Great-West Lifeco reports second quarter 2010 results
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.
TSX:GWO
WINNIPEG, Aug. 4, 2010 /CNW/ - Great-West Lifeco Inc. (Lifeco) has reported net earnings attributable to common shareholders of $433 million for the three months ended June 30, 2010, compared to $413 million in the second quarter of 2009. On a per common share basis, this represents $0.457 per common share for the three months ended June 30, 2010, compared to $0.437 per common share for the same period in 2009.
For the six months ended June 30, 2010, net earnings attributable to common shareholders were $874 million, compared to $739 million a year ago. This represents $0.923 per common share for the six months ended June 30, 2010, compared to $0.783 per common share for the same period in 2009.
The Company experienced solid earnings growth in the local currencies of all regions in which it operates, with in quarter net earnings on a constant currency basis up 13% year over year. The continued strengthening of the Canadian dollar against the US dollar, the British pound and the euro had a negative currency impact on Lifeco's net earnings of $33 million or $0.035 per common share in the second quarter of 2010 compared to the same period in 2009. For the six months ended June 30, 2010, negative currency impact on earnings was $64 million or $0.067 per common share compared to 2009.
Consolidated assets under administration at June 30, 2010 were $460.2 billion, up $1.6 billion from December 31, 2009.
Highlights
- Sales in Canada continue to be very strong, with individual life
insurance sales 26% higher and Individual Retirement and Investment
Services sales 27% higher than the second quarter of 2009.
- Sales in the U.S. Financial Services business increased 48% on a
constant currency basis in the quarter compared to the same quarter in
2009.
- Putnam sales are 19% higher than the second quarter of 2009 on a
constant currency basis and the Putnam suite of absolute return mutual
funds reached US$2.1 billion in assets under management.
- Sales of single premium savings products in the Isle of Man increased
by 226% in local currency in the quarter.
- Premiums and deposits overall were up 12% in quarter on a constant
currency basis and up 17% when excluding the impact of the acquisition
of the group retirement assets from Fidelity Investments Canada in
second quarter of 2009.
- The Company achieved a 15.2% return on common shareholders' equity,
consistent with its long-term objective.
- The Company declared a quarterly common dividend of $0.3075 per common
share payable September 30, 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 June 30, 2010. At
June 30, 2010 Lifeco held, at the holding company level, approximately
$1.0 billion in liquid assets derived from capital raising initiatives
since the fourth quarter of 2008.
Although equity markets fell during the second quarter to below December 31, 2009 levels, average equity market levels during 2010 have remained significantly higher than the same period in 2009. Higher average equity markets, as well as strong investment performance and sales growth, were the major contributors to an 8% increase in fee income year to date as compared to 2009, including the negative impact of currency movement. On a constant currency basis fee income was up 19% year to date as compared to 2009.
Credit market conditions were stable during the second quarter and interest rates generally declined. This contributed to an overall increase in the fair value of bonds in the quarter. The Company's gross unrealized bond losses decreased to $1.7 billion from $3.1 billion at year end 2009 and $5.7 billion at June 30, 2009.
For the three months ended June 30, 2010, the Company recognized a net recovery in investment impairment charges of $10 million after tax. Changes in bond credit ratings for the quarter positively impacted net earnings attributable to common shareholders by an additional $1 million after tax.
OPERATING RESULTS
Consolidated net earnings for Lifeco are comprised of 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 second quarter of 2010 were up 9% to $237 million compared to $217 million in the second quarter of 2009. For the six months ended June 30, 2010, net earnings attributable to common shareholders were $470 million compared to $425 million in 2009.
Total sales for the six months ended June 30, 2010 were up 38% to $5.0 billion compared to $3.6 billion after adjusting the 2009 six month period for the impact of the group retirement assets acquired from Fidelity Investments Canada. The growth in sales was driven by strong proprietary retail investment funds which were up 49%, payout annuity products were up 122% and individual life product sales increased 32% compared to the same six month period in 2009.
Total assets under administration at June 30, 2010 were $116.6 billion, compared to $114.6 billion at December 31, 2009.
UNITED STATES
Net earnings attributable to common shareholders for the second quarter of 2010 were $54 million compared to $49 million in the second quarter of 2009. For the six months ended June 30, 2010, net earnings attributable to common shareholders were $122 million compared to $124 million in 2009.
As a result of currency movement, net earnings were negatively impacted by $7 million compared to the second quarter of 2009 and by $21 million compared to the first six months of 2009. On a constant currency basis net earnings grew by 26% in the second quarter of 2010 and by 16% for the first six months of 2010 when compared to the same periods in 2009.
Total sales for the six months ended June 30, 2010 were $18.4 billion compared to $14.4 billion in 2009.
Total assets under administration at June 30, 2010 were $279.3 billion compared to $277.8 billion at December 31, 2009. Included in assets under administration at June 30, 2010 were $116.2 billion of mutual fund and institutional account assets managed by Putnam.
EUROPE
Net earnings attributable to common shareholders for the second quarter of 2010 were $142 million compared to $149 million in the second quarter of 2009. For the six months ended June 30, 2010, net earnings attributable to common shareholders were $282 million compared to $197 million in 2009.
As a result of currency movement, net earnings were negatively impacted by $26 million when compared to the second quarter of 2009 and by $43 million when compared to the first six months of 2009. On a constant currency basis net earnings grew 13% in the second quarter of 2010 and by 65% for the first six months of 2010 when compared to the same periods in 2009.
Total sales for the six months ended June 30, 2010 were $2.2 billion, level in comparison to 2009. Sales increased by 16% in local currency, however, this was largely offset by adverse currency movement.
Total assets under administration at June 30, 2010 were $64.3 billion, compared to $66.2 billion at December 31, 2009.
CORPORATE
Corporate net earnings for Lifeco attributable to common shareholders were nil for both the second quarter and the six months ended June 30, 2010 compared to a net loss of $2 million in the second quarter of 2009 and a net loss of $7 million for the six months ended June 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 September 30, 2010 to shareholders of record at the close of business September 2, 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 September 30, 2010 to shareholders of record at the close of business September 2, 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 $460 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 second quarter conference call and audio webcast will be held Thursday, August 5, 2010 at 9:00 a.m. (EDT). 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 August 5 to August 12, 2010, and can be accessed by calling 1-800-408-3053 or 416-695-5800 in Toronto (passcode: 5040650 followed by the number sign). The archived webcast will be available on www.greatwestlifeco.com from approximately 1:00 p.m. (EDT) on August 5, 2010 until August 5, 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 six months ended
------------------------------------------------------
June 30 March 31 June 30 June 30 June 30
2010 2010 2009 2010 2009
-------------------------------------------------------------------------
Premiums and deposits:
Life insurance,
guaranteed
annuities and
insured health
products $ 4,215 $ 4,610 $ 4,664 $ 8,825 $ 9,373
Self-funded
premium
equivalents
(ASO contracts) 657 645 639 1,302 1,257
Segregated funds
deposits:
Individual
products 1,633 1,790 1,699 3,423 2,957
Group products 2,335 1,730 1,823 4,065 4,519
Proprietary mutual
funds and
institutional
deposits 5,389 6,191 5,140 11,580 10,420
------------------------------------------------------
Total premiums
and deposits 14,229 14,966 13,965 29,195 28,526
------------------------------------------------------
Fee and other
income 718 736 666 1,454 1,346
Paid or credited
to policyholders 5,622 6,571 7,473 12,193 10,839
Net earnings -
common
shareholders 433 441 413 874 739
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Per common share
Basic earnings $ 0.457 $ 0.466 $ 0.437 $ 0.923 $ 0.783
Dividends paid 0.3075 0.3075 0.3075 0.615 0.615
Book value 12.30 11.88 12.65
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-------------------------------------------------------------------------
Return on common
shareholders'
equity (12 months):
Net earnings 15.2% 15.0% 2.3%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total assets $ 131,320 $ 126,842 $ 131,644
Segregated funds
net assets 87,023 87,349 83,192
Proprietary
mutual funds and
institutional
net assets 119,069 123,665 121,729
-------------------------------
Total assets
under
management 337,412 337,856 336,565
Other assets
under
administration 122,778 125,329 105,341
-------------------------------
Total assets
under
administration $ 460,190 $ 463,185 $ 441,906
-------------------------------
-------------------------------
Share capital
and surplus $ 13,309 $ 12,907 $ 13,270
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-------------------------------------------------------------------------
SUMMARIES OF CONSOLIDATED OPERATIONS (unaudited)
(in $ millions except per share amounts)
For the For the
three months ended six months ended
------------------------------------------------------
June 30 March 31 June 30 June 30 June 30
2010 2010 2009 2010 2009
-------------------------------------------------------------------------
Income
Premium income $ 4,215 $ 4,610 $ 4,664 $ 8,825 $ 9,373
Net investment
income (note 2)
Regular net
investment
income 1,342 1,422 1,616 2,764 3,127
Changes in
fair value on
held for
trading assets 1,091 1,502 2,272 2,593 305
------------------------------------------------------
Total net
investment
income 2,433 2,924 3,888 5,357 3,432
Fee and other
income 718 736 666 1,454 1,346
------------------------------------------------------
7,366 8,270 9,218 15,636 14,151
------------------------------------------------------
Benefits and
expenses
Policyholder
benefits 3,861 3,888 4,126 7,749 8,735
Policyholder
dividends and
experience
refunds 351 383 371 734 769
Change in
actuarial
liabilities 1,410 2,300 2,976 3,710 1,335
------------------------------------------------------
Total paid or
credited to
policyholders 5,622 6,571 7,473 12,193 10,839
Commissions 364 363 353 727 660
Operating
expenses 629 630 628 1,259 1,291
Premium taxes 61 65 68 126 123
Financing charges
(note 4) 70 69 106 139 181
Amortization of
finite life
intangible assets 24 23 25 47 47
------------------------------------------------------
Earnings before
income taxes 596 549 565 1,145 1,010
Income taxes
- current (19) 1 21 (18) 103
- future 134 85 101 219 97
------------------------------------------------------
Net earnings before
non-controlling
interests 481 463 443 944 810
Non-controlling
interests 26 2 12 28 36
------------------------------------------------------
Net earnings 455 461 431 916 774
Perpetual preferred
share dividends 22 20 18 42 35
------------------------------------------------------
Net earnings -
common
shareholders $ 433 $ 441 $ 413 $ 874 $ 739
------------------------------------------------------
------------------------------------------------------
Earnings per
common share
(note 9)
Basic $ 0.457 $ 0.466 $ 0.437 $ 0.923 $ 0.783
------------------------------------------------------
------------------------------------------------------
Diluted $ 0.457 $ 0.465 $ 0.437 $ 0.922 $ 0.782
------------------------------------------------------
------------------------------------------------------
CONSOLIDATED BALANCE SHEETS (unaudited)
(in $ millions)
June 30 December 31 June 30
2010 2009 2009
--------------------------------
Assets
Bonds (note 2) $ 69,944 $ 66,147 $ 67,376
Mortgage loans (note 2) 16,536 16,684 17,349
Stocks (note 2) 6,563 6,442 6,093
Real estate (note 2) 3,108 3,099 3,378
Loans to policyholders 7,052 6,957 7,416
Cash and cash equivalents 2,918 3,427 3,357
Funds held by ceding insurers 10,345 10,839 11,761
Goodwill 5,405 5,406 5,418
Intangible assets 3,226 3,238 3,426
Other assets 6,223 6,130 6,070
--------------------------------
Total assets $ 131,320 $ 128,369 $ 131,644
--------------------------------
--------------------------------
Liabilities
Policy liabilities
Actuarial liabilities $ 100,072 $ 98,059 $ 100,127
Provision for claims 1,242 1,308 1,352
Provision for policyholder dividends 619 606 636
Provision for experience rating refunds 279 317 286
Policyholder funds 2,470 2,361 2,409
--------------------------------
104,682 102,651 104,810
Debentures and other debt instruments 4,282 4,142 3,903
Funds held under reinsurance contracts 359 186 169
Other liabilities 4,747 4,608 5,202
Repurchase agreements 867 532 203
Deferred net realized gains 119 133 150
--------------------------------
115,056 112,252 114,437
Preferred shares (note 5) - 203 779
Capital trust securities and debentures 535 540 786
Non-controlling interests
Participating account surplus in
subsidiaries 2,041 2,004 2,018
Preferred shares issued by
subsidiaries 157 157 157
Perpetual preferred shares issued by
subsidiaries 146 147 149
Non-controlling interests in capital
stock and surplus 76 63 48
Share capital and surplus
Share capital (note 5)
Perpetual preferred shares 1,647 1,497 1,327
Common shares 5,790 5,751 5,741
Accumulated surplus 7,655 7,367 7,064
Accumulated other comprehensive loss (1,837) (1,664) (911)
Contributed surplus 54 52 49
--------------------------------
13,309 13,003 13,270
--------------------------------
Total liabilities, share capital and
surplus $ 131,320 $ 128,369 $ 131,644
--------------------------------
--------------------------------
CONSOLIDATED STATEMENTS OF SURPLUS (unaudited)
(in $ millions)
For the six months
ended June 30
---------------------
2010 2009
---------------------
Accumulated surplus
Balance, beginning of year $ 7,367 $ 6,906
Net earnings 916 774
Share issue costs (3) -
Dividends to shareholders
Perpetual preferred shareholders (42) (35)
Common shareholders (583) (581)
---------------------
Balance, end of period $ 7,655 $ 7,064
---------------------
---------------------
Accumulated other comprehensive loss,
net of income taxes
Balance, beginning of year $ (1,664) $ (787)
Other comprehensive loss (173) (124)
---------------------
Balance, end of period $ (1,837) $ (911)
---------------------
---------------------
Contributed surplus
Balance, beginning of year $ 52 $ 44
Stock option expense
Current period expense (note 7) 3 5
Exercised (1) -
---------------------
Balance, end of period $ 54 $ 49
---------------------
---------------------
SUMMARIES OF CONSOLIDATED COMPREHENSIVE INCOME (unaudited)
(in $ millions)
For the three months For the six months
ended June 30 ended June 30
-------------------------------------------
2010 2009 2010 2009
-------------------------------------------
Net earnings $ 455 $ 431 $ 916 $ 774
Other comprehensive income
(loss)
Unrealized foreign exchange
gains (losses) on
translation of foreign
operations 246 (311) (233) (129)
Income tax (expense)
benefit - (1) - (1)
Unrealized gains (losses) on
available for sale assets 109 104 163 (23)
Income tax (expense)
benefit (25) (33) (40) (6)
Realized (gains) losses on
available for sale assets 4 (20) (9) (35)
Income tax (expense)
benefit 1 3 4 6
Unrealized gains (losses) on
cash flow hedges (100) 171 (66) 89
Income tax (expense)
benefit 35 (60) 23 (31)
Realized (gains) losses on
cash flow hedges - (34) - (15)
Income tax (expense)
benefit - 12 - 5
Non-controlling interests (18) 12 (15) 16
-------------------------------------------
252 (157) (173) (124)
-------------------------------------------
Comprehensive income $ 707 $ 274 $ 743 $ 650
-------------------------------------------
-------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in $ millions)
For the three months For the six months
ended June 30 ended June 30
-------------------------------------------
2010 2009 2010 2009
-------------------------------------------
Operations
Net earnings $ 455 $ 431 $ 916 $ 774
Adjustments:
Change in policy
liabilities 1,430 2,817 3,753 1,228
Change in funds held by
ceding insurers 212 66 275 210
Change in funds held
under reinsurance
contracts 13 (3) 166 (11)
Change in current
income taxes payable 89 (100) 25 (207)
Future income tax expense 134 101 219 97
Changes in fair value of
financial instruments (1,091) (2,241) (2,595) (273)
Other 75 (4) (245) 4
-------------------------------------------
Cash flows from operations 1,317 1,067 2,514 1,822
Financing Activities
Issue of common shares 8 4 39 5
Issue of preferred shares - - 150 -
Redemption of preferred
shares - - (200) -
Increase in line of credit
in subsidiary 5 82 125 182
Repayment of debentures and
other debt instruments 4 (30) 1 (32)
Share issue costs - - (3) -
Dividends paid (314) (308) (625) (616)
-------------------------------------------
(297) (252) (513) (461)
Investment Activities
Bond sales and maturities 4,556 5,440 9,140 10,437
Mortgage loan repayments 572 374 966 793
Stock sales 356 655 805 1,277
Real estate sales 9 1 9 8
Change in loans to
policyholders (54) (9) (54) (55)
Change in repurchase
agreements 104 (257) 325 (73)
Investment in bonds (5,636) (5,501) (11,250) (11,080)
Investment in mortgage loans (684) (491) (974) (681)
Investment in stocks (526) (643) (1,148) (1,436)
Investment in real estate (86) (20) (143) (85)
-------------------------------------------
(1,389) (451) (2,324) (895)
Effect of changes in exchange
rates on cash and
cash equivalents 50 14 (186) 41
Increase (decrease) in cash
and cash equivalents (319) 378 (509) 507
Cash and cash equivalents,
beginning of period 3,237 2,979 3,427 2,850
-------------------------------------------
Cash and cash equivalents,
end of period $ 2,918 $ 3,357 $ 2,918 $ 3,357
-------------------------------------------
-------------------------------------------
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 June 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 six months ended June 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 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:
June 30, 2010
------------------------------------------------------------
Loans
Avail- and Total Total
Held-for- able- receiv- carrying fair
trading for sale ables Other value value
------------------------------------------------------------
Bonds $ 54,658 $ 6,059 $ 9,227 $ - $ 69,944 $ 70,580
Mortgage
loans - - 16,536 - 16,536 17,336
Stocks 5,167 1,068 - 328 6,563 6,577
Real
estate - - - 3,108 3,108 3,193
------------------------------------------------------------
$ 59,825 $ 7,127 $ 25,763 $ 3,436 $ 96,151 $ 97,686
------------------------------------------------------------
------------------------------------------------------------
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
------------------------------------------------------------
------------------------------------------------------------
June 30, 2009
------------------------------------------------------------
Loans
Avail- and Total Total
Held-for- able- receiv- carrying fair
trading for sale ables Other value value
------------------------------------------------------------
Bonds $ 52,628 $ 5,233 $ 9,515 $ - $ 67,376 $ 67,398
Mortgage
loans - - 17,349 - 17,349 17,095
Stocks 4,373 1,391 - 329 6,093 6,142
Real
estate - - - 3,378 3,378 3,044
------------------------------------------------------------
$ 57,001 $ 6,624 $ 26,864 $ 3,707 $ 94,196 $ 93,679
------------------------------------------------------------
------------------------------------------------------------
(b) Included in portfolio investments are the following:
(i) Impaired investments
June 30, 2010
--------------------------------
Gross Carrying
amount Impairment amount
--------------------------------
Impaired amounts by type(1)
Held for trading $ 568 $ (254) $ 314
Available for sale 57 (33) 24
Loans and receivables 152 (80) 72
--------------------------------
Total $ 777 $ (367) $ 410
--------------------------------
--------------------------------
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
--------------------------------
--------------------------------
June 30, 2009
--------------------------------
Gross Carrying
amount Impairment amount
--------------------------------
Impaired amounts by type(1)
Held for trading $ 164 $ (142) $ 22
Available for sale 16 (16) -
Loans and receivables 158 (85) 73
--------------------------------
Total $ 338 $ (243) $ 95
--------------------------------
--------------------------------
Impaired investments include $30 gross amount of capital securities
that have deferred coupons on a non-cumulative basis.
(1) Excludes amounts in funds held by ceding insurers of $9 and
impairment of $(3) at June 30, 2010 and $10 and $(4) at December
31, 2009 and $16 and $(13) at June 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:
June 30 December 31 June 30
2010 2009 2009
--------------------------------
Bonds $ 25 $ 36 $ 33
Bonds with equity conversion
features 152 169 -
Mortgages 1 1 1
--------------------------------
$ 178 $ 206 $ 34
--------------------------------
--------------------------------
(iii) Included in net earnings is the impact of other than temporary
impairment (OTTI) as follows:
For the three months ended June 30, 2010
--------------------------------------------------
Loans
Avail- and
Held-for- able- receiv-
trading for sale ables Other Total
--------------------------------------------------
Impact on OTTI
- Assets carried
at market
value $ (8) $ - $ - $ - $ (8)
- Transfer from
other
comprehensive
income - (6) - - (6)
- Assets carried
at amortized
cost - - (1) - (1)
--------------------------------------------------
Gross impairment
charges (8) (6) (1) - (15)
Release of
actuarial default
provision and
other 29 - - - 29
--------------------------------------------------
Net impairment
(charges)
recovery before
income taxes $ 21 $ (6) $ (1) $ - $ 14
--------------------------------------------------
--------------------------------------------------
Net impairment
(charges)
recovery after
income taxes $ 10
----------
----------
For the three months ended June 30, 2009
--------------------------------------------------
Loans
Avail- and
Held-for- able- receiv-
trading for sale ables Other Total
--------------------------------------------------
Impact on OTTI
- Assets carried
at market
value $ 4 $ - $ - $ - $ 4
- Assets carried
at amortized
cost - - (11) - (11)
--------------------------------------------------
Gross impairment
charges 4 - (11) - (7)
Release of
actuarial default
provision and
other - - - - -
--------------------------------------------------
Net impairment
(charges)
recovery before
income taxes $ 4 $ - $ (11) $ - $ (7)
--------------------------------------------------
--------------------------------------------------
Net impairment
(charges)
recovery after
income taxes $ (4)
---------
---------
For the six months ended June 30, 2010
--------------------------------------------------
Loans
Avail- and
Held-for- able- receiv-
trading for sale ables Other Total
--------------------------------------------------
Impact on OTTI
- Assets carried
at market
value $ (52) $ - $ - $ - $ (52)
- Transfer from
other
comprehensive
income - (10) - - (10)
- Assets carried
at amortized
cost - - (1) - (1)
--------------------------------------------------
Gross impairment
charges (52) (10) (1) - (63)
Release of
actuarial default
provision and
other 88 - - - 88
--------------------------------------------------
Net impairment
(charges)
recovery before
income taxes $ 36 $ (10) $ (1) $ - $ 25
--------------------------------------------------
--------------------------------------------------
Net impairment
(charges)
recovery after
income taxes $ 19
---------
---------
For the six months ended June 30, 2009
--------------------------------------------------
Loans
Avail- and
Held-for- able- receiv-
trading for sale ables Other Total
--------------------------------------------------
Impact on OTTI
- Assets carried
at market
value $ (3) $ - $ - $ - $ (3)
- Assets carried
at amortized
cost - - (30) - (30)
--------------------------------------------------
Gross impairment
charges (3) - (30) - (33)
Release of
actuarial default
provision and
other - - - - -
--------------------------------------------------
Net impairment
(charges)
recovery before
income taxes $ (3) $ - $ (30) $ - $ (33)
--------------------------------------------------
--------------------------------------------------
Net impairment
(charges)
recovery after
income taxes $ (23)
---------
---------
(c) Net investment income is comprised of the following:
For the three
months ended Mortgage Real
June 30, 2010 Bonds loans Stocks estate Other Total
---------------------------------------------------------------------
Regular net investment
income:
Investment income
earned $ 941 $ 215 $ 47 $ 55 $ 98 $1,356
Net realized gains
(losses) (available
for sale) (7) - 4 - - (3)
Net realized gains
(losses) (other
classifications) - 5 - - - 5
Amortization of net
realized/unrealized
gains (non financial
instruments) - - - 5 - 5
Net (provision)
recovery for credit
losses (loans and
receivables) - (1) - - - (1)
Other income and
expenses - - - - (20) (20)
-----------------------------------------------
934 219 51 60 78 1,342
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) 1,525 - (295) - (173) 1,057
-----------------------------------------------
1,559 - (295) - (173) 1,091
-----------------------------------------------
Net investment income $2,493 $ 219 $ (244) $ 60 $ (95) $2,433
-----------------------------------------------
-----------------------------------------------
For the three
months ended Mortgage Real
June 30, 2009 Bonds loans Stocks estate Other Total
---------------------------------------------------------------------
Regular net investment
income:
Investment income
earned $1,043 $ 228 $ 44 $ 48 $ 254 $1,617
Net realized gains
(losses) (available
for sale) 19 - 1 - - 20
Net realized gains
(losses) (other
classifications) 4 2 7 - - 13
Amortization of net
realized/unrealized
gains (non financial
instruments) - - - (6) - (6)
Net (provision)
recovery for credit
losses (loans and
receivables) (4) (7) - - - (11)
Other income and
expenses - - - - (17) (17)
---------------------------------------------------------------------
1,062 223 52 42 237 1,616
Changes in fair value
on held for trading
assets:
Net realized/
unrealized gains
(losses) (classified
held for trading) (9) - - - - (9)
Net realized/
unrealized gains
(losses) (designated
held for trading) 1,749 - 627 - (95) 2,281
---------------------------------------------------------------------
1,740 - 627 - (95) 2,272
---------------------------------------------------------------------
Net investment income $2,802 $ 223 $ 679 $ 42 $ 142 $3,888
---------------------------------------------------------------------
---------------------------------------------------------------------
For the six
months ended Mortgage Real
June 30, 2010 Bonds loans Stocks estate Other Total
---------------------------------------------------------------------
Regular net
investment income:
Investment income
earned $1,878 $ 436 $ 90 $ 100 $ 264 $2,768
Net realized gains
(losses) (available
for sale) (3) - 12 - - 9
Net realized gains
(losses) (other
classifications) 10 8 - - - 18
Amortization of net
realized/unrealized
gains (non financial
instruments) - - - 7 - 7
Net (provision)
recovery for credit
losses (loans and
receivables) - (1) - - - (1)
Other income and
expenses - - - - (37) (37)
---------------------------------------------------------------------
1,885 443 102 107 227 2,764
Changes in fair value
on held for trading
assets:
Net realized/
unrealized gains
(losses) (classified
held for trading) 49 - - - - 49
Net realized/
unrealized gains
(losses) (designated
held for trading) 2,860 - (137) - (179) 2,544
---------------------------------------------------------------------
2,909 - (137) - (179) 2,593
---------------------------------------------------------------------
Net investment income $4,794 $ 443 $ (35) $ 107 $ 48 $5,357
---------------------------------------------------------------------
---------------------------------------------------------------------
For the six
months ended Mortgage Real
June 30, 2009 Bonds loans Stocks estate Other Total
---------------------------------------------------------------------
Regular net investment
income:
Investment income
earned $2,107 $ 463 $ 88 $ 93 $ 324 $3,075
Net realized gains
(losses) (available
for sale) 35 - - - - 35
Net realized gains
(losses) (other
classifications) 1 6 83 - - 90
Amortization of net
realized/unrealized
gains (non financial
instruments) - - - (10) - (10)
Net (provision)
recovery for credit
losses (loans and
receivables) (16) (14) - - - (30)
Other income and
expenses - - - - (33) (33)
---------------------------------------------------------------------
2,127 455 171 83 291 3,127
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) (45) - 452 - (102) 305
---------------------------------------------------------------------
(45) - 452 - (102) 305
---------------------------------------------------------------------
Net investment income $2,082 $ 455 $ 623 $ 83 $ 189 $3,432
---------------------------------------------------------------------
---------------------------------------------------------------------
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:
June 30, 2010
---------------------------------------------------
United
Canada States Europe Total
---------------------------------------------------
Bonds issued or
guaranteed by:
Canadian
federal
government $ 2,890 $ - $ 13 $ 2,903
Provincial,
state and
municipal
governments 5,443 1,806 49 7,298
U.S. Treasury
and other U.S.
agencies 363 2,759 943 4,065
Other foreign
governments 133 - 6,272 6,405
Government
related 803 - 1,357 2,160
Sovereign 719 4 666 1,389
Asset backed
securities 2,807 3,572 868 7,247
Residential
mortgage backed
securities 47 846 102 995
Banks 2,470 474 2,234 5,178
Other financial
institutions 1,089 1,471 1,480 4,040
Basic materials 161 552 211 924
Communications 598 269 502 1,369
Consumer
products 1,529 1,573 1,597 4,699
Industrial
products/
services 567 706 177 1,450
Natural
resources 1,075 701 493 2,269
Real estate 591 - 1,378 1,969
Transportations 1,501 591 593 2,685
Utilities 3,202 2,367 2,811 8,380
Miscellaneous 1,666 616 189 2,471
---------------------------------------------------
Total long term
bonds 27,654 18,307 21,935 67,896
Short term
bonds 1,176 683 189 2,048
---------------------------------------------------
$ 28,830 $ 18,990 $ 22,124 $ 69,944
---------------------------------------------------
---------------------------------------------------
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
---------------------------------------------------
---------------------------------------------------
June 30, 2009
---------------------------------------------------
United
Canada States Europe Total
---------------------------------------------------
Bonds issued or
guaranteed by:
Canadian
federal
government $ 1,930 $ 1 $ 10 $ 1,941
Provincial,
state and
municipal
governments 4,630 1,394 73 6,097
U.S. Treasury
and other U.S.
agencies 270 3,201 777 4,248
Other foreign
governments 148 - 6,499 6,647
Government
related 816 - 1,357 2,173
Sovereign 731 6 908 1,645
Asset-backed
securities 2,707 3,447 901 7,055
Residential
mortgage backed
securities 75 979 64 1,118
Banks 2,164 425 2,425 5,014
Other financial
institutions 1,046 1,154 1,570 3,770
Basic materials 140 609 217 966
Communications 594 338 445 1,377
Consumer
products 1,401 1,326 1,806 4,533
Industrial
products/
services 590 680 243 1,513
Natural
resources 974 625 628 2,227
Real estate 557 - 1,275 1,832
Transportations 1,338 642 695 2,675
Utilities 2,989 2,075 2,863 7,927
Miscellaneous 1,391 544 190 2,125
---------------------------------------------------
Total long
term bonds 24,491 17,446 22,946 64,883
Short term
bonds 1,947 381 165 2,493
---------------------------------------------------
$ 26,438 $ 17,827 $ 23,111 $ 67,376
---------------------------------------------------
---------------------------------------------------
(ii) Asset Quality
Bond Portfolio Quality
June 30 December 31 June 30
2010 2009 2009
------------------------------------
AAA $ 24,007 $ 21,754 $ 23,255
AA 11,382 10,585 10,960
A 20,786 19,332 19,319
BBB 10,468 10,113 10,517
BB and lower 1,253 1,365 832
------------------------------------
67,896 63,149 64,883
Short term bonds 2,048 2,998 2,493
------------------------------------
Total bonds $ 69,944 $ 66,147 $ 67,376
------------------------------------
------------------------------------
Derivative Portfolio Quality
June 30 December 31 June 30
2010 2009 2009
------------------------------------
Over-the-counter contracts
(counterparty ratings):
AAA $ 7 $ 5 $ 3
AA 332 338 219
A 346 374 274
------------------------------------
Total $ 685 $ 717 $ 496
------------------------------------
------------------------------------
(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:
June 30 December 31 June 30
2010 2009 2009
------------------------------------
Less than 30 days $ 4 $ 45 $ 9
30 - 90 days 12 6 11
90 days and greater 1 9 3
------------------------------------
Total $ 17 $ 60 $ 23
------------------------------------
------------------------------------
(iv) Performing Securities Subject to Deferred Coupons
Payment Resumption Date
------------------------------------
less than 1 to 2 greater than
1 year years 2 years
------------------------------------
Coupon payment receivable $ - $ 2 $ -
(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 $174 causing a decrease in net earnings of
approximately $121.
- The effect of an immediate 1% parallel decrease in the yield
curve would be to increase these policy liabilities by
approximately $43 causing a decrease in net earnings of
approximately $29.
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
consisting of purchasing equity futures, currency forwards, and
interest rate swaps. 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 $31 causing an increase in net earnings of
approximately $23. A 10% decrease in equity markets would be
expected to additionally increase non-participating policy
liabilities by approximately $114 causing a decrease in net
earnings of approximately $81.
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 $307 causing an increase in net
earnings of approximately $224. A 1% decrease in the best estimate
assumption would be expected to increase non-participating policy
liabilities by approximately $361 causing a decrease in net
earnings of approximately $261.
4. Financing Charges
Financing charges consist of the following:
For the three months For the six months
ended June 30 ended June 30
---------------------------------------------------
2010 2009 2010 2009
---------------------------------------------------
Operating charges:
Interest on
operating lines
and short-term
debt
instruments $ 3 $ 1 $ 6 $ 2
Financial charges:
Interest on
long-term
debentures and
other debt
instruments 56 52 110 104
Dividends on
preferred shares
classified as
liabilities - 9 2 18
Net realized/
unrealized
losses (gains)
on preferred
shares
classified as
held for trading - 31 (2) 32
Other 3 2 7 4
Net interest on
capital trust
debentures and
securities 8 11 16 21
---------------------------------------------------
67 105 133 179
---------------------------------------------------
Total $ 70 $ 106 $ 139 $ 181
---------------------------------------------------
---------------------------------------------------
5. 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
June 30, 2010 December 31, 2009 June 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) 2,826,925 39 1,157,971 15 410,951 5
----------------------------------------------------------------
Balance,
end of
period 947,867,401 $ 5,790 945,040,476 $ 5,751 944,293,456 $ 5,741
----------------------------------------------------------------
----------------------------------------------------------------
6. 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):
June 30 December 31 June 30
2010 2009 2009
------------------------------------
Capital Available:
Net Tier 1 Capital $ 7,187 $ 7,014 $ 7,064
------------------------------------
Tier 2 Capital Allowed 1,663 1,856 2,088
------------------------------------
Total Available Capital $ 8,850 $ 8,870 $ 9,152
------------------------------------
------------------------------------
Capital Required:
Total Capital Required $ 4,385 $ 4,354 $ 4,464
------------------------------------
------------------------------------
MCCSR ratios:
Tier 1 164% 161% 158%
------------------------------------
------------------------------------
Total 202% 204% 205%
------------------------------------
------------------------------------
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 June 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.
7. Stock Based Compensation
No options were granted under the Company's stock option plan during
the second quarter and 863,000 options were granted during the first
quarter of 2010 (no options were granted under the Company's stock
option plan during the first and second quarter of 2009). The
weighted average fair value of options granted was $4.34 per option
during the six months ended June 30, 2010. Compensation expense
relating to the Company's stock option plan of $3 after-tax has been
recognized in the Summaries of Consolidated Operations for the six
months ended June 30, 2010 ($5 after-tax for the six months ended
June 30, 2009).
8. Pension Plans and Other Post-Retirement Benefits
The total benefit costs included in operating expenses are as
follows:
For the three months For the six months
ended June 30 ended June 30
---------------------------------------------------
2010 2009 2010 2009
---------------------------------------------------
Pension benefits $ 24 $ 20 $ 40 $ 36
Other benefits 4 3 7 6
---------------------------------------------------
Total $ 28 $ 23 $ 47 $ 42
---------------------------------------------------
---------------------------------------------------
9. Earnings per Common Share
The following table provides the reconciliation between basic and
diluted earnings per common share:
For the three months For the six months
ended June 30 ended June 30
---------------------------------------------------
2010 2009 2010 2009
---------------------------------------------------
Earnings
Net earnings $ 455 $ 431 $ 916 $ 774
Perpetual
preferred share
dividends 22 18 42 35
---------------------------------------------------
Net earnings -
common
shareholders $ 433 $ 413 $ 874 $ 739
---------------------------------------------------
---------------------------------------------------
Number of common
shares
Average number of
common shares
outstanding 947,648,873 944,194,975 946,877,593 944,056,508
Add:
- Potential
exercise of
outstanding
stock options 985,134 1,332,473 1,419,075 812,929
---------------------------------------------------
Average number of
common shares
outstanding
- diluted basis 948,634,007 945,527,448 948,296,668 944,869,437
---------------------------------------------------
---------------------------------------------------
Basic earnings per
common share $ 0.457 $ 0.437 $ 0.923 $ 0.783
---------------------------------------------------
---------------------------------------------------
Diluted earnings
per common share $ 0.457 $ 0.437 $ 0.922 $ 0.782
---------------------------------------------------
---------------------------------------------------
10. Segmented Information
Consolidated Operations
For the three months ended June 30, 2010
United Lifeco
Canada States Europe Corporate Total
-----------------------------------------------------
Income:
Premium
income $ 2,228 $ 675 $ 1,312 $ - $ 4,215
Net investment
income
Regular net
investment
income 589 324 425 4 1,342
Changes in
fair value
on held for
trading
assets 187 404 500 - 1,091
-----------------------------------------------------
Total net
investment
income 776 728 925 4 2,433
Fee and other
income 255 307 156 - 718
-----------------------------------------------------
Total income 3,259 1,710 2,393 4 7,366
-----------------------------------------------------
Benefits and
expenses:
Paid or
credited to
policyholders 2,278 1,247 2,097 - 5,622
Other 602 380 140 2 1,124
Amortization
of finite
life intangible
assets 10 13 1 - 24
-----------------------------------------------------
Earnings before
income taxes 369 70 155 2 596
Income taxes 90 16 7 2 115
-----------------------------------------------------
Net earnings
before non-
controlling
interests 279 54 148 - 481
Non-controlling
interests 24 - 2 - 26
-----------------------------------------------------
Net earnings 255 54 146 - 455
Perpetual
preferred share
dividends 18 - 4 - 22
-----------------------------------------------------
Net earnings -
common
shareholders $ 237 $ 54 $ 142 $ - $ 433
-----------------------------------------------------
-----------------------------------------------------
For the three months ended June 30, 2009
United Lifeco
Canada States Europe Corporate Total
-----------------------------------------------------
Income:
Premium
income $ 2,243 $ 609 $ 1,812 $ - $ 4,664
Net investment
income
Regular net
investment
income 741 357 512 6 1,616
Changes in
fair value
on held for
trading
assets 805 546 921 - 2,272
-----------------------------------------------------
Total net
investment
income 1,546 903 1,433 6 3,888
Fee and other
income 229 291 146 - 666
-----------------------------------------------------
Total income 4,018 1,803 3,391 6 9,218
-----------------------------------------------------
Benefits and
expenses:
Paid or
credited to
policyholders 3,085 1,363 3,025 - 7,473
Other 585 367 199 4 1,155
Amortization
of finite
life intangible
assets 8 15 2 - 25
-----------------------------------------------------
Earnings before
income taxes 340 58 165 2 565
Income taxes 101 8 13 - 122
-----------------------------------------------------
Net earnings
before non-
controlling
interests 239 50 152 2 443
Non-controlling
interests 12 1 (1) - 12
-----------------------------------------------------
Net earnings 227 49 153 2 431
Perpetual
preferred share
dividends 10 - 4 4 18
-----------------------------------------------------
Net earnings -
common
shareholders $ 217 $ 49 $ 149 $ (2) $ 413
-----------------------------------------------------
-----------------------------------------------------
For the six months ended June 30, 2010
United Lifeco
Canada States Europe Corporate Total
-----------------------------------------------------
Income:
Premium
income $ 4,496 $ 1,501 $ 2,828 $ - $ 8,825
Net investment
income
Regular net
investment
income 1,208 658 893 5 2,764
Changes in
fair value
on held for
trading
assets 608 696 1,289 - 2,593
-----------------------------------------------------
Total net
investment
income 1,816 1,354 2,182 5 5,357
Fee and other
income 511 624 319 - 1,454
-----------------------------------------------------
Total income 6,823 3,479 5,329 5 15,636
-----------------------------------------------------
Benefits and
expenses:
Paid or
credited to
policyholders 4,958 2,537 4,698 - 12,193
Other 1,189 758 302 2 2,251
Amortization
of finite
life intangible
assets 19 25 3 - 47
-----------------------------------------------------
Earnings before
income taxes 657 159 326 3 1,145
Income taxes 129 36 33 3 201
-----------------------------------------------------
Net earnings
before non-
controlling
interests 528 123 293 - 944
Non-controlling
interests 23 1 4 - 28
-----------------------------------------------------
Net earnings 505 122 289 - 916
Perpetual
preferred share
dividends 35 - 7 - 42
-----------------------------------------------------
Net earnings -
common
shareholders $ 470 $ 122 $ 282 $ - $ 874
-----------------------------------------------------
-----------------------------------------------------
For the six months ended June 30, 2009
United Lifeco
Canada States Europe Corporate Total
-----------------------------------------------------
Income:
Premium
income $ 4,317 $ 1,564 $ 3,492 $ - $ 9,373
Net investment
income
Regular net
investment
income 1,288 799 1,033 7 3,127
Changes in
fair value
on held for
trading
assets 483 325 (503) - 305
-----------------------------------------------------
Total net
investment
income 1,771 1,124 530 7 3,432
Fee and other
income 451 574 321 - 1,346
-----------------------------------------------------
Total income 6,539 3,262 4,343 7 14,151
-----------------------------------------------------
Benefits and
expenses:
Paid or
credited to
policyholders 4,768 2,307 3,764 - 10,839
Other 1,116 756 376 7 2,255
Amortization
of finite
life intangible
assets 15 29 3 - 47
-----------------------------------------------------
Earnings before
income taxes 640 170 200 - 1,010
Income taxes 163 40 (3) - 200
-----------------------------------------------------
Net earnings
before non-
controlling
interests 477 130 203 - 810
Non-controlling
interests 31 6 (1) - 36
-----------------------------------------------------
Net earnings 446 124 204 - 774
Perpetual
preferred share
dividends 21 - 7 7 35
-----------------------------------------------------
Net earnings -
common
shareholders $ 425 $ 124 $ 197 $ (7) $ 739
-----------------------------------------------------
-----------------------------------------------------
For further information: Marlene Klassen, APR, Assistant Vice-President, Communication Services, (204) 946-7705
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