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