Great-West Lifeco reports third quarter 2010 results
TSX:GWO
Readers are referred to the cautionary notes regarding Forward-Looking Information and Non-GAAP Financial Measures at the end of this release. All figures are expressed in Canadian dollars.
TORONTO, Nov. 10, 2010 /CNW/ - Great-West Lifeco Inc. (Lifeco) has reported operating earnings attributable to common shareholders of $479 million for the three months ended September 30, 2010, compared to $445 million in the third quarter of 2009. On a per share basis, this represents $0.505 per common share for the three months ended September 30, 2010, compared to $0.471 per common share for the same period in 2009.
For the nine months ended September 30, 2010, operating earnings attributable to common shareholders were $1,353 million, compared to $1,184 million a year ago, an increase of 14%. On a per share basis, this represents $1.429 per common share ($1.427 diluted) for 2010, compared to $1.254 per common share ($1.253 diluted) a year ago.
Operating earnings, a non-GAAP financial measure, exclude the impact of an incremental litigation provision established in the quarter in the amount of $225 million after-tax ($204 million attributable to the common shareholders or $0.216 per common share and $21 million to non controlling interests).
Net earnings attributable to common shareholders, as reported, were $275 million, or $0.289 per common share ($0.289 diluted) for the third quarter, and $1,149 million, or $1.213 per common share ($1.211 diluted) for the nine months ended September 30, 2010.
The Company continued to achieve solid operating results for the quarter in all business segments despite continued currency head winds due to the strengthening of the Canadian dollar against the U.S. dollar, British pound and the euro in 2010. For the three months ended September 30, 2010, the negative currency impact on Lifeco's net earnings was $22 million or $0.024 per common share compared to the same period in 2009. For the nine months ended September 30, 2010, the negative currency impact on net earnings was $86 million or $0.091 per common share compared to 2009.
Consolidated assets under administration at September 30, 2010 were $485.7 billion, up $27.1 billion from December 31, 2009.
Highlights
- In quarter operating earnings grew by 8% in Canadian dollars and by
13% on a constant currency basis when compared to 2009.
- The Company achieved strong organic sales growth in the quarter
with new annualized premiums, in local currency, up 27% over 2009.
- Sales in Canada continue to be very strong, with individual life
insurance sales 21% higher and group insurance sales 19% higher in
the quarter compared to the third quarter of 2009.
- Sales in the U.S. Financial Services business increased 41% on a
constant currency basis in the quarter compared to the same quarter
in 2009.
- Putnam sales are 35% higher than the third quarter of 2009 on a
constant currency basis and the Putnam suite of absolute return
mutual funds reached US$2.5 billion in assets under management.
- U.K. sales increased 45% on a constant currency basis in the quarter
compared to the same quarter in 2009.
- Return on common shareholders' equity was 15.5% on operating earnings
and 13.8% on net earnings.
- The Company declared a quarterly common dividend of $0.3075 per
common share payable December 31, 2010, unchanged from the previous
quarter.
- 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 202% at September 30, 2010. At
September 30, 2010 Lifeco held, at the holding company level,
approximately $0.8 billion in liquid assets derived from capital
raising initiatives since the fourth quarter of 2008, which is not
reflected in the Great-West Life MCCSR ratio.
SEGMENTED OPERATING RESULTS
Consolidated net earnings for Lifeco comprise the net earnings 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 earnings attributable to common shareholders for the third quarter of 2010 were up 9% to $232 million compared to $212 million in the third quarter of 2009. For the nine months ended September 30, 2010, net earnings attributable to common shareholders were up 10% to $702 million compared to $637 million in 2009.
Total sales for the nine months ended September 30, 2010 were up 31% to $7.0 billion compared to $5.3 billion after adjusting the 2009 nine month period for the impact of the group retirement assets acquired from Fidelity Investments Canada. This growth was driven by strong sales of proprietary retail investment funds which were up 47%, payout annuity products which were up 42% and individual life product sales which increased 28% compared to the nine month period in 2009.
Total assets under administration at September 30, 2010 were $122.4 billion, compared to $114.6 billion at December 31, 2009.
UNITED STATES
Net earnings attributable to common shareholders for the third quarter of 2010 were $88 million compared to $68 million in the third quarter of 2009. For the nine months ended September 30, 2010, net earnings attributable to common shareholders were $210 million compared to $192 million in 2009.
As a result of currency movement, net earnings were negatively impacted by $5 million compared to the third quarter of 2009 and by $26 million compared to the first nine months of 2009. On a constant currency basis net earnings grew by 35% in the third quarter of 2010 and by 23% for the first nine months of 2010 when compared to the same periods in 2009.
Total sales for the nine months ended September 30, 2010 were $29.5 billion compared to $22.9 billion in 2009.
Total assets under administration at September 30, 2010 were $295.7 billion compared to $277.8 billion at December 31, 2009. Included in assets under administration at September 30, 2010 were $123.3 billion of mutual fund and institutional account assets managed by Putnam.
EUROPE
Net earnings attributable to common shareholders for the third quarter of 2010 were $158 million compared to $167 million in the third quarter of 2009. For the nine months ended September 30, 2010, net earnings attributable to common shareholders were $440 million compared to $364 million in 2009.
As a result of currency movement, net earnings were negatively impacted by $17 million when compared to the third quarter of 2009 and by $60 million when compared to the first nine months of 2009. On a constant currency basis net earnings grew 5% in the third quarter of 2010 and by 37% for the first nine months of 2010 when compared to the same period in 2009.
Total sales for the nine months ended September 30, 2010 were $3.2 billion, compared to $3.0 billion in 2009. Sales increased by 21% in local currency, however, this was largely offset by the negative effect of currency movement.
Total assets under administration at September 30, 2010 were $67.6 billion, compared to $66.2 billion at December 31, 2009.
CORPORATE
Corporate net earnings for Lifeco attributable to common shareholders was a net loss of $203 million for both the third quarter and the nine months ended September 30, 2010, including the impact of the litigation provision, compared to a net loss of $2 million in the third quarter of 2009 and a net loss of $9 million for the nine months ended September 30, 2009.
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, 2010 to shareholders of record at the close of business December 3, 2010.
In addition, the Directors approved quarterly dividends on:
- Series F First Preferred Shares of $0.36875 per share;
- Series G First Preferred Shares of $0.3250 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;
- Series L First Preferred Shares of $0.353125 per share; and
- Series M First Preferred Shares of $0.36250 per share
all payable December 31, 2010 to shareholders of record at the close of
business December 3, 2010.
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 over $485 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 action by the Company 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 2009 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 "operating earnings", "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 and audio webcast will be held Wednesday, November 10, 2010 at 3:30 p.m. (EST). The call and webcast can be accessed through www.greatwestlifeco.com or by phone at:
- Participants in the Toronto area: 416-340-8018
- Participants from North America: 1-866-223-7781
- Participants from Overseas: Dial international access code first,
then 800-6578-9898
A replay of the call will be available from November 10 to November 17, 2010, and can be accessed by calling 1-800-408-3053 or 416-695-5800 in Toronto (passcode: 1316752 followed by the number sign). The archived webcast will be available on www.greatwestlifeco.com from approximately 7:00 p.m. (EST) on November 10, 2010 until November 9, 2011.
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 2010 30 2010 30 2009 30 2010 30 2009
-------------------------------------------------------------------------
Premiums and deposits:
Life insurance,
guaranteed
annuities and
insured health
products $ 4,313 $ 4,215 $ 4,336 $ 13,138 $ 13,709
Self-funded
premium
equivalents
(ASO contracts) 619 657 610 1,921 1,867
Segregated funds
deposits:
Individual
products 1,703 1,633 1,236 5,126 4,193
Group products 1,340 2,335 2,325 5,405 6,844
Proprietary mutual
funds and
institutional
deposits 6,407 5,389 5,045 17,987 15,465
------------------------------------------------------
Total premiums
and deposits 14,382 14,229 13,552 43,577 42,078
------------------------------------------------------
Fee and other
income 691 718 728 2,145 2,074
Paid or credited
to policyholders 7,317 5,622 8,687 19,510 19,526
Operating earnings -
common
shareholders 479 433 445 1,353 1,184
Net earnings -
common
shareholders 275 433 445 1,149 1,184
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-------------------------------------------------------------------------
Per common share
Operating
earnings $ 0.505 $ 0.457 $ 0.471 $ 1.429 $ 1.254
Basic earnings 0.289 0.457 0.471 1.213 1.254
Dividends paid 0.3075 0.3075 0.3075 0.9225 0.9225
Book value 12.35 12.30 12.21
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-------------------------------------------------------------------------
Return on common
shareholders'
equity (12 months):
Operating earnings 15.5% 15.2% 13.7%
Net earnings 13.8% 15.2% 2.4%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total assets $ 135,567 $ 131,320 $ 129,813
Segregated funds
net assets 92,167 87,023 86,640
Proprietary
mutual funds and
institutional
net assets 126,362 119,069 124,272
--------------------------------
Total assets
under
management 354,096 337,412 340,725
Other assets
under
administration 131,557 122,778 114,145
--------------------------------
Total assets
under
administration $ 485,653 $ 460,190 $ 454,870
--------------------------------
--------------------------------
Share capital
and surplus $ 13,361 $ 13,309 $ 12,861
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-------------------------------------------------------------------------
The Company uses operating earnings as a non-GAAP financial measure
of earnings performance, which reflects the litigation provision
described in Note 12 (a) to the September 30, 2010 financial
statements.
SUMMARIES OF CONSOLIDATED OPERATIONS (unaudited)
(in $ millions except per share amounts)
For the For the
three months ended nine months ended
------------------------------------------------------
September June September September September
30 2010 30 2010 30 2009 30 2010 30 2009
------------------------------------------------------
Income
Premium income $ 4,313 $ 4,215 $ 4,336 $ 13,138 $ 13,709
Net investment
income (note 2)
Regular net
investment
income 1,504 1,342 1,591 4,268 4,718
Changes in fair
value on held
for trading
assets 2,595 1,091 3,734 5,188 4,039
------------------------------------------------------
Total net
investment
income 4,099 2,433 5,325 9,456 8,757
Fee and other
income 691 718 728 2,145 2,074
------------------------------------------------------
9,103 7,366 10,389 24,739 24,540
------------------------------------------------------
Benefits and
expenses
Policyholder
benefits 3,556 3,861 3,918 11,305 12,653
Policyholder
dividends and
experience
refunds 382 351 382 1,116 1,151
Change in
actuarial
liabilities 3,379 1,410 4,387 7,089 5,722
------------------------------------------------------
Total paid or
credited to
policyholders 7,317 5,622 8,687 19,510 19,526
Commissions 366 364 319 1,093 979
Operating
expenses 970 629 636 2,229 1,927
Premium taxes 71 61 69 197 192
Financing charges
(note 4) 73 70 93 212 274
Amortization of
finite life
intangible
assets 22 24 21 69 68
------------------------------------------------------
Earnings before
income taxes 284 596 564 1,429 1,574
Income taxes
- current (33) (19) (43) (51) 60
- future 18 134 141 237 238
------------------------------------------------------
Net earnings before
non-controlling
interests 299 481 466 1,243 1,276
Non-controlling
interests 2 26 4 30 40
------------------------------------------------------
Net earnings 297 455 462 1,213 1,236
Perpetual
preferred share
dividends 22 22 17 64 52
------------------------------------------------------
Net earnings -
common
shareholders $ 275 $ 433 $ 445 $ 1,149 $ 1,184
------------------------------------------------------
------------------------------------------------------
Earnings per
common share
(note 10)
Basic $ 0.289 $ 0.457 $ 0.471 $ 1.213 $ 1.254
------------------------------------------------------
------------------------------------------------------
Diluted $ 0.289 $ 0.457 $ 0.470 $ 1.211 $ 1.253
------------------------------------------------------
------------------------------------------------------
CONSOLIDATED BALANCE SHEETS (unaudited)
(in $ millions)
September December September
30 2010 31 2009 30 2009
--------------------------------
Assets
Bonds (note 2) $ 73,513 $ 66,147 $ 67,156
Mortgage loans (note 2) 16,519 16,684 16,974
Stocks (note 2) 7,032 6,442 6,355
Real estate (note 2) 3,250 3,099 3,133
Loans to policyholders 6,926 6,957 7,058
Cash and cash equivalents 2,665 3,427 3,046
Funds held by ceding insurers 10,777 10,839 11,258
Goodwill 5,402 5,406 5,409
Intangible assets 3,180 3,238 3,283
Other assets 6,303 6,130 6,141
--------------------------------
Total assets $ 135,567 $ 128,369 $ 129,813
--------------------------------
--------------------------------
Liabilities
Policy liabilities
Actuarial liabilities $ 103,381 $ 98,059 $ 99,033
Provision for claims 1,263 1,308 1,253
Provision for policyholder dividends 645 606 651
Provision for experience rating refunds 311 317 322
Policyholder funds 2,431 2,361 2,321
--------------------------------
108,031 102,651 103,580
Debentures and other debt instruments 4,413 4,142 3,817
Funds held under reinsurance contracts 369 186 122
Other liabilities 5,247 4,608 4,636
Repurchase agreements 1,049 532 699
Deferred net realized gains 118 133 140
--------------------------------
119,227 112,252 112,994
Preferred shares (note 6) - 203 793
Capital trust securities and debentures 534 540 782
Non-controlling interests
Participating account surplus in
subsidiaries 2,052 2,004 2,018
Preferred shares issued by subsidiaries 157 157 157
Perpetual preferred shares issued by
subsidiaries 146 147 148
Non-controlling interests in capital
stock and surplus 90 63 60
Share capital and surplus
Share capital (note 6)
Perpetual preferred shares 1,647 1,497 1,327
Common shares 5,794 5,751 5,747
Accumulated surplus 7,638 7,367 7,219
Accumulated other comprehensive loss (1,773) (1,664) (1,482)
Contributed surplus 55 52 50
--------------------------------
13,361 13,003 12,861
--------------------------------
Total liabilities, share capital
and surplus $ 135,567 $ 128,369 $ 129,813
--------------------------------
--------------------------------
CONSOLIDATED STATEMENTS OF SURPLUS (unaudited)
(in $ millions)
For the nine months
ended September 30
---------------------
2010 2009
---------------------
Accumulated surplus
Balance, beginning of year $ 7,367 $ 6,906
Net earnings 1,213 1,236
Share issue costs (3) -
Dividends to shareholders
Perpetual preferred shareholders (64) (52)
Common shareholders (875) (871)
---------------------
Balance, end of period $ 7,638 $ 7,219
---------------------
---------------------
Accumulated other comprehensive loss,
net of income taxes
Balance, beginning of year $ (1,664) $ (787)
Other comprehensive loss (109) (695)
---------------------
Balance, end of period $ (1,773) $ (1,482)
---------------------
---------------------
Contributed surplus
Balance, beginning of year $ 52 $ 44
Stock option expense
Current period expense (note 8) 4 6
Exercised (1) -
---------------------
Balance, end of period $ 55 $ 50
---------------------
---------------------
SUMMARIES OF CONSOLIDATED COMPREHENSIVE INCOME (unaudited)
(in $ millions)
For the three months For the nine months
ended September 30 ended September 30
-------------------------------------------
2010 2009 2010 2009
-------------------------------------------
Net earnings $ 297 $ 462 $ 1,213 $ 1,236
Other comprehensive income
(loss)
Unrealized foreign exchange
gains (losses) on
translation of foreign
operations (35) (767) (268) (896)
Income tax (expense)
benefit - - - (1)
Unrealized gains (losses) on
available for sale assets 136 172 299 149
Income tax (expense)
benefit (34) (42) (74) (48)
Realized (gains) losses on
available for sale assets (27) (6) (36) (41)
Income tax expense
(benefit) 3 - 7 6
Unrealized gains (losses)
on cash flow hedges 50 108 (16) 197
Income tax (expense)
benefit (17) (38) 6 (69)
Realized (gains) losses on
cash flow hedges 2 1 2 (14)
Income tax expense
(benefit) (1) - (1) 5
Non-controlling interests (13) (4) (28) 12
Income tax (expense)
benefit - 5 - 5
-------------------------------------------
64 (571) (109) (695)
-------------------------------------------
Comprehensive income $ 361 $ (109) $ 1,104 $ 541
-------------------------------------------
-------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in $ millions)
For the three months For the nine months
ended September 30 ended September 30
-------------------------------------------
2010 2009 2010 2009
-------------------------------------------
Operations
Net earnings $ 297 $ 462 $ 1,213 $ 1,236
Adjustments:
Change in policy
liabilities 3,495 4,277 7,248 5,505
Change in funds held by
ceding insurers 109 127 384 337
Change in funds held under
reinsurance contracts 26 (27) 192 (38)
Change in current income
taxes payable (37) (149) (12) (356)
Future income tax expense 18 141 237 238
Changes in fair value of
financial instruments (2,595) (3,720) (5,190) (3,993)
Other 341 (377) 96 (373)
-------------------------------------------
Cash flows from operations 1,654 734 4,168 2,556
Financing Activities
Issue of common shares 4 6 43 11
Issue of preferred shares - - 150 -
Redemption of preferred
shares - - (200) -
Increase (decrease) in line
of credit in subsidiary (130) (17) (5) 165
Issue of debentures 500 - 500 -
Repayment of debentures and
other debt instruments (203) 31 (202) (1)
Share issue costs - - (3) -
Dividends paid (314) (307) (939) (923)
-------------------------------------------
(143) (287) (656) (748)
Investment Activities
Bond sales and maturities 4,375 4,325 13,515 14,762
Mortgage loan repayments 477 504 1,443 1,297
Stock sales 382 517 1,187 1,794
Real estate sales - - 9 8
Change in loans to
policyholders (3) (37) (57) (92)
Change in repurchase
agreements 204 531 529 458
Acquisition of intangible
assets - (37) - (37)
Investment in bonds (6,192) (5,199) (17,442) (16,279)
Investment in mortgage loans (493) (638) (1,467) (1,319)
Investment in stocks (454) (462) (1,602) (1,898)
Investment in real estate (108) (3) (251) (88)
-------------------------------------------
(1,812) (499) (4,136) (1,394)
Effect of changes in exchange
rates on cash and cash
equivalents 48 (259) (138) (218)
Increase (decrease) in cash
and cash equivalents (253) (311) (762) 196
Cash and cash equivalents,
beginning of period 2,918 3,357 3,427 2,850
-------------------------------------------
Cash and cash equivalents,
end of period $ 2,665 $ 3,046 $ 2,665 $ 3,046
-------------------------------------------
-------------------------------------------
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, 2010 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, 2009. During the nine months ended
September 30, 2010 the Company did not adopt any changes in
accounting policy that resulted in a material impact to the financial
statements of the Company. 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, 2009.
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 policy
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 policy 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 policy liabilities.
(a) Future Accounting Policies
International Financial Reporting Standards (IFRS)
--------------------------------------------------
The Canadian Accounting Standards Board has mandated that all
Canadian publicly accountable entities are required to transition
from Canadian generally accepted accounting principles (GAAP) to IFRS
for fiscal years beginning on or after January 1, 2011. Consequently,
the Company will adopt IFRS in its quarterly and annual reports
starting with the first quarter of 2011 and will provide
corresponding comparative information for 2010.
The Company continues to evaluate the financial statement impact of
transitioning from Canadian GAAP to IFRS and the related effect on
its information systems and processes. Until this effort is complete,
the final impact of adopting IFRS and the related effects on the
Company's consolidated financial statements cannot be reasonably
determined.
The IFRS standard that deals with the measurement of insurance
contracts, also referred to as Phase II Insurance Contracts, is
currently being developed and a final accounting standard is not
expected to be implemented for several years. As a result, the
Company will continue to measure insurance liabilities using the
Canadian Asset Liability Method (CALM) until such time when a new
IFRS standard for insurance contract measurement is issued.
Consequently, the evolving nature of IFRS will likely result in
additional accounting changes, some of which may be significant, in
the years following the Company's initial transition to IFRS.
2. Portfolio Investments
(a) Carrying values and estimated market values of portfolio investments
are as follows:
September 30, 2010
------------------------------------------------------------
Loans
Avail- and Total Total
Held-for- able- receiv- carrying fair
trading for sale ables Other value value
------------------------------------------------------------
Bonds $ 57,418 $ 6,910 $ 9,185 $ - $ 73,513 $ 74,397
Mortgage
loans - - 16,519 - 16,519 17,585
Stocks 5,606 1,097 - 329 7,032 7,087
Real
estate - - - 3,250 3,250 3,359
------------------------------------------------------------
$ 63,024 $ 8,007 $ 25,704 $ 3,579 $100,314 $102,428
------------------------------------------------------------
------------------------------------------------------------
December 31, 2009
------------------------------------------------------------
Loans
Avail- and Total Total
Held-for- able- receiv- carrying fair
trading for sale ables Other value value
------------------------------------------------------------
Bonds $ 52,362 $ 4,620 $ 9,165 $ - $ 66,147 $ 66,403
Mortgage
loans - - 16,684 - 16,684 16,891
Stocks 4,928 1,186 - 328 6,442 6,503
Real
estate - - - 3,099 3,099 3,053
------------------------------------------------------------
$ 57,290 $ 5,806 $ 25,849 $ 3,427 $ 92,372 $ 92,850
------------------------------------------------------------
------------------------------------------------------------
September 30, 2009
------------------------------------------------------------
Loans
Avail- and Total Total
Held-for- able- receiv- carrying fair
trading for sale ables Other value value
------------------------------------------------------------
Bonds $ 52,786 $ 5,122 $ 9,248 $ - $ 67,156 $ 67,395
Mortgage
loans - - 16,974 - 16,974 17,171
Stocks 4,629 1,399 - 327 6,355 6,418
Real
estate - - - 3,133 3,133 2,912
------------------------------------------------------------
$ 57,415 $ 6,521 $ 26,222 $ 3,460 $ 93,618 $ 93,896
------------------------------------------------------------
------------------------------------------------------------
(b) Included in portfolio investments are the following:
(i) Impaired investments
September 30, 2010
--------------------------------
Gross Carrying
amount Impairment amount
--------------------------------
Impaired amounts by type(1)
Held for trading $ 504 $ (199) $ 305
Available for sale 56 (32) 24
Loans and receivables 144 (69) 75
--------------------------------
Total $ 704 $ (300) $ 404
--------------------------------
--------------------------------
December 31, 2009
--------------------------------
Gross Carrying
amount Impairment amount
--------------------------------
Impaired amounts by type(1)
Held for trading $ 517 $ (278) $ 239
Available for sale 55 (36) 19
Loans and receivables 151 (81) 70
--------------------------------
Total $ 723 $ (395) $ 328
--------------------------------
--------------------------------
September 30, 2009
--------------------------------
Gross Carrying
amount Impairment amount
--------------------------------
Impaired amounts by type(1)
Held for trading $ 219 $ (141) $ 78
Available for sale 18 (14) 4
Loans and receivables 153 (84) 69
--------------------------------
Total $ 390 $ (239) $ 151
--------------------------------
--------------------------------
Impaired investments include $32 gross amount of capital securities
that have deferred coupons on a non-cumulative basis.
(1) Excludes amounts in funds held by ceding insurers of $5 and
impairment of $(1) at September 30, 2010 and $10 and $(4) at
December 31, 2009 and $10 and $(4) at September 30, 2009.
(ii) The Company holds investments with restructured terms or which have
been exchanged for securities with amended terms. These investments
are performing according to their new terms. Their carrying value
is as follows:
September December September
30 2010 31 2009 30 2009
--------------------------------
Bonds $ 24 $ 36 $ 31
Bonds with equity conversion
features 162 169 -
Mortgages 1 1 1
--------------------------------
$ 187 $ 206 $ 32
--------------------------------
--------------------------------
(iii) Included in net earnings is the impact of other than temporary
impairment (OTTI) as follows:
For the three months ended September 30, 2010
--------------------------------------------------
Loans
Avail- and
Held-for- able- receiv-
trading for sale ables Other Total
--------------------------------------------------
Impact on OTTI
- Assets carried
at market
value $ 26 $ - $ - $ - $ 26
- Transfer from
other
comprehensive
income - (1) - - (1)
- Assets carried
at amortized
cost - - 3 - 3
--------------------------------------------------
Gross impairment
charges 26 (1) 3 - 28
Release of
actuarial default
provision and
other (13) - - - (13)
--------------------------------------------------
Net impairment
(charges)
recovery before
income taxes $ 13 $ (1) $ 3 $ - $ 15
--------------------------------------------------
--------------------------------------------------
Net impairment
(charges)
recovery after
income taxes $ 11
----------
----------
For the three months ended September 30, 2009
--------------------------------------------------
Loans
Avail- and
Held-for- able- receiv-
trading for sale ables Other Total
--------------------------------------------------
Impact on OTTI
- Assets carried
at market
value $ (8) $ - $ - $ - $ (8)
- Assets carried
at amortized
cost - - (7) - (7)
--------------------------------------------------
Gross impairment
charges (8) - (7) - (15)
Release of
actuarial default
provision and
other 13 - - - 13
--------------------------------------------------
Net impairment
(charges)
recovery before
income taxes $ 5 $ - $ (7) $ - $ (2)
--------------------------------------------------
--------------------------------------------------
Net impairment
(charges)
recovery after
income taxes $ -
----------
----------
For the nine months ended September 30, 2010
--------------------------------------------------
Loans
Avail- and
Held-for- able- receiv-
trading for sale ables Other Total
--------------------------------------------------
Impact on OTTI
- Assets carried
at market
value $ (26) $ - $ - $ - $ (26)
- Transfer from
other
comprehensive
income - (11) - - (11)
- Assets carried
at amortized
cost - - 2 - 2
--------------------------------------------------
Gross impairment
charges (26) (11) 2 - (35)
Release of
actuarial default
provision and
other 75 - - - 75
--------------------------------------------------
Net impairment
(charges)
recovery before
income taxes $ 49 $ (11) $ 2 $ - $ 40
--------------------------------------------------
--------------------------------------------------
Net impairment
(charges)
recovery after
income taxes $ 30
----------
----------
For the nine months ended September 30, 2009
--------------------------------------------------
Loans
Avail- and
Held-for- able- receiv-
trading for sale ables Other Total
--------------------------------------------------
Impact on OTTI
- Assets carried
at market
value $ (11) $ - $ - $ - $ (11)
- Assets carried
at amortized
cost - - (37) - (37)
--------------------------------------------------
Gross impairment
charges (11) - (37) - (48)
Release of
actuarial default
provision and
other 13 - - - 13
--------------------------------------------------
Net impairment
(charges)
recovery before
income taxes $ 2 $ - $ (37) $ - $ (35)
--------------------------------------------------
--------------------------------------------------
Net impairment
(charges)
recovery after
income taxes $ (23)
----------
----------
(c) Net investment income is comprised of the following:
For the three
months ended Mortgage Real
September 30, 2010 Bonds loans Stocks estate Other Total
---------------------------------------------------------------------
Regular net investment
income:
Investment income
earned $ 970 $ 217 $ 72 $ 50 $ 170 $1,479
Net realized gains
(losses) (available
for sale) 29 - - - - 29
Net realized gains
(losses) (other
classifications) 2 3 - - - 5
Amortization of net
realized/unrealized
gains (non-financial
instruments) - - - 5 - 5
Net recovery
(provision) for
credit losses (loans
and receivables) 3 - - - - 3
Other income and
expenses - - - - (17) (17)
-----------------------------------------------
1,004 220 72 55 153 1,504
Changes in fair value
on held for trading
assets:
Net realized/
unrealized gains
(losses) (classified
held for trading) 34 - - - - 34
Net realized/
unrealized gains
(losses) (designated
held for trading) 2,106 - 367 - 88 2,561
-----------------------------------------------
2,140 - 367 - 88 2,595
-----------------------------------------------
Net investment income $3,144 $ 220 $ 439 $ 55 $ 241 $4,099
-----------------------------------------------
-----------------------------------------------
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 $ 43 $ 45 $ 250 $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 recovery
(provision) for
credit losses (loans
and receivables) - (7) - - - (7)
Other income and
expenses - - - - (17) (17)
-----------------------------------------------
1,052 227 39 40 233 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 $ 420 $ 40 $ 229 $5,325
-----------------------------------------------
-----------------------------------------------
For the nine
months ended Mortgage Real
September 30, 2010 Bonds loans Stocks estate Other Total
---------------------------------------------------------------------
Regular net investment
income:
Investment income
earned $2,848 $ 653 $ 168 $ 150 $ 428 $4,247
Net realized gains
(losses) (available
for sale) 26 - 12 - - 38
Net realized gains
(losses) (other
classifications) 12 11 - - - 23
Amortization of net
realized/unrealized
gains (non-financial
instruments) - - - 12 - 12
Net recovery
(provision) for
credit losses (loans
and receivables) 3 (1) - - - 2
Other income and
expenses - - - - (54) (54)
-----------------------------------------------
2,889 663 180 162 374 4,268
Changes in fair value
on held for trading
assets:
Net realized/
unrealized gains
(losses) (classified
held for trading) 83 - - - - 83
Net realized/
unrealized gains
(losses) (designated
held for trading) 4,966 - 230 - (91) 5,105
-----------------------------------------------
5,049 - 230 - (91) 5,188
-----------------------------------------------
Net investment income $7,938 $ 663 $ 410 $ 162 $ 283 $9,456
-----------------------------------------------
-----------------------------------------------
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 $ 135 $ 138 $ 570 $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 recovery
(provision) for
credit losses (loans
and receivables) (16) (21) - - - (37)
Other income and
expenses - - - - (50) (50)
-----------------------------------------------
3,179 682 214 123 520 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 $1,047 $ 123 $ 414 $8,757
-----------------------------------------------
-----------------------------------------------
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.
3. 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). Our risk governance structure and risk management
approach have not substantially changed from that described in our
2009 Annual Report. Certain risks have been outlined below. For a
complete discussion of our risk governance structure and our risk
management approach, see the "Financial Instrument Risk Management"
note in the Company's consolidated financial statements dated
December 31, 2009.
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.
(a) Credit Risk
Credit risk is the risk of financial loss resulting from the failure
of debtors making payments when due.
(i) 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 following table provides details of the carrying value of bonds
by industry sector and geographic distribution:
September 30, 2010
---------------------------------------------------
United
Canada States Europe Total
---------------------------------------------------
Bonds issued or
guaranteed by:
Canadian
federal
government $ 3,170 $ - $ 15 $ 3,185
Provincial,
state and
municipal
governments 5,859 1,742 46 7,647
U.S. Treasury
and other
U.S. agencies 377 2,911 1,091 4,379
Other foreign
governments 138 - 6,772 6,910
Government
related 839 - 1,470 2,309
Sovereign 673 8 790 1,471
Asset-backed
securities 2,826 3,593 912 7,331
Residential
mortgage
backed
securities 46 809 110 965
Banks 2,397 471 2,473 5,341
Other financial
institutions 1,113 1,455 1,583 4,151
Basic materials 213 556 219 988
Communications 612 267 525 1,404
Consumer
products 1,605 1,576 1,649 4,830
Industrial
products/
services 559 731 177 1,467
Natural
resources 1,096 565 476 2,137
Real estate 581 - 1,517 2,098
Transportations 1,534 591 622 2,747
Utilities 3,307 2,568 3,042 8,917
Miscellaneous 1,651 621 206 2,478
---------------------------------------------------
Total long
term bonds 28,596 18,464 23,695 70,755
Short term
bonds 1,689 973 96 2,758
---------------------------------------------------
$ 30,285 $ 19,437 $ 23,791 $ 73,513
---------------------------------------------------
---------------------------------------------------
December 31, 2009
---------------------------------------------------
United
Canada States Europe Total
---------------------------------------------------
Bonds issued or
guaranteed by:
Canadian
federal
government $ 2,264 $ 1 $ 14 $ 2,279
Provincial,
state and
municipal
governments 4,917 1,333 55 6,305
U.S. Treasury
and other
U.S. agencies 240 2,620 758 3,618
Other foreign
governments 104 - 5,773 5,877
Government
related 778 - 1,372 2,150
Sovereign 783 4 762 1,549
Asset-backed
securities 2,636 3,306 851 6,793
Residential
mortgage
backed
securities 46 842 60 948
Banks 2,201 453 2,299 4,953
Other financial
institutions 1,021 1,336 1,507 3,864
Basic materials 151 571 198 920
Communications 598 276 473 1,347
Consumer
products 1,384 1,351 1,664 4,399
Industrial
products/
services 516 651 206 1,373
Natural
resources 1,000 710 581 2,291
Real estate 559 - 1,216 1,775
Transportations 1,414 585 594 2,593
Utilities 3,008 2,172 2,702 7,882
Miscellaneous 1,489 562 182 2,233
---------------------------------------------------
Total long
term bonds 25,109 16,773 21,267 63,149
Short term
bonds 2,406 455 137 2,998
---------------------------------------------------
$ 27,515 $ 17,228 $ 21,404 $ 66,147
---------------------------------------------------
---------------------------------------------------
September 30, 2009
---------------------------------------------------
United
Canada States Europe Total
---------------------------------------------------
Bonds issued or
guaranteed by:
Canadian
federal
government $ 2,454 $ - $ 10 $ 2,464
Provincial,
state and
municipal
governments 4,860 1,307 64 6,231
U.S. Treasury
and other
U.S. agencies 262 2,788 748 3,798
Other foreign
governments 149 - 6,096 6,245
Government
related 809 - 1,306 2,115
Sovereign 752 5 797 1,554
Asset-backed
securities 2,757 3,398 877 7,032
Residential
mortgage
backed
securities 66 889 60 1,015
Banks 2,256 442 2,389 5,087
Other financial
institutions 1,096 1,235 1,560 3,891
Basic materials 149 577 202 928
Communications 606 299 495 1,400
Consumer
products 1,408 1,314 1,711 4,433
Industrial
products/
services 543 647 231 1,421
Natural
resources 1,010 714 601 2,325
Real estate 565 - 1,257 1,822
Transportations 1,384 608 595 2,587
Utilities 3,063 2,143 2,780 7,986
Miscellaneous 1,478 522 187 2,187
---------------------------------------------------
Total long
term bonds 25,667 16,888 21,966 64,521
Short term
bonds 1,911 603 121 2,635
---------------------------------------------------
$ 27,578 $ 17,491 $ 22,087 $ 67,156
---------------------------------------------------
---------------------------------------------------
(ii) Asset Quality
Bond Portfolio Quality
September December September
30 2010 31 2009 30 2009
--------------------------------
AAA $ 25,595 $ 21,754 $ 22,643
AA 11,827 10,585 10,752
A 21,100 19,332 19,449
BBB 10,867 10,113 10,588
BB and lower 1,366 1,365 1,089
--------------------------------
70,755 63,149 64,521
Short term bonds 2,758 2,998 2,635
--------------------------------
Total bonds $ 73,513 $ 66,147 $ 67,156
--------------------------------
--------------------------------
Derivative Portfolio Quality
September December September
30 2010 31 2009 30 2009
--------------------------------
Over-the-counter contracts
(counterparty ratings):
AAA $ 2 $ 5 $ 4
AA 370 338 257
A 418 374 441
--------------------------------
Total $ 790 $ 717 $ 702
--------------------------------
--------------------------------
(iii) 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 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 2010 31 2009 30 2009
--------------------------------
Less than 30 days $ 47 $ 45 $ 48
30 - 90 days 2 6 4
90 days and greater 13 9 10
--------------------------------
Total $ 62 $ 60 $ 62
--------------------------------
--------------------------------
(iv) Performing Securities Subject to Deferred Coupons
Payment Resumption Date
--------------------------------
greater
less than 1 to than
1 year 2 years 2 years
--------------------------------
Coupon payment receivable $ - $ 3 $ -
(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 and forecasting earned and
required yields, to ensure consistency between policyholder
requirements and the yield of assets.
- 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 or the capital markets.
(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 which include three types: currency risk, interest rate
(including related inflation) 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. If the assets backing
policy liabilities are not matched by currency, changes in foreign
exchange rates can expose the Company to the risk of foreign
exchange losses not offset by liability decreases.
- A 10% weakening of the Canadian dollar against foreign
currencies would be expected to increase non-participating
policy liabilities and their supporting assets by approximately
the same amount resulting in an immaterial change to net
earnings. A 10% strengthening of the Canadian dollar against
foreign currencies would be expected to decrease non-
participating policy liabilities and their supporting assets by
approximately the same amount resulting in an immaterial change
in net earnings.
(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.
Projected cash flows from the current assets and liabilities are
used in CALM to determine policy liabilities. Valuation assumptions
have been made regarding rates of returns on supporting assets,
fixed income, equity and inflation. The valuation assumptions use
best estimates of future reinvestment rates and inflation
assumptions with an assumed correlation together with margins for
adverse deviation set in accordance with professional standards.
These margins are necessary to provide for possibilities of
misestimation and/or future deterioration in the best estimate
assumptions and provide reasonable assurance that policy
liabilities cover a range of possible outcomes. Margins are
reviewed periodically for continued appropriateness.
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 policy liabilities
impacting the shareholder earnings of the Company of a 1% immediate
parallel shift in the yield curve. These interest rate changes will
impact the projected cash flows.
- The effect of an immediate 1% parallel increase in the yield
curve would be to increase these policy liabilities by
approximately $16 causing a decrease in net earnings of
approximately $11.
- The effect of an immediate 1% parallel decrease in the yield
curve would be to increase these policy liabilities by
approximately $240 causing a decrease in net earnings of
approximately $165.
In addition to above, if this change in the yield curve persisted
for an extended period the range of the tested scenarios might
change. The effect of an immediate 1% parallel decrease or increase
in the yield curve persisting for a year would have immaterial
additional effects on the reported policy liability.
(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. The risks associated with segregated fund
guarantees have been mitigated through a hedging program for
lifetime Guaranteed Minimum Withdrawal Benefit guarantees using
equity futures, currency forwards, and interest rate derivatives.
For policies with segregated fund guarantees, the Company generally
determines policy liabilities at a CTE75 (conditional tail
expectation of 75) level.
Some policy liabilities are supported by real estate, common stocks
and private equities, for example segregated fund products and
products with long-tail cash flows. 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 policy liabilities by
approximately $32 causing an increase in net earnings of
approximately $24. A 10% decrease in equity markets would be
expected to additionally increase non-participating policy
liabilities by approximately $68 causing a decrease in net earnings
of approximately $49.
The best estimate return assumptions for equities are primarily
based on long term historical averages. Changes in the current
market could result in changes to these assumptions and will impact
both asset and liability cash flows. A 1% increase in the best
estimate assumption would be expected to decrease non-participating
policy liabilities by approximately $318 causing an increase in net
earnings of approximately $232. A 1% decrease in the best estimate
assumption would be expected to increase non-participating policy
liabilities by approximately $369 causing a decrease in net
earnings of approximately $267.
4. Financing Charges
Financing charges consist of the following:
For the three months For the nine months
ended September 30 ended September 30
-------------------------------------------
2010 2009 2010 2009
-------------------------------------------
Operating charges:
Interest on operating
lines and short-term
debt instruments $ 2 $ 3 $ 8 $ 5
Financial charges:
Interest on long-term
debentures and other
debt instruments 56 51 166 155
Dividends on preferred
shares classified as
liabilities - 9 2 27
Net realized/unrealized
losses (gains) on
preferred shares
classified as held for
trading - 14 (2) 46
Other 7 4 14 8
Net interest on capital
trust debentures and
securities 8 12 24 33
-------------------------------------------
71 90 204 269
-------------------------------------------
Total $ 73 $ 93 $ 212 $ 274
-------------------------------------------
-------------------------------------------
5. Debentures and Other Debt Instruments
On August 10, 2010, the Company redeemed the $200 principal amount
6.75% debentures at par which had a maturity date of August 10, 2015.
On August 13, 2010, $500 principal amount debentures were issued at
par and will mature on August 13, 2020. Interest on the debentures at
the rate of 4.65% per annum will be payable semi-annually in arrears
on February 13 and August 13 in each year, commencing February 13,
2011, until the date on which the debentures are repaid. The
debentures are redeemable at any time in whole or in part at the
greater of the Canada Yield Price and par, together in each case with
accrued and unpaid interest.
6. Share Capital
(a) Preferred Shares
On March 4, 2010 the Company issued 6,000,000 Series M, 5.80% Non-
Cumulative First Preferred Shares at $25 per share. The shares are
redeemable at the option of the Company on or after March 31, 2015
for $25 per share plus a premium if redeemed prior to March 31, 2019,
in each case with all declared and unpaid dividends to but excluding
the date of redemption.
On March 31, 2010 the Company redeemed all of the remaining
outstanding Series D First Preferred shares at a redemption price of
$25.25 per share. The Company had designated outstanding Preferred
Shares Series D as held for trading on the Consolidated Balance
Sheets with changes in fair value reported in the Summaries of
Consolidated Operations. In connection with the transaction the
Company recognized unrealized gains of $2 in the Summaries of
Consolidated Operations. As a result the Company no longer has any
outstanding preferred shares classified as liabilities.
(b) Common Shares
Issued and outstanding
September 30, 2010 December 31, 2009 September 30, 2009
----------------------------------------------------------------
Carrying Carrying Carrying
Number value Number value Number value
----------------------------------------------------------------
Common
shares:
Balance,
beginning
of year 945,040,476 $ 5,751 943,882,505 $ 5,736 943,882,505 $ 5,736
Issued
under
stock
option
plan (ex-
ercised) 3,002,843 43 1,157,971 15 814,469 11
----------------------------------------------------------------
Balance,
end of
period 948,043,319 $ 5,794 945,040,476 $ 5,751 944,696,974 $ 5,747
----------------------------------------------------------------
----------------------------------------------------------------
7. 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.
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.
In Canada, The Office of the Superintendent of Financial Institutions
Canada (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 2010 31 2009 30 2009
--------------------------------
Capital Available:
Net Tier 1 Capital $ 7,445 $ 7,014 $ 6,765
--------------------------------
Tier 2 Capital Allowed 1,688 1,856 2,064
--------------------------------
Total Available Capital $ 9,133 $ 8,870 $ 8,829
--------------------------------
--------------------------------
Capital Required:
Total Capital Required $ 4,527 $ 4,354 $ 4,409
--------------------------------
--------------------------------
MCCSR ratios:
Tier 1 164% 161% 153%
--------------------------------
--------------------------------
Total 202% 204% 200%
--------------------------------
--------------------------------
In the United States, Great-West Life & Annuity Insurance Company
(GWL&A) is subject to comprehensive state and federal regulation and
supervision. The National Association of Insurance Commissioners
(NAIC) has adopted risk-based capital rules and other financial
ratios for U.S. life insurance companies. At December 31, 2009, the
Risk-Based Capital (RBC) ratio for GWL&A was 476% of the Company
Action Level.
As at September 30, 2010 and 2009 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 Company is
required to put amounts on deposit for certain reinsurance
transactions. These amounts on deposit are presented in funds held by
ceding insurers on the Consolidated Balance Sheets. Some of these
amounts on deposit support surplus.
8. Stock Based Compensation
No options were granted under the Company's stock option plan during
the third quarter and second quarter of 2010 and 863,000 options were
granted during the first quarter of 2010 (no options were granted
during the first three quarters of 2009). The weighted average fair
value of options granted was $4.34 per option during the nine months
ended September 30, 2010 Compensation expense of $4 after-tax has
been recognized in the Summaries of Consolidated Operations for the
nine months ended September 30, 2010 ($6 after-tax for the nine
months ended September 30, 2009).
9. 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
---------------------------------------------------
2010 2009 2010 2009
---------------------------------------------------
Pension benefits $ 17 $ 15 $ 57 $ 51
Other benefits 3 3 10 9
---------------------------------------------------
Total $ 20 $ 18 $ 67 $ 60
---------------------------------------------------
---------------------------------------------------
10. 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
---------------------------------------------------
2010 2009 2010 2009
---------------------------------------------------
Earnings
Net earnings $ 297 $ 462 $ 1,213 $ 1,236
Perpetual
preferred share
dividends 22 17 64 52
---------------------------------------------------
Net earnings -
common
shareholders $ 275 $ 445 $ 1,149 $ 1,184
---------------------------------------------------
---------------------------------------------------
Number of common
shares
Average number
of common shares
outstanding 947,922,398 944,465,294 947,229,688 944,194,267
Add:
- Potential
exercise of
outstanding
stock
options 719,080 2,157,507 1,201,599 1,423,061
---------------------------------------------------
Average number of
common shares
outstanding -
diluted basis 948,641,478 946,622,801 948,431,287 945,617,328
---------------------------------------------------
---------------------------------------------------
Basic earnings
per common share $ 0.289 $ 0.471 $ 1.213 $ 1.254
---------------------------------------------------
---------------------------------------------------
Diluted earnings
per common share $ 0.289 $ 0.470 $ 1.211 $ 1.253
---------------------------------------------------
---------------------------------------------------
11. Segmented Information
Consolidated Operations
For the three months ended September 30, 2010
United Lifeco
Canada States Europe Corporate Total
------------------------------------------------------
Income:
Premium
income $ 2,299 $ 815 $ 1,199 $ - $ 4,313
Net investment
income
Regular net
investment
income 686 342 473 3 1,504
Changes in
fair value
on held for
trading
assets 1,114 348 1,133 - 2,595
------------------------------------------------------
Total net
investment
income 1,800 690 1,606 3 4,099
Fee and other
income 251 311 129 - 691
------------------------------------------------------
Total income 4,350 1,816 2,934 3 9,103
------------------------------------------------------
Benefits and
expenses:
Paid or
credited to
policyholders 3,401 1,330 2,586 - 7,317
Other 698 364 144 274 1,480
Amortization of
finite life
intangible
assets 10 10 2 - 22
------------------------------------------------------
Earnings before
income taxes 241 112 202 (271) 284
Income taxes (8) 24 37 (68) (15)
------------------------------------------------------
Net earnings
before
non-controlling
interests 249 88 165 (203) 299
Non-controlling
interests (2) - 4 - 2
------------------------------------------------------
Net earnings 251 88 161 (203) 297
Perpetual
preferred
share dividends 19 - 3 - 22
------------------------------------------------------
Net earnings -
common
shareholders $ 232 $ 88 $ 158 $ (203) $ 275
------------------------------------------------------
------------------------------------------------------
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
------------------------------------------------------
Earnings before
income taxes 261 83 212 8 564
Income taxes 39 15 38 6 98
------------------------------------------------------
Net earnings
before
non-controlling
interests 222 68 174 2 466
Non-controlling
interests - - 4 - 4
------------------------------------------------------
Net earnings 222 68 170 2 462
Perpetual
preferred
share dividends 10 - 3 4 17
------------------------------------------------------
Net earnings -
common
shareholders $ 212 $ 68 $ 167 $ (2) $ 445
------------------------------------------------------
------------------------------------------------------
For the nine months ended September 30, 2010
United Lifeco
Canada States Europe Corporate Total
------------------------------------------------------
Income:
Premium
income $ 6,795 $ 2,316 $ 4,027 $ - $ 13,138
Net investment
income
Regular net
investment
income 1,894 1,000 1,366 8 4,268
Changes in
fair value
on held for
trading
assets 1,722 1,044 2,422 - 5,188
------------------------------------------------------
Total net
investment
income 3,616 2,044 3,788 8 9,456
Fee and other
income 762 935 448 - 2,145
------------------------------------------------------
Total income 11,173 5,295 8,263 8 24,739
------------------------------------------------------
Benefits and
expenses:
Paid or
credited to
policyholders 8,359 3,867 7,284 - 19,510
Other 1,887 1,122 446 276 3,731
Amortization of
finite life
intangible
assets 29 35 5 - 69
------------------------------------------------------
Earnings before
income taxes 898 271 528 (268) 1,429
Income taxes 121 60 70 (65) 186
------------------------------------------------------
Net earnings
before
non-controlling
interests 777 211 458 (203) 1,243
Non-controlling
interests 21 1 8 - 30
------------------------------------------------------
Net earnings 756 210 450 (203) 1,213
Perpetual
preferred
share dividends 54 - 10 - 64
------------------------------------------------------
Net earnings -
common
shareholders $ 702 $ 210 $ 440 $ (203) $ 1,149
------------------------------------------------------
------------------------------------------------------
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
------------------------------------------------------
Earnings before
income taxes 901 253 412 8 1,574
Income taxes 202 55 35 6 298
------------------------------------------------------
Net earnings
before
non-controlling
interests 699 198 377 2 1,276
Non-controlling
interests 31 6 3 - 40
------------------------------------------------------
Net earnings 668 192 374 2 1,236
Perpetual
preferred
share dividends 31 - 10 11 52
------------------------------------------------------
Net earnings -
common
shareholders $ 637 $ 192 $ 364 $ (9) $ 1,184
------------------------------------------------------
------------------------------------------------------
12. Subsequent Events
(a) Contingent liabilities (changes since December 31, 2009 annual
report)
The Ontario Superior Court of Justice released a decision on October
1, 2010 in regard to the involvement of the participating accounts of
Lifeco subsidiaries London Life Insurance Company (London Life) and
Great-West Life in the financing of the acquisition of London
Insurance Group Inc. (LIG) in 1997.
The Company believes there are significant aspects of the lower court
judgment that are in error and a Notice of Appeal has been filed.
Notwithstanding the foregoing, the Company has established an
incremental provision in the third quarter 2010 in the amount of $225
after-tax ($204 and $21 attributable to the common shareholder and
non-controlling interests, respectively). The Company now holds $310
in after-tax provisions for these proceedings.
Regardless of the ultimate outcome of this case, all of the
participating policy contract terms and conditions will continue to
be honoured.
Based on information presently known, the original decision, if
sustained on appeal, is not expected to have a material adverse
effect on the consolidated financial position of the Company.
(b) Share capital
On October 26, 2010 the Company invested $310 in common shares of its
wholly-owned subsidiary Great-West Life which in turn invested $255
in common shares of its indirect wholly-owned subsidiary London Life.
(c) Non-controlling interests
On October 29, 2010, Great-West Life redeemed all of its outstanding
5.55% Non-Cumulative Preferred Shares Series O at a price of $25.00
per share.
For further information: Marlene Klassen, APR, Assistant Vice-President, Communication Services (204) 946-7705
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