11 million for the nine months ended September 30, 2008.
QUARTERLY DIVIDENDS
At its meeting today, the Board of Directors approved a quarterly dividend of $0.3075 per share on the common shares of the Company payable December 31, 2009 to shareholders of record at the close of business December 3, 2009.
In addition, the Directors approved quarterly dividends on:
- Series D First Preferred Shares of $0.293750 per share;
- Series E First Preferred Shares of $0.30 per share;
- Series F First Preferred Shares of $0.36875 per share;
- Series G First Preferred Shares of $0.325 per share;
- Series H First Preferred Shares of $0.30313 per share;
- Series I First Preferred Shares of $0.28125 per share;
- Series J First Preferred Shares of $0.3750 per share; and
- Initial dividend on Series L First Preferred Shares of $0.34829 per
share
all payable December 31, 2009 to shareholders of record at the close of
business December 3, 2009.
For purposes of the Income Tax Act (Canada), and any similar provincial legislation, the dividends referred to above are eligible dividends.
GREAT-WEST LIFECO
Great-West Lifeco Inc. (TSX:GWO) is a financial services holding company with interests in the life insurance, health insurance, retirement savings, investment management and reinsurance businesses. The Company has operations in Canada, the United States, Europe and Asia through The Great-West Life Assurance Company, London Life Insurance Company, The Canada Life Assurance Company, Great-West Life & Annuity Insurance Company and Putnam Investments, LLC. Lifeco and its companies have nearly $455 billion in assets under administration and are members of the Power Financial Corporation group of companies.
Cautionary note regarding Forward-Looking Information
This release contains some forward-looking statements about the Company, including its business operations, strategy and expected financial performance and condition. Forward-looking statements include statements that are predictive in nature, depend upon or refer to future events or conditions, or include words such as "expects", "anticipates", "intends", "plans", "believes", "estimates" or negative versions thereof and similar expressions. In addition, any statement that may be made concerning future financial performance (including revenues, earnings or growth rates), ongoing business strategies or prospects, possible future Company action including statements made by the Company with respect to the expected benefits of acquisitions or divestitures are also forward-looking statements. Forward-looking statements are based on current expectations and projections about future events and are inherently subject to, among other things, risks, uncertainties and assumptions about the Company, economic factors and the financial services industry generally, including the insurance and mutual fund industries. They are not guarantees of future performance, and actual events and results could differ materially from those expressed or implied by forward-looking statements made by the Company due to, but not limited to, important factors such as sales levels, premium income, fee income, expense levels, mortality experience, morbidity experience, policy lapse rates and taxes, as well as general economic, political and market factors in North America and internationally, interest and foreign exchange rates, global equity and capital markets, business competition, technological change, changes in government regulations, unexpected judicial or regulatory proceedings, catastrophic events, and the Company's ability to complete strategic transactions and integrate acquisitions. The reader is cautioned that the foregoing list of important factors is not exhaustive, and there may be other factors, including factors set out under "Risk Management and Control Practices" in the Company's 2008 Annual Management's Discussion and Analysis and any listed in other filings with securities regulators, which are available for review at www.sedar.com. The reader is also cautioned to consider these and other factors carefully and to not place undue reliance on forward-looking statements. Other than as specifically required by applicable law, the Company has no intention to update any forward-looking statements whether as a result of new information, future events or otherwise.
Cautionary note regarding Non-GAAP Financial Measures
This release contains some non-GAAP financial measures. Terms by which non-GAAP financial measures are identified include but are not limited to "earnings before restructuring charges", "adjusted net income", "adjusted net income from continuing operations", "net income - adjusted", "earnings before adjustments", "constant currency basis", "premiums and deposits", "sales", and other similar expressions. Non-GAAP financial measures are used to provide management and investors with additional measures of performance. However, non-GAAP financial measures do not have standard meanings prescribed by GAAP and are not directly comparable to similar measures used by other companies. Please refer to the appropriate reconciliations of these non-GAAP financial measures to measures prescribed by GAAP.
Further information
Selected financial information is attached.
Great-West Lifeco's third quarter conference call will be held Thursday,
November 5 at 3:30 p.m. (Eastern). The call can be accessed through
www.greatwestlifeco.com or by phone at:
- Participants in the Toronto area: 416-340-2220
- Participants from North America: 1-866-226-1798
- Participants from Overseas: Dial international access code first,
then 800-2787-2090
A replay of the call will be available from November 5 to November 12, 2009, and can be accessed by calling 1-800-408-3053 or 416-695-5800 in Toronto (passcode: 4003484 followed by the number sign).
Additional information relating to Lifeco, including the most recent interim unaudited financial statements, interim Management's Discussion and Analysis (MD&A), and CEO/CFO certificates will be filed on SEDAR at www.sedar.com.
FINANCIAL HIGHLIGHTS (unaudited)
(in $ millions except per share amounts)
As at or for the For the
three months ended nine months ended
------------------------------------------------------
September June September September September
30, 2009 30, 2009 30, 2008 30, 2009 30, 2008
-------------------------------------------------------------------------
Premiums and
deposits:
Life insurance,
guaranteed
annuities and
insured health
products $ 4,336 $ 4,664 $ 3,912 $ 13,709 $ 25,225
Self-funded
premium
equivalents
(ASO contracts) 610 639 583 1,867 1,795
Segregated funds
deposits:
Individual
products 1,236 1,699 1,982 4,193 5,771
Group products 2,325 1,823 1,140 6,844 4,125
Proprietary mutual
funds and
institutional
deposits(1) 5,045 5,140 7,794 15,465 24,209
------------------------------------------------------
Total premiums and
deposits 13,552 13,965 15,411 42,078 61,125
------------------------------------------------------
Fee and other income 728 666 778 2,074 2,381
Paid or credited to
policyholders 8,687 7,473 2,176 19,526 21,962
Net income-common
shareholders
Continuing
operations
- adjusted(3) 445 413 436 1,184 1,493
Discontinued
operations
- adjusted(2) - - - - 43
------------------------------------------------------
Net income
- adjusted(3) 445 413 436 1,184 1,536
Adjustments
after tax(3) - - - - 767
------------------------------------------------------
Net income 445 413 436 1,184 2,303
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-------------------------------------------------------------------------
Per common share
Basic earnings
- adjusted(3) $ 0.471 $ 0.437 $ 0.487 $ 1.254 $ 1.717
Adjustments
after tax (3) - - - - 0.858
Basic earnings 0.471 0.437 0.487 1.254 2.575
Dividends paid 0.3075 0.3075 0.3075 0.9225 0.8925
Book value 12.21 12.65 12.70
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-------------------------------------------------------------------------
Return on common
shareholders'
equity (12 months):
Net income
- adjusted(3) 13.7% 14.2% 21.4%
Net income 2.4% 2.3% 27.1%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total assets $ 129,813 $ 131,644 $ 127,339
Segregated funds
net assets 86,640 83,192 81,916
Proprietary
mutual
funds and
institutional
net assets(4) 124,272 121,729 147,165
--------------------------------
Total assets
under
management 340,725 336,565 356,420
Other assets
under
administration(5) 114,145 105,341 107,970
--------------------------------
Total assets
under
administration $ 454,870 $ 441,906 $ 464,390
--------------------------------
--------------------------------
Share capital
and surplus $ 12,861 $ 13,270 $ 12,474
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-------------------------------------------------------------------------
(1) Includes Putnam Investments, LLC mutual funds and institutional
deposits, excluding Prime Money Market Fund net deposits.
(2) Represents the operating results of GWL&A's health care business,
which was sold effective April 1, 2008. Does not include the gain on
sale of the health care business.
(3) Net income, basic earnings per common share and return on common
shareholders' equity are presented on an adjusted basis, as a non-
GAAP financial measure of earnings performance, and reflect the
following items in 2008:
Refer to Annual
Per common share Financial
Net ------------------------ Statement
income In quarter Year-to-date Notes
----------------------------------------------------
Q1: Gain on
termination
of
reinsurance
agreement $ 176 $ - $ 0.197 Note 14
Reserve
strengthening
in GWL&A (58) $ 118 - (0.065) Note 2
Q2: Gain on sale
of GWL&A's
health care
business 649 649 - 0.726 Note 2
-----------------------------
$ 767 $ - $ 0.858
-----------------------------
-----------------------------
Return on common shareholders' equity is restated excluding non-
recurring items from prior periods.
(4) Excludes Putnam Prime Money Market Fund.
(5) Other assets under administration includes both retail and
institutional assets in which the Company only performs
administrative or recordkeeping type services for the end client. In
general, fee income is based on the type of services performed per
client and does not fluctuate with asset levels.
SUMMARIES OF CONSOLIDATED OPERATIONS (unaudited)
(in $ millions except per share amounts)
For the three months For the nine months
ended September 30, ended September 30,
-------------------------------------------
2009 2008 2009 2008
-------------------------------------------
Income
Premium income $ 4,336 $ 3,912 $ 13,709 $ 25,225
Net investment income
(note 4)
Regular net investment
income 1,591 1,539 4,718 4,539
Changes in fair value
on held for trading
assets 3,734 (2,258) 4,039 (4,793)
-------------------------------------------
Total net investment income 5,325 (719) 8,757 (254)
Fee and other income 728 778 2,074 2,381
-------------------------------------------
10,389 3,971 24,540 27,352
-------------------------------------------
Benefits and expenses
Policyholder benefits 3,918 3,732 12,653 11,855
Policyholder dividends and
experience refunds 382 338 1,151 1,016
Change in actuarial
liabilities 4,387 (1,894) 5,722 9,091
-------------------------------------------
Total paid or credited to
policyholders 8,687 2,176 19,526 21,962
Commissions 319 332 979 984
Operating expenses 636 661 1,927 1,932
Premium taxes 69 60 192 154
Financing charges (note 6) 93 76 274 259
Amortization of finite life
intangible assets 21 20 68 63
-------------------------------------------
Net income from continuing
operations before income taxes 564 646 1,574 1,998
Income taxes - current (43) 95 60 435
- future 141 89 238 28
-------------------------------------------
Net income from continuing
operations before
non-controlling interests 466 462 1,276 1,535
Non-controlling interests 4 12 40 (118)
-------------------------------------------
Net income from continuing
operations 462 450 1,236 1,653
Net income from discontinued
operations (note 2) - - - 692
-------------------------------------------
Net income 462 450 1,236 2,345
Perpetual preferred share
dividends 17 14 52 42
-------------------------------------------
Net income - common
shareholders $ 445 $ 436 $ 1,184 $ 2,303
-------------------------------------------
-------------------------------------------
Earnings per common share
(note 13)
Basic $ 0.471 $ 0.487 $ 1.254 $ 2.575
-------------------------------------------
-------------------------------------------
Diluted $ 0.470 $ 0.485 $ 1.253 $ 2.563
-------------------------------------------
-------------------------------------------
CONSOLIDATED BALANCE SHEETS (unaudited)
(in $ millions)
September December September
30, 2009 31, 2008 30, 2008
--------------------------------
Assets
Bonds (note 4) $ 67,156 $ 66,554 $ 62,010
Mortgage loans (note 4) 16,974 17,444 17,159
Stocks (note 4) 6,355 5,394 6,054
Real estate (note 4) 3,133 3,188 3,230
Loans to policyholders 7,058 7,622 6,814
Cash and cash equivalents 3,046 2,850 3,333
Funds held by ceding insurers 11,258 11,447 12,527
Goodwill 5,409 5,425 6,355
Intangible assets 3,283 3,523 4,198
Other assets 6,141 6,627 5,659
--------------------------------
Total assets $ 129,813 $ 130,074 $ 127,339
--------------------------------
--------------------------------
Liabilities
Policy liabilities
Actuarial liabilities $ 99,033 $ 97,895 $ 96,723
Provision for claims 1,253 1,466 1,368
Provision for policyholder dividends 651 630 638
Provision for experience rating refunds 322 310 272
Policyholder funds 2,321 2,326 2,244
--------------------------------
103,580 102,627 101,245
Debentures and other debt instruments
(note 7) 3,817 3,821 3,852
Funds held under reinsurance contracts 122 192 164
Other liabilities 4,636 5,969 5,251
Repurchase agreements 699 334 445
Deferred net realized gains 140 161 160
--------------------------------
112,994 113,104 111,117
Preferred shares (note 9) 793 752 795
Capital trust securities and debentures
(note 8) 782 658 642
Non-controlling interests
Participating account surplus in
subsidiaries 2,018 2,012 1,970
Preferred shares issued by subsidiaries 157 157 157
Perpetual preferred shares issued by
subsidiaries 148 150 150
Non-controlling interests in capital
stock and surplus 60 13 34
Share capital and surplus
Share capital (note 9)
Perpetual preferred shares 1,327 1,329 1,099
Common shares 5,747 5,736 4,733
Accumulated surplus 7,219 6,906 8,109
Accumulated other comprehensive loss
(note 14) (1,482) (787) (1,509)
Contributed surplus 50 44 42
--------------------------------
12,861 13,228 12,474
--------------------------------
Total liabilities, share capital and
surplus $ 129,813 $ 130,074 $ 127,339
--------------------------------
--------------------------------
CONSOLIDATED STATEMENTS OF SURPLUS (unaudited)
(in $ millions)
For the nine months
ended September 30,
---------------------
2009 2008
---------------------
Accumulated surplus
Balance, beginning of year $ 6,906 $ 6,599
Net income 1,236 2,345
Repatriation of Canada Life seed capital from
participating policyholder account - 5
Dividends to shareholders
Perpetual preferred shareholders (52) (42)
Common shareholders (871) (798)
---------------------
Balance, end of period $ 7,219 $ 8,109
---------------------
---------------------
Accumulated other comprehensive loss, net of income
taxes (note 14)
Balance, beginning of year $ (787) $ (1,533)
Other comprehensive income (loss) (695) 24
---------------------
Balance, end of period $ (1,482) $ (1,509)
---------------------
---------------------
Contributed surplus
Balance, beginning of year $ 44 $ 34
Stock option expense
Current period expense (note 11) 6 8
---------------------
Balance, end of period $ 50 $ 42
---------------------
---------------------
SUMMARIES OF CONSOLIDATED COMPREHENSIVE INCOME (unaudited)
(in $ millions)
For the three months For the nine months
ended September 30, ended September 30,
-------------------------------------------
2009 2008 2009 2008
-------------------------------------------
Net income $ 462 $ 450 $ 1,236 $ 2,345
Other comprehensive income
(loss), net of income taxes
Unrealized foreign exchange
gains (losses) on
translation of foreign
operations (767) (36) (897) 326
Unrealized gains (losses) on
available for sale assets 130 (38) 101 (195)
Realized (gains) losses on
available for sale assets (6) (6) (35) (34)
Unrealized gains (losses) on
cash flow hedges 70 (61) 128 (71)
Realized (gains) losses on
cash flow hedges 1 (1) (9) (1)
Non-controlling interests 1 - 17 (1)
-------------------------------------------
(571) (142) (695) 24
-------------------------------------------
Comprehensive income $ (109) $ 308 $ 541 $ 2,369
-------------------------------------------
-------------------------------------------
Income tax (expense) benefit
included in other comprehensive
income
For the three months For the nine months
ended September 30, ended September 30,
-------------------------------------------
2009 2008 2009 2008
-------------------------------------------
Unrealized foreign exchange
gains (losses) on
translation of foreign
operations $ - $ - $ (1) $ -
Unrealized gains (losses) on
available for sale assets (42) 25 (48) 81
Realized (gains) losses on
available for sale assets - 3 6 12
Unrealized gains (losses) on
cash flow hedges (38) 33 (69) 39
Realized (gains) losses on
cash flow hedges - 1 5 1
Non-controlling interests 5 (3) 5 (3)
-------------------------------------------
$ (75) $ 59 $ (102) $ 130
-------------------------------------------
-------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in $ millions)
For the three months For the nine months
ended September 30, ended September 30,
-------------------------------------------
2009 2008 2009 2008
-------------------------------------------
Operations
Net income $ 462 $ 450 $ 1,236 $ 2,345
Adjustments:
Change in policy
liabilities 4,277 (3,131) 5,505 (4,581)
Change in funds held by
ceding insurers 127 1,605 337 2,106
Change in funds held under
reinsurance contracts (27) (6) (38) (12)
Change in current income
taxes payable (149) (333) (356) (44)
Future income tax expense 141 89 238 28
Gain on disposal of
business, after tax
(note 2) - - - (649)
Changes in fair value of
financial instruments (3,720) 2,259 (3,993) 4,802
Other (377) (208) (373) (1,563)
-------------------------------------------
Cash flows from operations 734 725 2,556 2,432
Financing Activities
Issue of common shares 6 15 11 24
Partial repayment of five
year term facility in
subsidiary - - - (198)
Issue of subordinated
debentures in subsidiary - - - 500
Repayments on credit facility - - - (1,886)
Increase in (repayment of)
line of credit in subsidiary (17) 73 165 143
Increase in (repayment of)
debentures and other debt
instruments 31 (33) (1) (30)
Dividends paid (307) (289) (923) (840)
-------------------------------------------
(287) (234) (748) (2,287)
Investment Activities
Bond sales and maturities 4,325 5,166 14,762 13,974
Mortgage loan repayments 504 524 1,297 1,441
Stock sales 517 729 1,794 1,727
Real estate sales - - 8 198
Change in loans to
policyholders (37) (28) (92) (202)
Change in repurchase
agreements 531 (90) 458 185
Acquisition of intangible
assets (37) - (37) -
Disposal of business (note 2) - - - 1,344
Investment in bonds (5,199) (4,617) (16,279) (13,587)
Investment in mortgage loans (638) (907) (1,319) (2,744)
Investment in stocks (462) (635) (1,898) (1,998)
Investment in real estate (3) (452) (88) (852)
-------------------------------------------
(499) (310) (1,394) (514)
Effect of changes in exchange
rates on cash and cash
equivalents (259) (115) (218) 26
Increase (decrease) in cash and
cash equivalents (311) 66 196 (343)
Cash and cash equivalents from
continuing operations,
beginning of period 3,357 3,267 2,850 3,676
-------------------------------------------
Cash and cash equivalents from
continuing operations, end
of period $ 3,046 $ 3,333 $ 3,046 $ 3,333
-------------------------------------------
-------------------------------------------
Notes to Consolidated Financial Statements (unaudited)
(in $ millions except per share amounts)
1. Basis of Presentation and Summary of Accounting Policies
The interim unaudited consolidated financial statements of Great-West
Lifeco Inc. (Lifeco or the Company) at September 30, 2009 have been
prepared in accordance with Canadian generally accepted accounting
principles, using the same accounting policies and methods of
computation followed in the consolidated financial statements for the
year ended December 31, 2008 except as noted below. These interim
consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto in the
Company's annual report dated December 31, 2008.
The preparation of financial statements in conformity with Canadian
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities
at the balance sheet date and the reported amounts of revenues and
expenses during the reporting period. The valuation of actuarial
liabilities, certain financial assets and liabilities, goodwill and
indefinite life intangible assets, income taxes and pension plans and
other post retirement benefits are the most significant components of
the Company's financial statements subject to management estimates.
The year to date results of the Company reflect management's
judgments regarding the impact of prevailing global credit, equity
and foreign exchange market conditions. Financial instrument carrying
values currently reflect the illiquidity of the markets and the
liquidity premiums embedded in the market pricing methods the Company
relies upon.
The estimation of actuarial liabilities relies upon investment credit
ratings. The Company's practice is to use third party independent
credit ratings where available. Credit rating changes may lag
developments in the current environment. Subsequent credit rating
adjustments will impact actuarial liabilities.
In addition to the Company's direct investments in certain financial
institutions, the Company has contractual business relationships with
these financial institutions. Given the current uncertainty
associated with these entities, normal business conditions do not
prevail and the Company's contractual business relationships may be
impacted.
Given the uncertainty surrounding the continued volatility in these
markets, and the general lack of liquidity in financial markets, the
actual financial results could differ from those estimates.
(a) Changes in Accounting Policy
Goodwill and Intangible Assets
------------------------------
Effective January 1, 2009, the Company adopted the Canadian
Institute of Chartered Accountants (CICA) Handbook Section
3064, Goodwill and Intangible Assets. This section replaces
existing Section 3062, Goodwill and Other Intangible Assets,
and Section 3450, Research and Development Costs. This section
establishes new standards for the recognition and measurement
of intangible assets, but does not affect the accounting for
goodwill. As a result of the adoption of the new requirements
software costs previously included in other assets have been
reclassified to intangible assets and amortization on software
costs previously included in operating expenses has been
reclassified to amortization of finite life intangible assets.
(b) Comparative Figures
Certain of the 2008 amounts presented for comparative purposes
have been reclassified to conform to the presentation adopted
in the current year as a result of the reclassifications in
note 1(a) and certain other reclassifications. On the
Consolidated Balance Sheets these reclassifications resulted in
a decrease to other assets of $138 with a corresponding
increase to intangible assets at September 30, 2008 and a
decrease to other assets of $151 at December 31, 2008 with a
corresponding increase to intangible assets. On the Summaries
of Consolidated Operations these reclassifications resulted in
a decrease to operating expenses of $24, an increase to the
amortization of finite life intangible assets of $33, a
decrease to commissions of $9 and an increase in total paid or
credited to policyholders of $3 with a corresponding decrease
in income tax expense for the nine months ended September 30,
2008.
2. Acquisitions and Disposals
(a) On April 1, 2008, Great-West Life & Annuity Insurance Company
(GWL&A) completed the sale of its health care business. After-tax
net income of the health care business presented as discontinued
operations on the Summaries of Consolidated Operations is
comprised of the following:
For the For the
three months nine months
ended ended
September September
30, 30,
------------------------
2008 2008
------------------------
Income
Premium income $ - $ 184
Net investment income - 11
Fee and other income - 164
------------------------
- 359
------------------------
Gain on sale - 1,025
------------------------
- 1,384
------------------------
Benefits and expenses
Paid or credited to policyholders and
beneficiaries including policyholder
dividends and experience refunds - 151
Other - 145
------------------------
Net income from discontinued operations
before income taxes - 1,088
Income taxes - 396
------------------------
Net income from discontinued operations $ - $ 692
------------------------
------------------------
As of April 1, 2008 all of the assets and liabilities of
operations held for sale have been sold.
(b) On January 19, 2009, PanAgora, a subsidiary of Putnam LLC, sold
its equity investment in Union PanAgora Asset Management GmbH to
Union Asset Management. Gross proceeds received of approximately
U.S. $77 resulted in a gain to Putnam LLC of approximately U.S.
$33 after taxes and minority interests.
3. Restructuring Costs
The following details the amount and status of the Putnam LLC
restructuring program costs:
Changes
in
Expected Amounts Amounts Amounts foreign Balance
total utilized utilized utilized exchange September
costs - 2007 - 2008 - 2009 rates 30, 2009
------------------------------------------------------
Compensation
costs $ 133 $ (27) $ (76) $ (17) $ 1 $ 14
Exiting and
consolidating
operations 22 (6) (5) - - 11
Eliminating
duplicate
systems 29 (1) - - - 28
------------------------------------------------------
$ 184 $ (34) $ (81) $ (17) $ 1 $ 53
------------------------------------------------------
------------------------------------------------------
Accrued on
acquisition $ 154 $ (34) $ (81) $ (17) $ 1 $ 23
Expense as
incurred 30 - - - - 30
------------------------------------------------------
$ 184 $ (34) $ (81) $ (17) $ 1 $ 53
------------------------------------------------------
------------------------------------------------------
4. Portfolio Investments
(a) Carrying values and estimated market values of portfolio
investments are as follows:
September 30, 2009
-----------------------------------
Carrying Value & Market Value
-----------------------------------
Held for trading(1)
Available ------------------------
for sale Designated Classified
-----------------------------------
Bonds
- government $ 2,925 $ 15,337 $ 824
- corporate 2,197 35,644 981
-----------------------------------
5,122 50,981 1,805
-----------------------------------
Mortgage loans
- residential - - -
- non-
residential - - -
-----------------------------------
- - -
-----------------------------------
Stocks 1,399 4,629 -
Real estate - - -
-----------------------------------
$ 6,521 $ 55,610 $ 1,805
-----------------------------------
-----------------------------------
September 30, 2009
---------------------------------------------------------
Amortized Cost Total
---------------------------------------------------------
Carrying Market Carrying Market
Value Value Value Non- Value Non-
Loans and Loans and financial financial Carrying
receivables receivables instruments instruments value
---------------------------------------------------------
Bonds
- government $ 1,536 $ 1,696 $ - $ - $ 20,622
- corporate 7,712 7,791 - - 46,534
---------------------------------------------------------
9,248 9,487 - - 67,156
---------------------------------------------------------
Mortgage loans
- residential 6,389 6,596 - - 6,389
- non-
residential 10,585 10,575 - - 10,585
---------------------------------------------------------
16,974 17,171 - - 16,974
---------------------------------------------------------
Stocks - - 327 390 6,355
Real estate - - 3,133 2,912 3,133
---------------------------------------------------------
$ 26,222 $ 26,658 $ 3,460 $ 3,302 $ 93,618
---------------------------------------------------------
---------------------------------------------------------
December 31, 2008
-----------------------------------
Carrying Value & Market Value
-----------------------------------
Held for trading(1)
Available ------------------------
for sale Designated Classified
-----------------------------------
Bonds
- government $ 3,594 $ 16,197 $ 836
- corporate 2,051 33,319 849
-----------------------------------
5,645 49,516 1,685
-----------------------------------
Mortgage loans
- residential - - -
- non-
residential - - -
-----------------------------------
- - -
-----------------------------------
Stocks 1,411 3,653 -
Real estate - - -
-----------------------------------
$ 7,056 $ 53,169 $ 1,685
-----------------------------------
-----------------------------------
December 31, 2008
---------------------------------------------------------
Amortized Cost Total
---------------------------------------------------------
Carrying Market Carrying Market
Value Value Value Non- Value Non-
Loans and Loans and financial financial Carrying
receivables receivables instruments instruments value
---------------------------------------------------------
Bonds
- government $ 1,877 $ 1,879 $ - $ - $ 22,504
- corporate 7,831 7,371 - - 44,050
---------------------------------------------------------
9,708 9,250 - - 66,554
---------------------------------------------------------
Mortgage loans
- residential 6,986 7,157 - - 6,986
- non-
residential 10,458 10,414 - - 10,458
---------------------------------------------------------
17,444 17,571 - - 17,444
---------------------------------------------------------
Stocks - - 330 326 5,394
Real estate - - 3,188 3,053 3,188
---------------------------------------------------------
$ 27,152 $ 26,821 $ 3,518 $ 3,379 $ 92,580
---------------------------------------------------------
---------------------------------------------------------
September 30, 2008
-----------------------------------
Carrying Value & Market Value
-----------------------------------
Held for trading(1)
Available ------------------------
for sale Designated Classified
-----------------------------------
Bonds
- government $ 1,839 $ 13,977 $ 516
- corporate 2,127 33,464 1,089
-----------------------------------
3,966 47,441 1,605
-----------------------------------
Mortgage loans
- residential - - -
- non-
residential - - -
-----------------------------------
- - -
-----------------------------------
Stocks 1,348 4,377 -
Real estate - - -
-----------------------------------
$ 5,314 $ 51,818 $ 1,605
-----------------------------------
-----------------------------------
September 30, 2008
---------------------------------------------------------
Amortized Cost Total
---------------------------------------------------------
Carrying Market Carrying Market
Value Value Value Non- Value Non-
Loans and Loans and financial financial Carrying
receivables receivables instruments instruments value
---------------------------------------------------------
Bonds
- government $ 1,716 $ 1,757 $ - $ - $ 18,048
- corporate 7,282 7,096 - - 43,962
---------------------------------------------------------
8,998 8,853 - - 62,010
---------------------------------------------------------
Mortgage loans
- residential 6,992 7,021 - - 6,992
- non-
residential 10,167 9,983 - - 10,167
---------------------------------------------------------
17,159 17,004 - - 17,159
---------------------------------------------------------
Stocks - - 329 354 6,054
Real estate - - 3,230 3,334 3,230
---------------------------------------------------------
$ 26,157 $ 25,857 $ 3,559 $ 3,688 $ 88,453
---------------------------------------------------------
---------------------------------------------------------
(1) Investments can be held for trading in two ways: designated as
held for trading at the option of management; or, classified as
held for trading if they are actively traded for the purpose of
earning investment income.
(b) Included in portfolio investments are the following:
(i) Impaired investments
September 30, 2009
--------------------------------
Gross Carrying
amount Impairment amount
--------------------------------
Impaired amounts by type
Held for trading(1) $ 219 $ (141) $ 78
Available for sale 18 (14) 4
Loans and receivables 153 (84) 69
--------------------------------
Total $ 390 $ (239) $ 151
--------------------------------
--------------------------------
December 31, 2008
--------------------------------
Gross Carrying
amount Impairment amount
--------------------------------
Impaired amounts by type
Held for trading(1) $ 160 $ (138) $ 22
Available for sale 18 (17) 1
Loans and receivables 93 (60) 33
--------------------------------
Total $ 271 $ (215) $ 56
--------------------------------
--------------------------------
September 30, 2008
--------------------------------
Gross Carrying
amount Impairment amount
--------------------------------
Impaired amounts by type
Held for trading(1) $ 156 $ (130) $ 26
Available for sale 7 (7) -
Loans and receivables 52 (50) 2
--------------------------------
Total $ 215 $ (187) $ 28
--------------------------------
--------------------------------
(1) Excludes amounts in funds held by ceding insurers of $10
and impairment of $(4) at September 30, 2009, $15 and
$(11) at December 31, 2008 and $15 and $(12) at
September 30, 2008.
(ii) The allowance for credit losses and changes in the allowance
for credit losses related to investments classified as loans
and receivables are as follows:
For the nine For the nine
months ended months ended
September 30, 2009 September 30, 2008
-----------------------------------------------
Mortgage Mortgage
Bonds loans Total Bonds loans Total
-----------------------------------------------
Balance, beginning of
year $ 31 $ 29 $ 60 $ 34 $ 19 $ 53
Net provision (recovery)
for credit losses - in
year 16 21 37 1 (2) (1)
Write-offs, net of
recoveries (1) (2) (3) (6) 2 (4)
Other (including foreign
exchange rate changes) (5) (5) (10) 1 1 2
-----------------------------------------------
Balance, end of period $ 41 $ 43 $ 84 $ 30 $ 20 $ 50
-----------------------------------------------
-----------------------------------------------
(c) Net investment income is comprised of the following:
For the three
months ended Mortgage Real
September 30, 2009 Bonds loans Stocks estate Other Total
-------------------------------------------------------------------------
Regular net investment
income:
Investment income
earned $1,039 $ 231 $ 38 $ 45 $ 255 $1,608
Net realized gains
(losses) (available
for sale) 10 - (4) - - 6
Net realized gains
(losses) (other
classifications) 3 3 - - - 6
Amortization of net
realized/unrealized
gains (non-financial
instruments) - - - (5) - (5)
Net (provision) recovery
for credit losses
(loans and receivables) - (7) - - - (7)
Other income and expenses - - - - (17) (17)
-----------------------------------------------
1,052 227 34 40 238 1,591
Changes in fair value on
held for trading assets:
Net realized/unrealized
gains (losses)
(classified held for
trading) 28 - - - - 28
Net realized/unrealized
gains (losses)
(designated held for
trading) 3,329 - 381 - (4) 3,706
-----------------------------------------------
3,357 - 381 - (4) 3,734
-----------------------------------------------
Net investment income $4,409 $ 227 $ 415 $ 40 $ 234 $5,325
-----------------------------------------------
-----------------------------------------------
For the three
months ended Mortgage Real
September 30, 2008 Bonds loans Stocks estate Other Total
-------------------------------------------------------------------------
Regular net investment
income:
Investment income
earned $1,079 $ 241 $ 28 $ 46 $ 132 $1,526
Net realized gains
(losses) (available
for sale) 5 - (3) - - 2
Net realized gains
(losses) (other
classifications) 14 12 (6) - - 20
Amortization of net
realized/unrealized
gains (non-financial
instruments) - - - 8 - 8
Net (provision) recovery
for credit losses
(loans and receivables) (1) - - - - (1)
Other income and expenses - - - - (16) (16)
-----------------------------------------------
1,097 253 19 54 116 1,539
Changes in fair value on
held for trading assets:
Net realized/unrealized
gains (losses)
(classified held for
trading) - - - - - -
Net realized/unrealized
gains (losses)
(designated held for
trading) (1,464) - (660) - (134) (2,258)
-----------------------------------------------
(1,464) - (660) - (134) (2,258)
-----------------------------------------------
Net investment income $ (367) $ 253 $ (641) $ 54 $ (18) $ (719)
-----------------------------------------------
-----------------------------------------------
For the nine
months ended Mortgage Real
September 30, 2009 Bonds loans Stocks estate Other Total
-------------------------------------------------------------------------
Regular net investment
income:
Investment income
earned $3,146 $ 694 $ 126 $ 138 $ 579 $4,683
Net realized gains
(losses) (available
for sale) 45 - (4) - - 41
Net realized gains
(losses) (other
classifications) 4 9 83 - - 96
Amortization of net
realized/unrealized
gains (non-financial
instruments) - - - (15) - (15)
Net (provision) recovery
for credit losses
(loans and receivables) (16) (21) - - - (37)
Other income and expenses - - - - (50) (50)
-----------------------------------------------
3,179 682 205 123 529 4,718
Changes in fair value on
held for trading assets:
Net realized/unrealized
gains (losses)
(classified held for
trading) 28 - - - - 28
Net realized/unrealized
gains (losses)
(designated held for
trading) 3,284 - 833 - (106) 4,011
-----------------------------------------------
3,312 - 833 - (106) 4,039
-----------------------------------------------
Net investment income $6,491 $ 682 $1,038 $ 123 $ 423 $8,757
-----------------------------------------------
-----------------------------------------------
For the nine
months ended Mortgage Real
September 30, 2008 Bonds loans Stocks estate Other Total
-------------------------------------------------------------------------
Regular net investment
income:
Investment income
earned $3,066 $ 705 $ 146 $ 123 $ 419 $4,459
Net realized gains
(losses) (available
for sale) 50 - (4) - - 46
Net realized gains
(losses) (other
classifications) 29 23 - - - 52
Amortization of net
realized/unrealized
gains (non-financial
instruments) - - - 28 - 28
Net (provision) recovery
for credit losses
(loans and receivables) (1) 2 - - - 1
Other income and expenses - - - - (47) (47)
-----------------------------------------------
3,144 730 142 151 372 4,539
Changes in fair value on
held for trading assets:
Net realized/unrealized
gains (losses)
(classified held for
trading) 1 - - - - 1
Net realized/unrealized
gains (losses)
(designated held for
trading) (4,029) - (733) - (32) (4,794)
-----------------------------------------------
(4,028) - (733) - (32) (4,793)
-----------------------------------------------
Net investment income $ (884) $ 730 $ (591) $ 151 $ 340 $ (254)
-----------------------------------------------
-----------------------------------------------
Investment income earned is comprised of income from investments that are
classified or designated as held for trading, classified as available for
sale and classified as loans and receivables.
5. Financial Instrument Risk Management
The Company has policies relating to the identification, measurement,
monitoring, mitigating, and controlling of risks associated with
financial instruments. The key risks related to financial instruments
are credit risk, liquidity risk and market risk (currency, interest
rate and equity). The following sections describe how the Company
manages each of these risks.
(a) Credit Risk
Credit risk is the risk of financial loss resulting from the
failure of debtors making payments when due. The following
policies and procedures are in place to manage this risk:
- Investment guidelines are in place that require only the
purchase of investment-grade assets and minimize undue
concentration of assets in any single geographic area, industry
and company.
- Investment guidelines specify minimum and maximum limits for
each asset class. Credit ratings are determined by recognized
external credit rating agencies and/or internal credit review.
- Investment guidelines also specify collateral requirements.
- Portfolios are monitored continuously, and reviewed regularly
with the Boards of Directors or the Investment Committees of
the Boards of Directors.
- Credit risk associated with derivative instruments is evaluated
quarterly based on conditions that existed at the balance sheet
date, using practices that are at least as conservative as
those recommended by regulators.
- The Company is exposed to credit risk relating to premiums due
from policyholders during the grace period specified by the
insurance policy or until the policy is paid up or terminated.
Commissions paid to agents and brokers are netted against
amounts receivable, if any.
- Reinsurance is placed with counterparties that have a good
credit rating and concentration of credit risk is managed by
following policy guidelines set each year by the Board of
Directors. Management continuously monitors and performs an
assessment of creditworthiness of reinsurers.
(i) Maximum Exposure to Credit Risk
The following table summarizes the Company's maximum exposure
to credit risk related to financial instruments. The maximum
credit exposure is the carrying value of the asset net of any
allowances for losses.
September December September
30, 2009 31, 2008 30, 2008
--------------------------------
Cash and cash equivalents $ 3,046 $ 2,850 $ 3,333
Bonds
Held for trading 52,786 51,201 49,046
Available for sale 5,122 5,645 3,966
Amortized cost 9,248 9,708 8,998
Mortgage loans 16,974 17,444 17,159
Loans to policyholders 7,058 7,622 6,814
Other financial assets 14,702 15,004 15,863
Derivative assets 671 677 605
--------------------------------
Total balance sheet maximum
credit exposure $ 109,607 $ 110,151 $ 105,784
--------------------------------
--------------------------------
Credit risk is also mitigated by entering into collateral
agreements. The amount and type of collateral required depends
on an assessment of the credit risk of the counterparty.
Guidelines are implemented regarding the acceptability of types
of collateral and the valuation parameters. Management monitors
the value of the collateral, requests additional collateral
when needed and performs an impairment valuation when
applicable.
(ii) Concentration of Credit Risk
Concentrations of credit risk arise from exposures to a single
debtor, a group of related debtors or groups of debtors that
have similar credit risk characteristics in that they operate
in the same geographic region or in similar industries. The
characteristics are similar in that changes in economic or
political environments may impact their ability to meet
obligations as they come due.
The following table provides details of the carrying value of
bonds by industry sector and geographic distribution:
September December September
30, 2009 31, 2008 30, 2008
--------------------------------
Bonds issued or guaranteed by:
Canadian federal government $ 2,464 $ 1,867 $ 1,358
Canadian provincial and
municipal governments 6,231 6,029 5,591
U.S. Treasury and other U.S.
agencies 3,798 4,968 4,154
Other foreign governments 6,245 6,854 6,035
Government related 2,115 1,563 2,061
Sovereign 1,554 1,739 1,923
Asset-backed securities 7,032 7,243 7,288
Residential mortgage backed
securities 1,015 1,156 1,002
Banks 5,087 5,070 5,400
Other financial institutions 3,891 3,602 3,857
Basic materials 928 870 816
Communications 1,400 1,220 1,178
Consumer products 4,433 4,104 3,854
Industrial products/services 1,421 1,985 1,463
Natural resources 2,325 1,813 1,758
Real estate 1,822 1,645 1,646
Transportations 2,587 2,497 2,444
Utilities 7,986 7,068 6,511
Miscellaneous 2,187 1,866 1,661
--------------------------------
Total long term bonds 64,521 63,159 60,000
Short term bonds 2,635 3,395 2,010
--------------------------------
$ 67,156 $ 66,554 $ 62,010
--------------------------------
--------------------------------
Canada $ 27,578 $ 26,231 $ 24,085
United States 17,491 17,703 15,811
Europe/Reinsurance 22,087 22,620 22,114
--------------------------------
$ 67,156 $ 66,554 $ 62,010
--------------------------------
--------------------------------
The following table provides details of the carrying value of
mortgage loans by geographic location:
September 30, 2009
-------------------------------------------
Single Multi-
family family
residen- residen-
tial tial Commercial Total
-------------------------------------------
Canada $ 1,743 $ 4,127 $ 6,350 $ 12,220
United States - 489 1,454 1,943
Europe/Reinsurance - 30 2,781 2,811
-------------------------------------------
Total mortgage
loans $ 1,743 $ 4,646 $ 10,585 $ 16,974
-------------------------------------------
-------------------------------------------
December 31, 2008
-------------------------------------------
Single Multi-
family family
residen- residen-
tial tial Commercial Total
-------------------------------------------
Canada $ 1,850 $ 4,524 $ 6,144 $ 12,518
United States - 576 1,581 2,157
Europe/Reinsurance - 36 2,733 2,769
-------------------------------------------
Total mortgage
loans $ 1,850 $ 5,136 $ 10,458 $ 17,444
-------------------------------------------
-------------------------------------------
September 30, 2008
-------------------------------------------
Single Multi-
family family
residen- residen-
tial tial Commercial Total
-------------------------------------------
Canada $ 1,836 $ 4,606 $ 6,007 $ 12,449
United States - 519 1,259 1,778
Europe/Reinsurance - 31 2,901 2,932
-------------------------------------------
Total mortgage
loans $ 1,836 $ 5,156 $ 10,167 $ 17,159
-------------------------------------------
-------------------------------------------
(iii) Asset Quality
Bond Portfolio Quality
September December September
30, 2009 31, 2008 30, 2008
--------------------------------
AAA $ 22,643 $ 25,138 $ 23,523
AA 10,752 10,765 11,331
A 19,449 18,030 16,968
BBB 10,588 8,809 7,729
BB and lower 1,089 417 449
--------------------------------
64,521 63,159 60,000
Short term bonds 2,635 3,395 2,010
--------------------------------
Total bonds $ 67,156 $ 66,554 $ 62,010
--------------------------------
--------------------------------
Derivative Portfolio Quality
September December September
30, 2009 31, 2008 30, 2008
--------------------------------
Over-the-counter contracts
(counterparty ratings):
AAA $ 4 $ 19 $ 2
AA 257 165 333
A 441 468 270
--------------------------------
Total $ 702 $ 652 $ 605
--------------------------------
--------------------------------
(iv) Loans Past Due, But Not Impaired
Loans that are past due but not considered impaired are loans
for which scheduled payments have not been received, but
management has reasonable assurance of timely collection of the
full amount of principal and interest due. The following table
provides carrying values of the loans past due, but not
impaired:
September December September
30, 2009 31, 2008 30, 2008
--------------------------------
Less than 30 days $ 48 $ 50 $ 64
30 - 90 days 4 4 2
90 days and greater 10 1 1
--------------------------------
Total $ 62 $ 55 $ 67
--------------------------------
--------------------------------
(b) Liquidity Risk
Liquidity risk is the risk that the Company will not be able to
meet all cash outflow obligations as they come due. The following
policies and procedures are in place to manage this risk:
- The Company closely manages operating liquidity through cash
flow matching of assets and liabilities.
- Management monitors the use of lines of credit on a regular
basis, and assesses the ongoing availability of these and
alternative forms of operating credit.
- Management closely monitors the solvency and capital positions
of its principal subsidiaries opposite liquidity requirements
at the holding company. Additional liquidity is available
through established lines of credit and the Company's
demonstrated ability to access capital markets for funds. The
Company maintains a $200 million committed line of credit with
a Canadian chartered bank.
(c) Market Risk
Market risk is the risk that the fair value or future cash flows
of a financial instrument will fluctuate as a result of changes
in market factors. Market factors include three types of risks:
currency risk, interest rate risk and equity risk.
(i) Currency Risk
Currency risk relates to the Company operating in different
currencies and converting non-Canadian earnings at different
points in time at different foreign exchange levels when
adverse changes in foreign currency exchange rates occur. The
following policies and procedures are in place to mitigate the
Company's exposure to currency risk.
- The Company uses financial measures such as constant currency
calculations to monitor the effect of currency translation
fluctuations.
- Investments are normally made in the same currency as the
liabilities supported by those investments.
- Foreign currency assets acquired to back liabilities are
normally converted back to the currency of the liability
using foreign exchange contracts.
- A 10% weakening of the Canadian dollar against foreign
currencies would be expected to increase non-participating
actuarial liabilities by the same amount as the supporting
assets. A 10% strengthening of the Canadian dollar against
foreign currencies would be expected to decrease non-
participating actuarial liabilities by the same amount as the
supporting assets.
(ii) Interest Rate Risk
Interest rate risk exists if asset and liability cash flows are
not closely matched and interest rates change causing a
difference in value between the asset and liability. The
following policies and procedures are in place to mitigate the
Company's exposure to interest rate risk.
- The Company utilizes a formal process for managing the
matching of assets and liabilities. This involves grouping
general fund assets and liabilities into segments. Assets in
each segment are managed in relation to the liabilities in
the segment.
- Interest rate risk is managed by investing in assets that are
suitable for the products sold.
- For products with fixed and highly predictable benefit
payments, investments are made in fixed income assets that
closely match the liability product cash flows. Protection
against interest rate change is achieved as any change in the
fair market value of the assets will be offset by a similar
change in the fair market value of the liabilities.
- For products with less predictable timing of benefit
payments, investments are made in fixed income assets with
cash flows of a shorter duration than the anticipated timing
of benefit payments, or equities as described below.
- The risk associated with the mismatch in portfolio duration
and cash flow, asset prepayment exposure and the pace of
asset acquisition are quantified and reviewed regularly.
Projected cash flows from the current assets and liabilities
are used in the Canadian Asset Liability Method (CALM) to
determine actuarial liabilities. Cash flows from assets are
reduced to provide for potential asset default losses. Testing
under several interest rate scenarios (including increasing and
decreasing rates) is done to assess reinvestment risk.
One way of measuring the interest rate risk associated with
this assumption is to determine the effect on the present value
of the projected net asset and liability cash flows of the non-
participating business of the Company of an immediate and
permanent 1% increase and 1% decrease in interest rates at each
future duration. These interest rate changes will impact the
projected cash flows.
- The effect of an immediate and permanent 1% increase in
interest rates at each future duration would be to decrease
the present value of these net projected cash flows by
approximately $123.
- The effect of an immediate and permanent 1% decrease in
interest rates at each future duration would be to decrease
the present value of these net projected cash flows by
approximately $28.
(iii) Equity Risk
Equity risk is the uncertainty associated with the valuation of
assets arising from changes in equity markets. To mitigate
price risk, the Company has investment policy guidelines in
place that provide for prudent investment in equity markets
within clearly defined limits.
Some policy liabilities are supported by equities (including
real estate), for example segregated fund products and products
with long-tail liabilities. Generally these liabilities will
fluctuate in line with equity market values. There will be
additional impacts on these liabilities as equity market values
fluctuate. A 10% increase in equity markets would be expected
to additionally decrease non-participating actuarial
liabilities by approximately $19. A 10% decrease in equity
markets would be expected to additionally increase non-
participating actuarial liabilities by approximately $153.
6. Financing Charges
Financing charges consist of the following:
For the three months For the nine months
ended September 30, ended September 30,
-------------------------------------------
2009 2008 2009 2008
-------------------------------------------
Operating charges:
Interest on long-term
debentures and other
debt instruments $ 3 $ 1 $ 5 $ 4
Financial charges:
Interest on long-term
debentures and other
debt instruments 51 47 155 173
Dividends on preferred
shares classified as
liabilities 9 9 27 27
Unrealized losses (gains)
on preferred shares
classified as held
for trading 14 1 46 9
Subordinated debenture
issue costs - - - 5
Other 4 9 8 13
Interest on capital
trust debentures 13 13 37 37
Distributions on
capital trust
securities held by
consolidated group as
temporary investments (1) (4) (4) (9)
-------------------------------------------
90 75 269 255
-------------------------------------------
Total $ 93 $ 76 $ 274 $ 259
-------------------------------------------
-------------------------------------------
7. Debentures and Other Debt Instruments
On June 22, 2009, Putnam LLC executed a new revolving credit facility
agreement with a Canadian chartered bank for US $500, an increase of
US $300 from the previous agreement. At September 30, 2009, a
subsidiary of Putnam LLC had drawn US $255 (US $120 at December 31,
2008) on this credit facility.
8. Capital Trust Securities and Debentures
During the nine months ended September 30, 2009, the Company disposed
of $138 principal amount of capital trust securities held by the
consolidated group as temporary investments.
9. Share Capital
(a) Preferred Shares
The Company recognized the surrender of Series E First Preferred
shares with a carrying value of $5 and Series F First Preferred
shares with a carrying value of $2
The Company has designated outstanding Preferred Shares Series D
and Series E as held for trading on the Consolidated Balance
Sheets with changes in fair value reported in the Summaries of
Consolidated Operations. During the nine months ended September
30, 2009 the Company recognized unrealized gains (losses) of $(5)
for Series D and $(41) for Series E (for the nine months ended
September 30, 2008, $3 for Series D and $(12) for Series E). The
redemption price at maturity is $25 per share plus accrued
dividends.
(b) Common Shares
Issued and outstanding
September 30, 2009 December 31, 2008 September 30, 2008
--------------------------------------------------------------
Carrying Carrying Carrying
Number value Number value Number value
--------------------------------------------------------------
Common
shares:
Balance,
beginning
of year 943,882,505 $5,736 893,761,639 $4,709 893,761,639 $4,709
Issued from
treasury - - 48,200,000 1,000 - -
Issued
under stock
option plan 814,469 11 1,920,866 27 1,759,600 24
--------------------------------------------------------------
Balance,
end of
period 944,696,974 $5,747 943,882,505 $5,736 895,521,239 $4,733
--------------------------------------------------------------
--------------------------------------------------------------
10. Capital Management
At the holding company level, the Company monitors the amount of
consolidated capital available, and the amounts deployed in its
various operating subsidiaries. The amount of capital deployed in any
particular company or country is dependent upon local regulatory
requirements as well as the Company's internal assessment of capital
requirements in the context of its operational risks and
requirements, and strategic plans.
Since the timing of available funds cannot always be matched
precisely to commitments, imbalances may arise when demands for funds
exceed those on hand. Also, a demand for funds may arise as a result
of the Company taking advantage of current investment opportunities.
The sources of the funds that may be required in such situations
include bank financing and the issuance of debentures and equity
securities.
The Company's practice is to maintain the capitalization of its
regulated operating subsidiaries at a level that will exceed the
relevant minimum regulatory capital requirements in the jurisdictions
in which they operate.
In Canada, the Office of the Superintendent of the Financial
Institutions (OSFI) has established a capital adequacy measurement
for life insurance companies incorporated under the Insurance
Companies Act (Canada) and their subsidiaries, known as the Minimum
Continuing Capital and Surplus Requirements (MCCSR).
For Canadian regulatory reporting purposes, capital is defined by
OSFI in its MCCSR guideline. The following table provides the MCCSR
information and ratios for The Great-West Life Assurance Company
(Great-West Life):
September December September
30, 2009 31, 2008 30, 2008
--------------------------------
Capital Available:
Tier 1 Capital
Common shares(1) $ 6,116 $ 6,116 $ 6,116
Shareholder surplus 5,876 5,604 5,394
Qualifying non-controlling
interests 148 150 150
Innovative instruments 777 648 637
Other Tier 1 Capital Elements 1,083 1,513 1,372
--------------------------------
Gross Tier 1 Capital 14,000 14,031 13,669
Deductions from Tier 1:
Goodwill & intangible assets in
excess of limit 5,683 5,673 5,689
Other deductions 1,509 1,697 1,355
--------------------------------
Net Tier 1 Capital 6,808 6,661 6,625
Adjustment to Net Tier 1 Capital (43) - -
--------------------------------
Net Tier 1 Capital 6,765 6,661 6,625
--------------------------------
Tier 2 Capital
Tier 2A 359 345 273
Tier 2B allowed 300 300 500
Tier 2C 1,448 1,550 1,324
Tier 2 Deductions (43) - -
--------------------------------
Tier 2 Capital Allowed 2,064 2,195 2,097
--------------------------------
Total Tier 1 and Tier 2 Capital 8,829 8,856 8,722
Less: Deductions/Adjustments - 124 127
--------------------------------
Total Available Capital $ 8,829 $ 8,732 $ 8,595
--------------------------------
--------------------------------
Capital Required:
Assets Default & market risk $ 1,732 $ 1,510 $ 1,581
Insurance Risks 1,831 1,800 1,711
Interest Rate Risks 832 803 961
Other 14 50 (19)
--------------------------------
Total Capital Required $ 4,409 $ 4,163 $ 4,234
--------------------------------
--------------------------------
MCCSR ratios:
Tier 1 153% 160% 156%
--------------------------------
--------------------------------
Total 200% 210% 203%
--------------------------------
--------------------------------
(1) The $1,230 of common and preferred share capital that was raised
by the Company in the fourth quarter of 2008 remained at the
holding company as at September 30, 2009.
In the United States, GWL&A is subject to comprehensive state and
federal regulation and supervision throughout the United States. The
National Association of Insurance Commissioners (NAIC) has adopted
risk-based capital rules and other financial ratios for U.S. life
insurance companies. At the end of 2008 the risk-based capital (RBC)
ratio for GWL&A was 381%, in excess of that required by NAIC.
As at September 30, 2009 and 2008 the Company maintained capital
levels above the minimum local requirements in its other foreign
operations.
The Company is both a user and a provider of reinsurance, including
both traditional reinsurance, which is undertaken primarily to
mitigate against assumed insurance risks, and financial or finite
reinsurance, under which the amount of insurance risk passed to the
reinsurer or its reinsureds may be more limited.
The capitalization of the Company and its operating subsidiaries will
also take into account the views expressed by the various credit
rating agencies that provide financial strength and other ratings to
the Company.
The Company has also established policies and procedures designed to
identify, measure and report all material risks. Management is
responsible for establishing capital management procedures for
implementing and monitoring the capital plan. The Board of Directors
reviews and approves all capital transactions undertaken by
management.
11. Stock Based Compensation
No options were granted under the Company's stock option plan during
the first three quarters of 2009 (110,000 options were granted during
the first quarter of 2008, 3,115,000 options were granted during the
second quarter of 2008, and 933,270 options were granted during the
third quarter of 2008). The weighted average fair value of options
granted was $3.11 per option during the nine months ended September
30, 2008. Compensation expense of $6 after-tax has been recognized in
the Summaries of Consolidated Operations for the nine months ended
September 30, 2009 ($8 after-tax for the nine months ended September
30, 2008).
12. Pension Plans and Other Post-Retirement Benefits
The total benefit costs included in operating expenses are as
follows:
For the three months For the nine months
ended September 30, ended September 30,
-------------------------------------------
2009 2008 2009 2008
-------------------------------------------
Pension benefits $ 15 $ 9 $ 51 $ 43
Other benefits 3 4 9 11
-------------------------------------------
Total $ 18 $ 13 $ 60 $ 54
-------------------------------------------
-------------------------------------------
13. Earnings per Common Share
The following table provides the reconciliation between basic and
diluted earnings per common share:
For the three months For the nine months
ended September 30, ended September 30,
---------------------------------------------------
2009 2008 2009 2008
---------------------------------------------------
Earnings
Net income from
continuing
operations $ 462 $ 450 $ 1,236 $ 1,653
Net income from
discontinued
operations - - - 692
---------------------------------------------------
Net income $ 462 $ 450 $ 1,236 $ 2,345
Perpetual preferred
share dividends 17 14 52 42
---------------------------------------------------
Net income - common
shareholders $ 445 $ 436 $ 1,184 $ 2,303
---------------------------------------------------
---------------------------------------------------
Number of common
shares
Average number of
common shares
outstanding 944,465,294 894,580,690 944,194,267 894,243,179
Add:
- Potential
exercise of
outstanding
stock options 2,157,507 3,981,236 1,423,061 4,349,332
---------------------------------------------------
Average number
of common shares
outstanding
- diluted basis 946,622,801 898,561,926 945,617,328 898,592,511
---------------------------------------------------
---------------------------------------------------
Basic earnings per
common share
From continuing
operations $ 0.471 $ 0.487 $ 1.254 $ 1.801
From discontinued
operations - - - 0.774
---------------------------------------------------
$ 0.471 $ 0.487 $ 1.254 $ 2.575
---------------------------------------------------
---------------------------------------------------
Diluted earnings
per common share
From continuing
operations $ 0.470 $ 0.485 $ 1.253 $ 1.793
From discontinuing
operations - - - 0.770
---------------------------------------------------
$ 0.470 $ 0.485 $ 1.253 $ 2.563
---------------------------------------------------
---------------------------------------------------
14. Accumulated Other Comprehensive Loss
For the nine months ended September 30, 2009
-------------------------------------------------------------
Unrealized
foreign Unreal-
exchange ized Unreal-
gains gains ized
(losses) (losses) gains
on trans- on (losses) Non-
lation of available on cash contr-
foreign for sale flow olling Share-
operations assets hedges Total interest holder
-------------------------------------------------------------
Balance,
beginning
of year $ (605) $ (36) $ (197) $ (838) $ 51 $ (787)
Other
comprehensive
loss (896) 108 183 (605) 12 (593)
Income tax (1) (42) (64) (107) 5 (102)
-------------------------------------------------------------
(897) 66 119 (712) 17 (695)
-------------------------------------------------------------
Balance, end
of period $ (1,502) $ 30 $ (78) $ (1,550) $ 68 $ (1,482)
-------------------------------------------------------------
-------------------------------------------------------------
For the nine months ended September 30, 2008
-------------------------------------------------------------
Unrealized
foreign Unreal-
exchange ized Unreal-
gains gains ized
(losses) (losses) gains
on trans- on (losses) Non-
lation of available on cash contr-
foreign for sale flow olling Share-
operations assets hedges Total interest holder
-------------------------------------------------------------
Balance,
beginning
of year $ (1,801) $ 174 $ 13 $ (1,614) $ 81 $ (1,533)
Other
comprehensive
loss 326 (322) (112) (108) 2 (106)
Income tax - 93 40 133 (3) 130
-------------------------------------------------------------
326 (229) (72) 25 (1) 24
-------------------------------------------------------------
Balance, end
of period $ (1,475) $ (55) $ (59) $ (1,589) $ 80 $ (1,509)
-------------------------------------------------------------
-------------------------------------------------------------
15. Contingent Liabilities (changes since December 31, 2008 annual
report)
A subsidiary of the Company has concluded an arbitration relating to
the interpretation of certain provisions of a reinsurance treaty. The
results of the arbitration award fall within the amount of the
established actuarial provision.
The trial of the class proceedings in Ontario regarding the
participation of the London Life Insurance Company and The Great-West
Life Assurance Company (Great-West Life) participating accounts in
the financing of the acquisition of London Insurance Group Inc. in
1997 by Great-West Life has commenced.
16. Segmented Information
Consolidated Operations
For the three months ended September 30, 2009
United Lifeco
Canada States Europe Corporate Total
------------------------------------------------------
Income:
Premium
income $ 2,243 $ 724 $ 1,369 $ - $ 4,336
Net
investment
income
Regular net
investment
income 689 390 501 11 1,591
Changes in
fair value
on held for
trading
assets 1,012 671 2,051 - 3,734
------------------------------------------------------
Total net
investment
income 1,701 1,061 2,552 11 5,325
Fee and other
income 238 308 182 - 728
------------------------------------------------------
Total income 4,182 2,093 4,103 11 10,389
------------------------------------------------------
Benefits and
expenses:
Paid or
credited to
policyholders 3,353 1,618 3,716 - 8,687
Other 559 381 174 3 1,117
Amortization
of finite life
intangible
assets 9 11 1 - 21
------------------------------------------------------
Net income from
continuing
operations
before income
taxes 261 83 212 8 564
Income taxes 39 15 38 6 98
------------------------------------------------------
Net income before
non-controlling
interests 222 68 174 2 466
Non-controlling
interests - - 4 - 4
------------------------------------------------------
Net income from
continuing
operations 222 68 170 2 462
Net income from
discontinued
operations - - - - -
------------------------------------------------------
Net Income 222 68 170 2 462
Perpetual
preferred share
dividends 10 - 3 4 17
------------------------------------------------------
Net income
- common
shareholders $ 212 $ 68 $ 167 $ (2) $ 445
------------------------------------------------------
------------------------------------------------------
For the three months ended September 30, 2008
United Lifeco
Canada States Europe Corporate Total
------------------------------------------------------
Income:
Premium
income $ 1,949 $ 479 $ 1,484 $ - $ 3,912
Net
investment
income
Regular net
investment
income 609 331 597 2 1,539
Changes in
fair value
on held for
trading
assets (1,392) (398) (468) - (2,258)
------------------------------------------------------
Total net
investment
income (783) (67) 129 2 (719)
Fee and other
income 262 353 163 - 778
------------------------------------------------------
Total income 1,428 765 1,776 2 3,971
------------------------------------------------------
Benefits and
expenses:
Paid or
credited to
policyholders 436 343 1,397 - 2,176
Other 529 385 214 1 1,129
Amortization
of finite life
intangible
assets 8 11 1 - 20
------------------------------------------------------
Net income from
continuing
operations
before income
taxes 455 26 164 1 646
Income taxes 187 (17) 15 (1) 184
------------------------------------------------------
Net income before
non-controlling
interests 268 43 149 2 462
Non-controlling
interests 6 - 6 - 12
------------------------------------------------------
Net income from
continuing
operations 262 43 143 2 450
Net income from
discontinued
operations - - - - -
------------------------------------------------------
Net Income 262 43 143 2 450
Perpetual
preferred share
dividends 11 - 3 - 14
------------------------------------------------------
Net income
- common
shareholders $ 251 $ 43 $ 140 $ 2 $ 436
------------------------------------------------------
------------------------------------------------------
For the nine months ended September 30, 2009
United Lifeco
Canada States Europe Corporate Total
------------------------------------------------------
Income:
Premium
income $ 6,560 $ 2,288 $ 4,861 $ - $ 13,709
Net
investment
income
Regular net
investment
income 1,977 1,189 1,534 18 4,718
Changes in
fair value
on held for
trading
assets 1,495 996 1,548 - 4,039
------------------------------------------------------
Total net
investment
income 3,472 2,185 3,082 18 8,757
Fee and other
income 689 882 503 - 2,074
------------------------------------------------------
Total income 10,721 5,355 8,446 18 24,540
------------------------------------------------------
Benefits and
expenses:
Paid or
credited to
policyholders 8,121 3,925 7,480 - 19,526
Other 1,675 1,137 550 10 3,372
Amortization
of finite life
intangible
assets 24 40 4 - 68
------------------------------------------------------
Net income from
continuing
operations
before income
taxes 901 253 412 8 1,574
Income taxes 202 55 35 6 298
------------------------------------------------------
Net income before
non-controlling
interests 699 198 377 2 1,276
Non-controlling
interests 31 6 3 - 40
------------------------------------------------------
Net income from
continuing
operations 668 192 374 2 1,236
Net income from
discontinued
operations - - - - -
------------------------------------------------------
Net Income 668 192 374 2 1,236
Perpetual
preferred share
dividends 31 - 10 11 52
------------------------------------------------------
Net income
- common
shareholders $ 637 $ 192 $ 364 $ (9) $ 1,184
------------------------------------------------------
------------------------------------------------------
For the nine months ended September 30, 2008
United Lifeco
Canada States Europe Corporate Total
------------------------------------------------------
Income:
Premium
income $ 5,998 $ 1,805 $ 17,422 $ - $ 25,225
Net
investment
income
Regular net
investment
income 1,873 977 1,692 (3) 4,539
Changes in
fair value
on held for
trading
assets (1,560) (1,005) (2,228) - (4,793)
------------------------------------------------------
Total net
investment
income 313 (28) (536) (3) (254)
Fee and other
income 804 1,107 470 - 2,381
------------------------------------------------------
Total income 7,115 2,884 17,356 (3) 27,352
------------------------------------------------------
Benefits and
expenses:
Paid or
credited to
policyholders 4,238 1,533 16,191 - 21,962
Other 1,647 1,131 542 9 3,329
Amortization
of finite life
intangible
assets 22 38 3 - 63
------------------------------------------------------
Net income from
continuing
operations
before income
taxes 1,208 182 620 (12) 1,998
Income taxes 351 12 101 (1) 463
------------------------------------------------------
Net income before
non-controlling
interests 857 170 519 (11) 1,535
Non-controlling
interests 50 (175) 7 - (118)
------------------------------------------------------
Net income from
continuing
operations 807 345 512 (11) 1,653
Net income from
discontinued
operations - 692 - - 692
------------------------------------------------------
Net Income 807 1,037 512 (11) 2,345
Perpetual
preferred share
dividends 32 - 10 - 42
------------------------------------------------------
Net income
- common
shareholders $ 775 $ 1,037 $ 502 $ (11) $ 2,303
------------------------------------------------------
------------------------------------------------------
17. Subsequent Events
(a) On October 2, 2009 the Company issued 6,800,000 Series L, 5.65%
Non-Cumulative First Preferred Shares at $25 per share. The
shares are redeemable at the option of the Company on and after
December 31, 2014 for $25 per share plus a premium if redeemed
prior to December 31, 2018, in each case with all declared and
unpaid dividends to but excluding the date of redemption.
(b) The Company has entered into an agreement to settle a class
action relating to the provision of notice of the acquisition of
Canada Life Financial Corporation to certain shareholders of
Canada Life Financial Corporation. The agreement requires
approval of the Court before it is final. Based on information
presently known, this matter is not expected to have a material
adverse effect on the consolidated financial position of the
Company.
(c) On November 3, 2009, the Royal Bank of Scotland Group PLC (RBS)
and Lloyds Banking Group (Lloyds) announced capital and
restructuring plans which contemplate the deferral of coupons and
extensions of anticipated redemption dates on some capital
securities. The Company believes that some, but not all, of its
investment holdings in these issuers may be affected by these
plans. The instruments most likely to be impacted are the Upper
Tier 2 and Tier 1 Capital Securities. As at September 30, 2009,
the Company held the following Upper Tier 2 and Tier 1 Capital
Securities of these companies.
Amortized Market
Cost Value
--------------------------
Royal Bank of Scotland $ 473* $ 294
Lloyds Banking Group $ 567* $ 374
The Company currently holds provisions of $306 against these
securities.
* These are all cumulative instruments, except for $96 of holdings
in Lloyds which are non cumulative.
There is uncertainty regarding the impact on these securities of the
announcements. Therefore management is not yet able to determine the
impact, if any, on the Company.
For further information: Marlene Klassen, APR, Assistant Vice-President, Communication Services, (204) 946-7705
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