The Globe and Mail

Go to the Globe and Mail homepage

Jump to main navigationJump to main content

Globe Investor

News Sources

Take control of your investments with the latest investing news and analysis

Press release from CNW Group

Great-West Lifeco reports third quarter 2010 results

Wednesday, November 10, 2010

Great-West Lifeco reports third quarter 2010 results12:03 EST Wednesday, November 10, 2010TSX:GWOReaders are referred to the cautionary notes regarding Forward-Looking Information and Non-GAAP Financial Measures at the end of this release. All figures are expressed in Canadian dollars.TORONTO, Nov. 10, 2010 /CNW/ - Great-West Lifeco Inc. (Lifeco) has reported operating earnings attributable to common shareholders of $479 million for the three months ended September 30, 2010, compared to $445 million in the third quarter of 2009. On a per share basis, this represents $0.505 per common share for the three months ended September 30, 2010, compared to $0.471 per common share for the same period in 2009.For the nine months ended September 30, 2010, operating earnings attributable to common shareholders were $1,353 million, compared to $1,184 million a year ago, an increase of 14%. On a per share basis, this represents $1.429 per common share ($1.427 diluted) for 2010, compared to $1.254 per common share ($1.253 diluted) a year ago.Operating earnings, a non-GAAP financial measure, exclude the impact of an incremental litigation provision established in the quarter in the amount of $225 million after-tax ($204 million attributable to the common shareholders or $0.216 per common share and $21 million to non controlling interests).Net earnings attributable to common shareholders, as reported, were $275 million, or $0.289 per common share ($0.289 diluted) for the third quarter, and $1,149 million, or $1.213 per common share ($1.211 diluted) for the nine months ended September 30, 2010.The Company continued to achieve solid operating results for the quarter in all business segments despite continued currency head winds due to the strengthening of the Canadian dollar against the U.S. dollar, British pound and the euro in 2010. For the three months ended September 30, 2010, the negative currency impact on Lifeco's net earnings was $22 million or $0.024 per common share compared to the same period in 2009. For the nine months ended September 30, 2010, the negative currency impact on net earnings was $86 million or $0.091 per common share compared to 2009.Consolidated assets under administration at September 30, 2010 were $485.7 billion, up $27.1 billion from December 31, 2009.Highlights << - In quarter operating earnings grew by 8% in Canadian dollars and by 13% on a constant currency basis when compared to 2009. - The Company achieved strong organic sales growth in the quarter with new annualized premiums, in local currency, up 27% over 2009. - Sales in Canada continue to be very strong, with individual life insurance sales 21% higher and group insurance sales 19% higher in the quarter compared to the third quarter of 2009. - Sales in the U.S. Financial Services business increased 41% on a constant currency basis in the quarter compared to the same quarter in 2009. - Putnam sales are 35% higher than the third quarter of 2009 on a constant currency basis and the Putnam suite of absolute return mutual funds reached US$2.5 billion in assets under management. - U.K. sales increased 45% on a constant currency basis in the quarter compared to the same quarter in 2009. - Return on common shareholders' equity was 15.5% on operating earnings and 13.8% on net earnings. - The Company declared a quarterly common dividend of $0.3075 per common share payable December 31, 2010, unchanged from the previous quarter. - The Company's capital position remains very strong. Lifeco's Canadian operating subsidiary, Great-West Life, reported a Minimum Continuing Capital and Surplus (MCCSR) ratio of 202% at September 30, 2010. At September 30, 2010 Lifeco held, at the holding company level, approximately $0.8 billion in liquid assets derived from capital raising initiatives since the fourth quarter of 2008, which is not reflected in the Great-West Life MCCSR ratio. >>SEGMENTED OPERATING RESULTSConsolidated net earnings for Lifeco comprise the net earnings of The Great-West Life Assurance Company (Great-West Life), Canada Life Financial Corporation (CLFC), London Life Insurance Company (London Life), Great-West Life & Annuity Insurance Company (GWL&A), and Putnam Investments, LLC (Putnam), together with Lifeco's corporate results.CANADANet earnings attributable to common shareholders for the third quarter of 2010 were up 9% to $232 million compared to $212 million in the third quarter of 2009. For the nine months ended September 30, 2010, net earnings attributable to common shareholders were up 10% to $702 million compared to $637 million in 2009.Total sales for the nine months ended September 30, 2010 were up 31% to $7.0 billion compared to $5.3 billion after adjusting the 2009 nine month period for the impact of the group retirement assets acquired from Fidelity Investments Canada. This growth was driven by strong sales of proprietary retail investment funds which were up 47%, payout annuity products which were up 42% and individual life product sales which increased 28% compared to the nine month period in 2009.Total assets under administration at September 30, 2010 were $122.4 billion, compared to $114.6 billion at December 31, 2009.UNITED STATESNet earnings attributable to common shareholders for the third quarter of 2010 were $88 million compared to $68 million in the third quarter of 2009. For the nine months ended September 30, 2010, net earnings attributable to common shareholders were $210 million compared to $192 million in 2009.As a result of currency movement, net earnings were negatively impacted by $5 million compared to the third quarter of 2009 and by $26 million compared to the first nine months of 2009. On a constant currency basis net earnings grew by 35% in the third quarter of 2010 and by 23% for the first nine months of 2010 when compared to the same periods in 2009.Total sales for the nine months ended September 30, 2010 were $29.5 billion compared to $22.9 billion in 2009.Total assets under administration at September 30, 2010 were $295.7 billion compared to $277.8 billion at December 31, 2009. Included in assets under administration at September 30, 2010 were $123.3 billion of mutual fund and institutional account assets managed by Putnam.EUROPENet earnings attributable to common shareholders for the third quarter of 2010 were $158 million compared to $167 million in the third quarter of 2009. For the nine months ended September 30, 2010, net earnings attributable to common shareholders were $440 million compared to $364 million in 2009.As a result of currency movement, net earnings were negatively impacted by $17 million when compared to the third quarter of 2009 and by $60 million when compared to the first nine months of 2009. On a constant currency basis net earnings grew 5% in the third quarter of 2010 and by 37% for the first nine months of 2010 when compared to the same period in 2009.Total sales for the nine months ended September 30, 2010 were $3.2 billion, compared to $3.0 billion in 2009. Sales increased by 21% in local currency, however, this was largely offset by the negative effect of currency movement.Total assets under administration at September 30, 2010 were $67.6 billion, compared to $66.2 billion at December 31, 2009.CORPORATECorporate net earnings for Lifeco attributable to common shareholders was a net loss of $203 million for both the third quarter and the nine months ended September 30, 2010, including the impact of the litigation provision, compared to a net loss of $2 million in the third quarter of 2009 and a net loss of $9 million for the nine months ended September 30, 2009.QUARTERLY DIVIDENDSAt its meeting today, the Board of Directors approved a quarterly dividend of $0.3075 per share on the common shares of the Company payable December 31, 2010 to shareholders of record at the close of business December 3, 2010.In addition, the Directors approved quarterly dividends on: << - Series F First Preferred Shares of $0.36875 per share; - Series G First Preferred Shares of $0.3250 per share; - Series H First Preferred Shares of $0.30313 per share; - Series I First Preferred Shares of $0.28125 per share; - Series J First Preferred Shares of $0.3750 per share; - Series L First Preferred Shares of $0.353125 per share; and - Series M First Preferred Shares of $0.36250 per share all payable December 31, 2010 to shareholders of record at the close ofbusiness December 3, 2010. >>For purposes of the Income Tax Act (Canada), and any similar provincial legislation, the dividends referred to above are eligible dividends.GREAT-WEST LIFECOGreat-West Lifeco Inc. (TSX:GWO) is a financial services holding company with interests in the life insurance, health insurance, retirement savings, investment management and reinsurance businesses. The Company has operations in Canada, the United States, Europe and Asia through The Great-West Life Assurance Company, London Life Insurance Company, The Canada Life Assurance Company, Great-West Life & Annuity Insurance Company and Putnam Investments, LLC. Lifeco and its companies have over $485 billion in assets under administration and are members of the Power Financial Corporation group of companies.Cautionary note regarding Forward-Looking InformationThis 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 MeasuresThis 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 informationSelected financial information is attached.Great-West Lifeco's third quarter conference call and audio webcast will be held Wednesday, November 10, 2010 at 3:30 p.m. (EST). The call and webcast can be accessed through www.greatwestlifeco.com or by phone at: << - Participants in the Toronto area: 416-340-8018 - Participants from North America: 1-866-223-7781 - Participants from Overseas: Dial international access code first, then 800-6578-9898 >>A replay of the call will be available from November 10 to November 17, 2010, and can be accessed by calling 1-800-408-3053 or 416-695-5800 in Toronto (passcode: 1316752 followed by the number sign). The archived webcast will be available on www.greatwestlifeco.com from approximately 7:00 p.m. (EST) on November 10, 2010 until November 9, 2011.Additional information relating to Lifeco, including the most recent interim unaudited financial statements, interim Management's Discussion and Analysis (MD&A), and CEO/CFO certificates will be filed on SEDAR at www.sedar.com. << FINANCIAL HIGHLIGHTS (unaudited) (in $ millions except per share amounts) As at or for the For the three months ended nine months ended ------------------------------------------------------ September June September September September 30 2010 30 2010 30 2009 30 2010 30 2009 ------------------------------------------------------------------------- Premiums and deposits: Life insurance, guaranteed annuities and insured health products $ 4,313 $ 4,215 $ 4,336 $ 13,138 $ 13,709 Self-funded premium equivalents (ASO contracts) 619 657 610 1,921 1,867 Segregated funds deposits: Individual products 1,703 1,633 1,236 5,126 4,193 Group products 1,340 2,335 2,325 5,405 6,844 Proprietary mutual funds and institutional deposits 6,407 5,389 5,045 17,987 15,465 ------------------------------------------------------ Total premiums and deposits 14,382 14,229 13,552 43,577 42,078 ------------------------------------------------------ Fee and other income 691 718 728 2,145 2,074 Paid or credited to policyholders 7,317 5,622 8,687 19,510 19,526 Operating earnings - common shareholders 479 433 445 1,353 1,184 Net earnings - common shareholders 275 433 445 1,149 1,184 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Per common share Operating earnings $ 0.505 $ 0.457 $ 0.471 $ 1.429 $ 1.254 Basic earnings 0.289 0.457 0.471 1.213 1.254 Dividends paid 0.3075 0.3075 0.3075 0.9225 0.9225 Book value 12.35 12.30 12.21 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Return on common shareholders' equity (12 months): Operating earnings 15.5% 15.2% 13.7% Net earnings 13.8% 15.2% 2.4% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Total assets $ 135,567 $ 131,320 $ 129,813 Segregated funds net assets 92,167 87,023 86,640 Proprietary mutual funds and institutional net assets 126,362 119,069 124,272 -------------------------------- Total assets under management 354,096 337,412 340,725 Other assets under administration 131,557 122,778 114,145 -------------------------------- Total assets under administration $ 485,653 $ 460,190 $ 454,870 -------------------------------- -------------------------------- Share capital and surplus $ 13,361 $ 13,309 $ 12,861 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The Company uses operating earnings as a non-GAAP financial measure of earnings performance, which reflects the litigation provision described in Note 12 (a) to the September 30, 2010 financial statements. SUMMARIES OF CONSOLIDATED OPERATIONS (unaudited) (in $ millions except per share amounts) For the For the three months ended nine months ended ------------------------------------------------------ September June September September September 30 2010 30 2010 30 2009 30 2010 30 2009 ------------------------------------------------------ Income Premium income $ 4,313 $ 4,215 $ 4,336 $ 13,138 $ 13,709 Net investment income (note 2) Regular net investment income 1,504 1,342 1,591 4,268 4,718 Changes in fair value on held for trading assets 2,595 1,091 3,734 5,188 4,039 ------------------------------------------------------ Total net investment income 4,099 2,433 5,325 9,456 8,757 Fee and other income 691 718 728 2,145 2,074 ------------------------------------------------------ 9,103 7,366 10,389 24,739 24,540 ------------------------------------------------------ Benefits and expenses Policyholder benefits 3,556 3,861 3,918 11,305 12,653 Policyholder dividends and experience refunds 382 351 382 1,116 1,151 Change in actuarial liabilities 3,379 1,410 4,387 7,089 5,722 ------------------------------------------------------ Total paid or credited to policyholders 7,317 5,622 8,687 19,510 19,526 Commissions 366 364 319 1,093 979 Operating expenses 970 629 636 2,229 1,927 Premium taxes 71 61 69 197 192 Financing charges (note 4) 73 70 93 212 274 Amortization of finite life intangible assets 22 24 21 69 68 ------------------------------------------------------ Earnings before income taxes 284 596 564 1,429 1,574 Income taxes - current (33) (19) (43) (51) 60 - future 18 134 141 237 238 ------------------------------------------------------ Net earnings before non-controlling interests 299 481 466 1,243 1,276 Non-controlling interests 2 26 4 30 40 ------------------------------------------------------ Net earnings 297 455 462 1,213 1,236 Perpetual preferred share dividends 22 22 17 64 52 ------------------------------------------------------ Net earnings - common shareholders $ 275 $ 433 $ 445 $ 1,149 $ 1,184 ------------------------------------------------------ ------------------------------------------------------ Earnings per common share (note 10) Basic $ 0.289 $ 0.457 $ 0.471 $ 1.213 $ 1.254 ------------------------------------------------------ ------------------------------------------------------ Diluted $ 0.289 $ 0.457 $ 0.470 $ 1.211 $ 1.253 ------------------------------------------------------ ------------------------------------------------------ CONSOLIDATED BALANCE SHEETS (unaudited) (in $ millions) September December September 30 2010 31 2009 30 2009 -------------------------------- Assets Bonds (note 2) $ 73,513 $ 66,147 $ 67,156 Mortgage loans (note 2) 16,519 16,684 16,974 Stocks (note 2) 7,032 6,442 6,355 Real estate (note 2) 3,250 3,099 3,133 Loans to policyholders 6,926 6,957 7,058 Cash and cash equivalents 2,665 3,427 3,046 Funds held by ceding insurers 10,777 10,839 11,258 Goodwill 5,402 5,406 5,409 Intangible assets 3,180 3,238 3,283 Other assets 6,303 6,130 6,141 -------------------------------- Total assets $ 135,567 $ 128,369 $ 129,813 -------------------------------- -------------------------------- Liabilities Policy liabilities Actuarial liabilities $ 103,381 $ 98,059 $ 99,033 Provision for claims 1,263 1,308 1,253 Provision for policyholder dividends 645 606 651 Provision for experience rating refunds 311 317 322 Policyholder funds 2,431 2,361 2,321 -------------------------------- 108,031 102,651 103,580 Debentures and other debt instruments 4,413 4,142 3,817 Funds held under reinsurance contracts 369 186 122 Other liabilities 5,247 4,608 4,636 Repurchase agreements 1,049 532 699 Deferred net realized gains 118 133 140 -------------------------------- 119,227 112,252 112,994 Preferred shares (note 6) - 203 793 Capital trust securities and debentures 534 540 782 Non-controlling interests Participating account surplus in subsidiaries 2,052 2,004 2,018 Preferred shares issued by subsidiaries 157 157 157 Perpetual preferred shares issued by subsidiaries 146 147 148 Non-controlling interests in capital stock and surplus 90 63 60 Share capital and surplus Share capital (note 6) Perpetual preferred shares 1,647 1,497 1,327 Common shares 5,794 5,751 5,747 Accumulated surplus 7,638 7,367 7,219 Accumulated other comprehensive loss (1,773) (1,664) (1,482) Contributed surplus 55 52 50 -------------------------------- 13,361 13,003 12,861 -------------------------------- Total liabilities, share capital and surplus $ 135,567 $ 128,369 $ 129,813 -------------------------------- -------------------------------- CONSOLIDATED STATEMENTS OF SURPLUS (unaudited) (in $ millions) For the nine months ended September 30 --------------------- 2010 2009 --------------------- Accumulated surplus Balance, beginning of year $ 7,367 $ 6,906 Net earnings 1,213 1,236 Share issue costs (3) - Dividends to shareholders Perpetual preferred shareholders (64) (52) Common shareholders (875) (871) --------------------- Balance, end of period $ 7,638 $ 7,219 --------------------- --------------------- Accumulated other comprehensive loss, net of income taxes Balance, beginning of year $ (1,664) $ (787) Other comprehensive loss (109) (695) --------------------- Balance, end of period $ (1,773) $ (1,482) --------------------- --------------------- Contributed surplus Balance, beginning of year $ 52 $ 44 Stock option expense Current period expense (note 8) 4 6 Exercised (1) - --------------------- Balance, end of period $ 55 $ 50 --------------------- --------------------- SUMMARIES OF CONSOLIDATED COMPREHENSIVE INCOME (unaudited) (in $ millions) For the three months For the nine months ended September 30 ended September 30 ------------------------------------------- 2010 2009 2010 2009 ------------------------------------------- Net earnings $ 297 $ 462 $ 1,213 $ 1,236 Other comprehensive income (loss) Unrealized foreign exchange gains (losses) on translation of foreign operations (35) (767) (268) (896) Income tax (expense) benefit - - - (1) Unrealized gains (losses) on available for sale assets 136 172 299 149 Income tax (expense) benefit (34) (42) (74) (48) Realized (gains) losses on available for sale assets (27) (6) (36) (41) Income tax expense (benefit) 3 - 7 6 Unrealized gains (losses) on cash flow hedges 50 108 (16) 197 Income tax (expense) benefit (17) (38) 6 (69) Realized (gains) losses on cash flow hedges 2 1 2 (14) Income tax expense (benefit) (1) - (1) 5 Non-controlling interests (13) (4) (28) 12 Income tax (expense) benefit - 5 - 5 ------------------------------------------- 64 (571) (109) (695) ------------------------------------------- Comprehensive income $ 361 $ (109) $ 1,104 $ 541 ------------------------------------------- ------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (in $ millions) For the three months For the nine months ended September 30 ended September 30 ------------------------------------------- 2010 2009 2010 2009 ------------------------------------------- Operations Net earnings $ 297 $ 462 $ 1,213 $ 1,236 Adjustments: Change in policy liabilities 3,495 4,277 7,248 5,505 Change in funds held by ceding insurers 109 127 384 337 Change in funds held under reinsurance contracts 26 (27) 192 (38) Change in current income taxes payable (37) (149) (12) (356) Future income tax expense 18 141 237 238 Changes in fair value of financial instruments (2,595) (3,720) (5,190) (3,993) Other 341 (377) 96 (373) ------------------------------------------- Cash flows from operations 1,654 734 4,168 2,556 Financing Activities Issue of common shares 4 6 43 11 Issue of preferred shares - - 150 - Redemption of preferred shares - - (200) - Increase (decrease) in line of credit in subsidiary (130) (17) (5) 165 Issue of debentures 500 - 500 - Repayment of debentures and other debt instruments (203) 31 (202) (1) Share issue costs - - (3) - Dividends paid (314) (307) (939) (923) ------------------------------------------- (143) (287) (656) (748) Investment Activities Bond sales and maturities 4,375 4,325 13,515 14,762 Mortgage loan repayments 477 504 1,443 1,297 Stock sales 382 517 1,187 1,794 Real estate sales - - 9 8 Change in loans to policyholders (3) (37) (57) (92) Change in repurchase agreements 204 531 529 458 Acquisition of intangible assets - (37) - (37) Investment in bonds (6,192) (5,199) (17,442) (16,279) Investment in mortgage loans (493) (638) (1,467) (1,319) Investment in stocks (454) (462) (1,602) (1,898) Investment in real estate (108) (3) (251) (88) ------------------------------------------- (1,812) (499) (4,136) (1,394) Effect of changes in exchange rates on cash and cash equivalents 48 (259) (138) (218) Increase (decrease) in cash and cash equivalents (253) (311) (762) 196 Cash and cash equivalents, beginning of period 2,918 3,357 3,427 2,850 ------------------------------------------- Cash and cash equivalents, end of period $ 2,665 $ 3,046 $ 2,665 $ 3,046 ------------------------------------------- ------------------------------------------- Notes to Consolidated Financial Statements (unaudited) (in $ millions except per share amounts) 1. Basis of Presentation and Summary of Accounting Policies The interim unaudited consolidated financial statements of Great-West Lifeco Inc. (Lifeco or the Company) at September 30, 2010 have been prepared in accordance with Canadian generally accepted accounting principles, using the same accounting policies and methods of computation followed in the consolidated financial statements for the year ended December 31, 2009. During the nine months ended September 30, 2010 the Company did not adopt any changes in accounting policy that resulted in a material impact to the financial statements of the Company. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Company's annual report dated December 31, 2009. The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting period. The valuation of policy liabilities, certain financial assets and liabilities, goodwill and indefinite life intangible assets, income taxes and pension plans and other post-retirement benefits are the most significant components of the Company's financial statements subject to management estimates. The year to date results of the Company reflect management's judgments regarding the impact of prevailing global credit, equity and foreign exchange market conditions. Financial instrument carrying values currently reflect the illiquidity of the markets and the liquidity premiums embedded in the market pricing methods the Company relies upon. The estimation of policy liabilities relies upon investment credit ratings. The Company's practice is to use third party independent credit ratings where available. Credit rating changes may lag developments in the current environment. Subsequent credit rating adjustments will impact policy liabilities. (a) Future Accounting Policies International Financial Reporting Standards (IFRS) -------------------------------------------------- The Canadian Accounting Standards Board has mandated that all Canadian publicly accountable entities are required to transition from Canadian generally accepted accounting principles (GAAP) to IFRS for fiscal years beginning on or after January 1, 2011. Consequently, the Company will adopt IFRS in its quarterly and annual reports starting with the first quarter of 2011 and will provide corresponding comparative information for 2010. The Company continues to evaluate the financial statement impact of transitioning from Canadian GAAP to IFRS and the related effect on its information systems and processes. Until this effort is complete, the final impact of adopting IFRS and the related effects on the Company's consolidated financial statements cannot be reasonably determined. The IFRS standard that deals with the measurement of insurance contracts, also referred to as Phase II Insurance Contracts, is currently being developed and a final accounting standard is not expected to be implemented for several years. As a result, the Company will continue to measure insurance liabilities using the Canadian Asset Liability Method (CALM) until such time when a new IFRS standard for insurance contract measurement is issued. Consequently, the evolving nature of IFRS will likely result in additional accounting changes, some of which may be significant, in the years following the Company's initial transition to IFRS. 2. Portfolio Investments (a) Carrying values and estimated market values of portfolio investments are as follows: September 30, 2010 ------------------------------------------------------------ Loans Avail- and Total Total Held-for- able- receiv- carrying fair trading for sale ables Other value value ------------------------------------------------------------ Bonds $ 57,418 $ 6,910 $ 9,185 $ - $ 73,513 $ 74,397 Mortgage loans - - 16,519 - 16,519 17,585 Stocks 5,606 1,097 - 329 7,032 7,087 Real estate - - - 3,250 3,250 3,359 ------------------------------------------------------------ $ 63,024 $ 8,007 $ 25,704 $ 3,579 $100,314 $102,428 ------------------------------------------------------------ ------------------------------------------------------------ December 31, 2009 ------------------------------------------------------------ Loans Avail- and Total Total Held-for- able- receiv- carrying fair trading for sale ables Other value value ------------------------------------------------------------ Bonds $ 52,362 $ 4,620 $ 9,165 $ - $ 66,147 $ 66,403 Mortgage loans - - 16,684 - 16,684 16,891 Stocks 4,928 1,186 - 328 6,442 6,503 Real estate - - - 3,099 3,099 3,053 ------------------------------------------------------------ $ 57,290 $ 5,806 $ 25,849 $ 3,427 $ 92,372 $ 92,850 ------------------------------------------------------------ ------------------------------------------------------------ September 30, 2009 ------------------------------------------------------------ Loans Avail- and Total Total Held-for- able- receiv- carrying fair trading for sale ables Other value value ------------------------------------------------------------ Bonds $ 52,786 $ 5,122 $ 9,248 $ - $ 67,156 $ 67,395 Mortgage loans - - 16,974 - 16,974 17,171 Stocks 4,629 1,399 - 327 6,355 6,418 Real estate - - - 3,133 3,133 2,912 ------------------------------------------------------------ $ 57,415 $ 6,521 $ 26,222 $ 3,460 $ 93,618 $ 93,896 ------------------------------------------------------------ ------------------------------------------------------------ (b) Included in portfolio investments are the following: (i) Impaired investments September 30, 2010 -------------------------------- Gross Carrying amount Impairment amount -------------------------------- Impaired amounts by type(1) Held for trading $ 504 $ (199) $ 305 Available for sale 56 (32) 24 Loans and receivables 144 (69) 75 -------------------------------- Total $ 704 $ (300) $ 404 -------------------------------- -------------------------------- December 31, 2009 -------------------------------- Gross Carrying amount Impairment amount -------------------------------- Impaired amounts by type(1) Held for trading $ 517 $ (278) $ 239 Available for sale 55 (36) 19 Loans and receivables 151 (81) 70 -------------------------------- Total $ 723 $ (395) $ 328 -------------------------------- -------------------------------- September 30, 2009 -------------------------------- Gross Carrying amount Impairment amount -------------------------------- Impaired amounts by type(1) Held for trading $ 219 $ (141) $ 78 Available for sale 18 (14) 4 Loans and receivables 153 (84) 69 -------------------------------- Total $ 390 $ (239) $ 151 -------------------------------- -------------------------------- Impaired investments include $32 gross amount of capital securities that have deferred coupons on a non-cumulative basis. (1) Excludes amounts in funds held by ceding insurers of $5 and impairment of $(1) at September 30, 2010 and $10 and $(4) at December 31, 2009 and $10 and $(4) at September 30, 2009. (ii) The Company holds investments with restructured terms or which have been exchanged for securities with amended terms. These investments are performing according to their new terms. Their carrying value is as follows: September December September 30 2010 31 2009 30 2009 -------------------------------- Bonds $ 24 $ 36 $ 31 Bonds with equity conversion features 162 169 - Mortgages 1 1 1 -------------------------------- $ 187 $ 206 $ 32 -------------------------------- -------------------------------- (iii) Included in net earnings is the impact of other than temporary impairment (OTTI) as follows: For the three months ended September 30, 2010 -------------------------------------------------- Loans Avail- and Held-for- able- receiv- trading for sale ables Other Total -------------------------------------------------- Impact on OTTI - Assets carried at market value $ 26 $ - $ - $ - $ 26 - Transfer from other comprehensive income - (1) - - (1) - Assets carried at amortized cost - - 3 - 3 -------------------------------------------------- Gross impairment charges 26 (1) 3 - 28 Release of actuarial default provision and other (13) - - - (13) -------------------------------------------------- Net impairment (charges) recovery before income taxes $ 13 $ (1) $ 3 $ - $ 15 -------------------------------------------------- -------------------------------------------------- Net impairment (charges) recovery after income taxes $ 11 ---------- ---------- For the three months ended September 30, 2009 -------------------------------------------------- Loans Avail- and Held-for- able- receiv- trading for sale ables Other Total -------------------------------------------------- Impact on OTTI - Assets carried at market value $ (8) $ - $ - $ - $ (8) - Assets carried at amortized cost - - (7) - (7) -------------------------------------------------- Gross impairment charges (8) - (7) - (15) Release of actuarial default provision and other 13 - - - 13 -------------------------------------------------- Net impairment (charges) recovery before income taxes $ 5 $ - $ (7) $ - $ (2) -------------------------------------------------- -------------------------------------------------- Net impairment (charges) recovery after income taxes $ - ---------- ---------- For the nine months ended September 30, 2010 -------------------------------------------------- Loans Avail- and Held-for- able- receiv- trading for sale ables Other Total -------------------------------------------------- Impact on OTTI - Assets carried at market value $ (26) $ - $ - $ - $ (26) - Transfer from other comprehensive income - (11) - - (11) - Assets carried at amortized cost - - 2 - 2 -------------------------------------------------- Gross impairment charges (26) (11) 2 - (35) Release of actuarial default provision and other 75 - - - 75 -------------------------------------------------- Net impairment (charges) recovery before income taxes $ 49 $ (11) $ 2 $ - $ 40 -------------------------------------------------- -------------------------------------------------- Net impairment (charges) recovery after income taxes $ 30 ---------- ---------- For the nine months ended September 30, 2009 -------------------------------------------------- Loans Avail- and Held-for- able- receiv- trading for sale ables Other Total -------------------------------------------------- Impact on OTTI - Assets carried at market value $ (11) $ - $ - $ - $ (11) - Assets carried at amortized cost - - (37) - (37) -------------------------------------------------- Gross impairment charges (11) - (37) - (48) Release of actuarial default provision and other 13 - - - 13 -------------------------------------------------- Net impairment (charges) recovery before income taxes $ 2 $ - $ (37) $ - $ (35) -------------------------------------------------- -------------------------------------------------- Net impairment (charges) recovery after income taxes $ (23) ---------- ---------- (c) Net investment income is comprised of the following: For the three months ended Mortgage Real September 30, 2010 Bonds loans Stocks estate Other Total --------------------------------------------------------------------- Regular net investment income: Investment income earned $ 970 $ 217 $ 72 $ 50 $ 170 $1,479 Net realized gains (losses) (available for sale) 29 - - - - 29 Net realized gains (losses) (other classifications) 2 3 - - - 5 Amortization of net realized/unrealized gains (non-financial instruments) - - - 5 - 5 Net recovery (provision) for credit losses (loans and receivables) 3 - - - - 3 Other income and expenses - - - - (17) (17) ----------------------------------------------- 1,004 220 72 55 153 1,504 Changes in fair value on held for trading assets: Net realized/ unrealized gains (losses) (classified held for trading) 34 - - - - 34 Net realized/ unrealized gains (losses) (designated held for trading) 2,106 - 367 - 88 2,561 ----------------------------------------------- 2,140 - 367 - 88 2,595 ----------------------------------------------- Net investment income $3,144 $ 220 $ 439 $ 55 $ 241 $4,099 ----------------------------------------------- ----------------------------------------------- For the three months ended Mortgage Real September 30, 2009 Bonds loans Stocks estate Other Total --------------------------------------------------------------------- Regular net investment income: Investment income earned $1,039 $ 231 $ 43 $ 45 $ 250 $1,608 Net realized gains (losses) (available for sale) 10 - (4) - - 6 Net realized gains (losses) (other classifications) 3 3 - - - 6 Amortization of net realized/unrealized gains (non-financial instruments) - - - (5) - (5) Net recovery (provision) for credit losses (loans and receivables) - (7) - - - (7) Other income and expenses - - - - (17) (17) ----------------------------------------------- 1,052 227 39 40 233 1,591 Changes in fair value on held for trading assets: Net realized/ unrealized gains (losses) (classified held for trading) 28 - - - - 28 Net realized/ unrealized gains (losses) (designated held for trading) 3,329 - 381 - (4) 3,706 ----------------------------------------------- 3,357 - 381 - (4) 3,734 ----------------------------------------------- Net investment income $4,409 $ 227 $ 420 $ 40 $ 229 $5,325 ----------------------------------------------- ----------------------------------------------- For the nine months ended Mortgage Real September 30, 2010 Bonds loans Stocks estate Other Total --------------------------------------------------------------------- Regular net investment income: Investment income earned $2,848 $ 653 $ 168 $ 150 $ 428 $4,247 Net realized gains (losses) (available for sale) 26 - 12 - - 38 Net realized gains (losses) (other classifications) 12 11 - - - 23 Amortization of net realized/unrealized gains (non-financial instruments) - - - 12 - 12 Net recovery (provision) for credit losses (loans and receivables) 3 (1) - - - 2 Other income and expenses - - - - (54) (54) ----------------------------------------------- 2,889 663 180 162 374 4,268 Changes in fair value on held for trading assets: Net realized/ unrealized gains (losses) (classified held for trading) 83 - - - - 83 Net realized/ unrealized gains (losses) (designated held for trading) 4,966 - 230 - (91) 5,105 ----------------------------------------------- 5,049 - 230 - (91) 5,188 ----------------------------------------------- Net investment income $7,938 $ 663 $ 410 $ 162 $ 283 $9,456 ----------------------------------------------- ----------------------------------------------- For the nine months ended Mortgage Real September 30, 2009 Bonds loans Stocks estate Other Total --------------------------------------------------------------------- Regular net investment income: Investment income earned $3,146 $ 694 $ 135 $ 138 $ 570 $4,683 Net realized gains (losses) (available for sale) 45 - (4) - - 41 Net realized gains (losses) (other classifications) 4 9 83 - - 96 Amortization of net realized/unrealized gains (non-financial instruments) - - - (15) - (15) Net recovery (provision) for credit losses (loans and receivables) (16) (21) - - - (37) Other income and expenses - - - - (50) (50) ----------------------------------------------- 3,179 682 214 123 520 4,718 Changes in fair value on held for trading assets: Net realized/ unrealized gains (losses) (classified held for trading) 28 - - - - 28 Net realized/ unrealized gains (losses) (designated held for trading) 3,284 - 833 - (106) 4,011 ----------------------------------------------- 3,312 - 833 - (106) 4,039 ----------------------------------------------- Net investment income $6,491 $ 682 $1,047 $ 123 $ 414 $8,757 ----------------------------------------------- ----------------------------------------------- Investment income earned is comprised of income from investments that are classified or designated as held for trading, classified as available for sale and classified as loans and receivables. 3. Risk Management The Company has policies relating to the identification, measurement, monitoring, mitigating, and controlling of risks associated with financial instruments. The key risks related to financial instruments are credit risk, liquidity risk and market risk (currency, interest rate and equity). Our risk governance structure and risk management approach have not substantially changed from that described in our 2009 Annual Report. Certain risks have been outlined below. For a complete discussion of our risk governance structure and our risk management approach, see the "Financial Instrument Risk Management" note in the Company's consolidated financial statements dated December 31, 2009. The Company has also established policies and procedures designed to identify, measure and report all material risks. Management is responsible for establishing capital management procedures for implementing and monitoring the capital plan. The Board of Directors reviews and approves all capital transactions undertaken by management. (a) Credit Risk Credit risk is the risk of financial loss resulting from the failure of debtors making payments when due. (i) Concentration of Credit Risk Concentrations of credit risk arise from exposures to a single debtor, a group of related debtors or groups of debtors that have similar credit risk characteristics in that they operate in the same geographic region or in similar industries. The following table provides details of the carrying value of bonds by industry sector and geographic distribution: September 30, 2010 --------------------------------------------------- United Canada States Europe Total --------------------------------------------------- Bonds issued or guaranteed by: Canadian federal government $ 3,170 $ - $ 15 $ 3,185 Provincial, state and municipal governments 5,859 1,742 46 7,647 U.S. Treasury and other U.S. agencies 377 2,911 1,091 4,379 Other foreign governments 138 - 6,772 6,910 Government related 839 - 1,470 2,309 Sovereign 673 8 790 1,471 Asset-backed securities 2,826 3,593 912 7,331 Residential mortgage backed securities 46 809 110 965 Banks 2,397 471 2,473 5,341 Other financial institutions 1,113 1,455 1,583 4,151 Basic materials 213 556 219 988 Communications 612 267 525 1,404 Consumer products 1,605 1,576 1,649 4,830 Industrial products/ services 559 731 177 1,467 Natural resources 1,096 565 476 2,137 Real estate 581 - 1,517 2,098 Transportations 1,534 591 622 2,747 Utilities 3,307 2,568 3,042 8,917 Miscellaneous 1,651 621 206 2,478 --------------------------------------------------- Total long term bonds 28,596 18,464 23,695 70,755 Short term bonds 1,689 973 96 2,758 --------------------------------------------------- $ 30,285 $ 19,437 $ 23,791 $ 73,513 --------------------------------------------------- --------------------------------------------------- December 31, 2009 --------------------------------------------------- United Canada States Europe Total --------------------------------------------------- Bonds issued or guaranteed by: Canadian federal government $ 2,264 $ 1 $ 14 $ 2,279 Provincial, state and municipal governments 4,917 1,333 55 6,305 U.S. Treasury and other U.S. agencies 240 2,620 758 3,618 Other foreign governments 104 - 5,773 5,877 Government related 778 - 1,372 2,150 Sovereign 783 4 762 1,549 Asset-backed securities 2,636 3,306 851 6,793 Residential mortgage backed securities 46 842 60 948 Banks 2,201 453 2,299 4,953 Other financial institutions 1,021 1,336 1,507 3,864 Basic materials 151 571 198 920 Communications 598 276 473 1,347 Consumer products 1,384 1,351 1,664 4,399 Industrial products/ services 516 651 206 1,373 Natural resources 1,000 710 581 2,291 Real estate 559 - 1,216 1,775 Transportations 1,414 585 594 2,593 Utilities 3,008 2,172 2,702 7,882 Miscellaneous 1,489 562 182 2,233 --------------------------------------------------- Total long term bonds 25,109 16,773 21,267 63,149 Short term bonds 2,406 455 137 2,998 --------------------------------------------------- $ 27,515 $ 17,228 $ 21,404 $ 66,147 --------------------------------------------------- --------------------------------------------------- September 30, 2009 --------------------------------------------------- United Canada States Europe Total --------------------------------------------------- Bonds issued or guaranteed by: Canadian federal government $ 2,454 $ - $ 10 $ 2,464 Provincial, state and municipal governments 4,860 1,307 64 6,231 U.S. Treasury and other U.S. agencies 262 2,788 748 3,798 Other foreign governments 149 - 6,096 6,245 Government related 809 - 1,306 2,115 Sovereign 752 5 797 1,554 Asset-backed securities 2,757 3,398 877 7,032 Residential mortgage backed securities 66 889 60 1,015 Banks 2,256 442 2,389 5,087 Other financial institutions 1,096 1,235 1,560 3,891 Basic materials 149 577 202 928 Communications 606 299 495 1,400 Consumer products 1,408 1,314 1,711 4,433 Industrial products/ services 543 647 231 1,421 Natural resources 1,010 714 601 2,325 Real estate 565 - 1,257 1,822 Transportations 1,384 608 595 2,587 Utilities 3,063 2,143 2,780 7,986 Miscellaneous 1,478 522 187 2,187 --------------------------------------------------- Total long term bonds 25,667 16,888 21,966 64,521 Short term bonds 1,911 603 121 2,635 --------------------------------------------------- $ 27,578 $ 17,491 $ 22,087 $ 67,156 --------------------------------------------------- --------------------------------------------------- (ii) Asset Quality Bond Portfolio Quality September December September 30 2010 31 2009 30 2009 -------------------------------- AAA $ 25,595 $ 21,754 $ 22,643 AA 11,827 10,585 10,752 A 21,100 19,332 19,449 BBB 10,867 10,113 10,588 BB and lower 1,366 1,365 1,089 -------------------------------- 70,755 63,149 64,521 Short term bonds 2,758 2,998 2,635 -------------------------------- Total bonds $ 73,513 $ 66,147 $ 67,156 -------------------------------- -------------------------------- Derivative Portfolio Quality September December September 30 2010 31 2009 30 2009 -------------------------------- Over-the-counter contracts (counterparty ratings): AAA $ 2 $ 5 $ 4 AA 370 338 257 A 418 374 441 -------------------------------- Total $ 790 $ 717 $ 702 -------------------------------- -------------------------------- (iii) Loans Past Due, But Not Impaired Loans that are past due but not considered impaired are loans for which scheduled payments have not been received, but management has reasonable assurance of collection of the full amount of principal and interest due. The following table provides carrying values of the loans past due, but not impaired: September December September 30 2010 31 2009 30 2009 -------------------------------- Less than 30 days $ 47 $ 45 $ 48 30 - 90 days 2 6 4 90 days and greater 13 9 10 -------------------------------- Total $ 62 $ 60 $ 62 -------------------------------- -------------------------------- (iv) Performing Securities Subject to Deferred Coupons Payment Resumption Date -------------------------------- greater less than 1 to than 1 year 2 years 2 years -------------------------------- Coupon payment receivable $ - $ 3 $ - (b) Liquidity Risk Liquidity risk is the risk that the Company will not be able to meet all cash outflow obligations as they come due. The following policies and procedures are in place to manage this risk: - The Company closely manages operating liquidity through cash flow matching of assets and liabilities and forecasting earned and required yields, to ensure consistency between policyholder requirements and the yield of assets. - Management closely monitors the solvency and capital positions of its principal subsidiaries opposite liquidity requirements at the holding company. Additional liquidity is available through established lines of credit or the capital markets. (c) Market Risk Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate as a result of changes in market factors which include three types: currency risk, interest rate (including related inflation) risk and equity risk. (i) Currency Risk Currency risk relates to the Company operating in different currencies and converting non-Canadian earnings at different points in time at different foreign exchange levels when adverse changes in foreign currency exchange rates occur. If the assets backing policy liabilities are not matched by currency, changes in foreign exchange rates can expose the Company to the risk of foreign exchange losses not offset by liability decreases. - A 10% weakening of the Canadian dollar against foreign currencies would be expected to increase non-participating policy liabilities and their supporting assets by approximately the same amount resulting in an immaterial change to net earnings. A 10% strengthening of the Canadian dollar against foreign currencies would be expected to decrease non- participating policy liabilities and their supporting assets by approximately the same amount resulting in an immaterial change in net earnings. (ii) Interest Rate Risk Interest rate risk exists if asset and liability cash flows are not closely matched and interest rates change causing a difference in value between the asset and liability. Projected cash flows from the current assets and liabilities are used in CALM to determine policy liabilities. Valuation assumptions have been made regarding rates of returns on supporting assets, fixed income, equity and inflation. The valuation assumptions use best estimates of future reinvestment rates and inflation assumptions with an assumed correlation together with margins for adverse deviation set in accordance with professional standards. These margins are necessary to provide for possibilities of misestimation and/or future deterioration in the best estimate assumptions and provide reasonable assurance that policy liabilities cover a range of possible outcomes. Margins are reviewed periodically for continued appropriateness. Testing under several interest rate scenarios (including increasing and decreasing rates) is done to assess reinvestment risk. One way of measuring the interest rate risk associated with this assumption is to determine the effect on the policy liabilities impacting the shareholder earnings of the Company of a 1% immediate parallel shift in the yield curve. These interest rate changes will impact the projected cash flows. - The effect of an immediate 1% parallel increase in the yield curve would be to increase these policy liabilities by approximately $16 causing a decrease in net earnings of approximately $11. - The effect of an immediate 1% parallel decrease in the yield curve would be to increase these policy liabilities by approximately $240 causing a decrease in net earnings of approximately $165. In addition to above, if this change in the yield curve persisted for an extended period the range of the tested scenarios might change. The effect of an immediate 1% parallel decrease or increase in the yield curve persisting for a year would have immaterial additional effects on the reported policy liability. (iii) Equity Risk Equity risk is the uncertainty associated with the valuation of assets arising from changes in equity markets. To mitigate price risk, the Company has investment policy guidelines in place that provide for prudent investment in equity markets within clearly defined limits. The risks associated with segregated fund guarantees have been mitigated through a hedging program for lifetime Guaranteed Minimum Withdrawal Benefit guarantees using equity futures, currency forwards, and interest rate derivatives. For policies with segregated fund guarantees, the Company generally determines policy liabilities at a CTE75 (conditional tail expectation of 75) level. Some policy liabilities are supported by real estate, common stocks and private equities, for example segregated fund products and products with long-tail cash flows. Generally these liabilities will fluctuate in line with equity market values. There will be additional impacts on these liabilities as equity market values fluctuate. A 10% increase in equity markets would be expected to additionally decrease non-participating policy liabilities by approximately $32 causing an increase in net earnings of approximately $24. A 10% decrease in equity markets would be expected to additionally increase non-participating policy liabilities by approximately $68 causing a decrease in net earnings of approximately $49. The best estimate return assumptions for equities are primarily based on long term historical averages. Changes in the current market could result in changes to these assumptions and will impact both asset and liability cash flows. A 1% increase in the best estimate assumption would be expected to decrease non-participating policy liabilities by approximately $318 causing an increase in net earnings of approximately $232. A 1% decrease in the best estimate assumption would be expected to increase non-participating policy liabilities by approximately $369 causing a decrease in net earnings of approximately $267. 4. Financing Charges Financing charges consist of the following: For the three months For the nine months ended September 30 ended September 30 ------------------------------------------- 2010 2009 2010 2009 ------------------------------------------- Operating charges: Interest on operating lines and short-term debt instruments $ 2 $ 3 $ 8 $ 5 Financial charges: Interest on long-term debentures and other debt instruments 56 51 166 155 Dividends on preferred shares classified as liabilities - 9 2 27 Net realized/unrealized losses (gains) on preferred shares classified as held for trading - 14 (2) 46 Other 7 4 14 8 Net interest on capital trust debentures and securities 8 12 24 33 ------------------------------------------- 71 90 204 269 ------------------------------------------- Total $ 73 $ 93 $ 212 $ 274 ------------------------------------------- ------------------------------------------- 5. Debentures and Other Debt Instruments On August 10, 2010, the Company redeemed the $200 principal amount 6.75% debentures at par which had a maturity date of August 10, 2015. On August 13, 2010, $500 principal amount debentures were issued at par and will mature on August 13, 2020. Interest on the debentures at the rate of 4.65% per annum will be payable semi-annually in arrears on February 13 and August 13 in each year, commencing February 13, 2011, until the date on which the debentures are repaid. The debentures are redeemable at any time in whole or in part at the greater of the Canada Yield Price and par, together in each case with accrued and unpaid interest. 6. Share Capital (a) Preferred Shares On March 4, 2010 the Company issued 6,000,000 Series M, 5.80% Non- Cumulative First Preferred Shares at $25 per share. The shares are redeemable at the option of the Company on or after March 31, 2015 for $25 per share plus a premium if redeemed prior to March 31, 2019, in each case with all declared and unpaid dividends to but excluding the date of redemption. On March 31, 2010 the Company redeemed all of the remaining outstanding Series D First Preferred shares at a redemption price of $25.25 per share. The Company had designated outstanding Preferred Shares Series D as held for trading on the Consolidated Balance Sheets with changes in fair value reported in the Summaries of Consolidated Operations. In connection with the transaction the Company recognized unrealized gains of $2 in the Summaries of Consolidated Operations. As a result the Company no longer has any outstanding preferred shares classified as liabilities. (b) Common Shares Issued and outstanding September 30, 2010 December 31, 2009 September 30, 2009 ---------------------------------------------------------------- Carrying Carrying Carrying Number value Number value Number value ---------------------------------------------------------------- Common shares: Balance, beginning of year 945,040,476 $ 5,751 943,882,505 $ 5,736 943,882,505 $ 5,736 Issued under stock option plan (ex- ercised) 3,002,843 43 1,157,971 15 814,469 11 ---------------------------------------------------------------- Balance, end of period 948,043,319 $ 5,794 945,040,476 $ 5,751 944,696,974 $ 5,747 ---------------------------------------------------------------- ---------------------------------------------------------------- 7. Capital Management At the holding company level, the Company monitors the amount of consolidated capital available, and the amounts deployed in its various operating subsidiaries. The amount of capital deployed in any particular company or country is dependent upon local regulatory requirements as well as the Company's internal assessment of capital requirements in the context of its operational risks and requirements, and strategic plans. Since the timing of available funds cannot always be matched precisely to commitments, imbalances may arise when demands for funds exceed those on hand. Also, a demand for funds may arise as a result of the Company taking advantage of current investment opportunities. The sources of the funds that may be required in such situations include bank financing and the issuance of debentures and equity securities. The Company's practice is to maintain the capitalization of its regulated operating subsidiaries at a level that will exceed the relevant minimum regulatory capital requirements in the jurisdictions in which they operate. The capitalization of the Company and its operating subsidiaries will also take into account the views expressed by the various credit rating agencies that provide financial strength and other ratings to the Company. In Canada, The Office of the Superintendent of Financial Institutions Canada (OSFI) has established a capital adequacy measurement for life insurance companies incorporated under the Insurance Companies Act (Canada) and their subsidiaries, known as the Minimum Continuing Capital and Surplus Requirements (MCCSR). For Canadian regulatory reporting purposes, capital is defined by OSFI in its MCCSR guideline. The following table provides the MCCSR information and ratios for The Great-West Life Assurance Company (Great-West Life): September December September 30 2010 31 2009 30 2009 -------------------------------- Capital Available: Net Tier 1 Capital $ 7,445 $ 7,014 $ 6,765 -------------------------------- Tier 2 Capital Allowed 1,688 1,856 2,064 -------------------------------- Total Available Capital $ 9,133 $ 8,870 $ 8,829 -------------------------------- -------------------------------- Capital Required: Total Capital Required $ 4,527 $ 4,354 $ 4,409 -------------------------------- -------------------------------- MCCSR ratios: Tier 1 164% 161% 153% -------------------------------- -------------------------------- Total 202% 204% 200% -------------------------------- -------------------------------- In the United States, Great-West Life & Annuity Insurance Company (GWL&A) is subject to comprehensive state and federal regulation and supervision. The National Association of Insurance Commissioners (NAIC) has adopted risk-based capital rules and other financial ratios for U.S. life insurance companies. At December 31, 2009, the Risk-Based Capital (RBC) ratio for GWL&A was 476% of the Company Action Level. As at September 30, 2010 and 2009 the Company maintained capital levels above the minimum local requirements in its other foreign operations. The Company is both a user and a provider of reinsurance, including both traditional reinsurance, which is undertaken primarily to mitigate against assumed insurance risks, and financial or finite reinsurance, under which the amount of insurance risk passed to the reinsurer or its reinsureds may be more limited. The Company is required to put amounts on deposit for certain reinsurance transactions. These amounts on deposit are presented in funds held by ceding insurers on the Consolidated Balance Sheets. Some of these amounts on deposit support surplus. 8. Stock Based Compensation No options were granted under the Company's stock option plan during the third quarter and second quarter of 2010 and 863,000 options were granted during the first quarter of 2010 (no options were granted during the first three quarters of 2009). The weighted average fair value of options granted was $4.34 per option during the nine months ended September 30, 2010 Compensation expense of $4 after-tax has been recognized in the Summaries of Consolidated Operations for the nine months ended September 30, 2010 ($6 after-tax for the nine months ended September 30, 2009). 9. Pension Plans and Other Post-Retirement Benefits The total benefit costs included in operating expenses are as follows: For the three months For the nine months ended September 30 ended September 30 --------------------------------------------------- 2010 2009 2010 2009 --------------------------------------------------- Pension benefits $ 17 $ 15 $ 57 $ 51 Other benefits 3 3 10 9 --------------------------------------------------- Total $ 20 $ 18 $ 67 $ 60 --------------------------------------------------- --------------------------------------------------- 10. Earnings per Common Share The following table provides the reconciliation between basic and diluted earnings per common share: For the three months For the nine months ended September 30 ended September 30 --------------------------------------------------- 2010 2009 2010 2009 --------------------------------------------------- Earnings Net earnings $ 297 $ 462 $ 1,213 $ 1,236 Perpetual preferred share dividends 22 17 64 52 --------------------------------------------------- Net earnings - common shareholders $ 275 $ 445 $ 1,149 $ 1,184 --------------------------------------------------- --------------------------------------------------- Number of common shares Average number of common shares outstanding 947,922,398 944,465,294 947,229,688 944,194,267 Add: - Potential exercise of outstanding stock options 719,080 2,157,507 1,201,599 1,423,061 --------------------------------------------------- Average number of common shares outstanding - diluted basis 948,641,478 946,622,801 948,431,287 945,617,328 --------------------------------------------------- --------------------------------------------------- Basic earnings per common share $ 0.289 $ 0.471 $ 1.213 $ 1.254 --------------------------------------------------- --------------------------------------------------- Diluted earnings per common share $ 0.289 $ 0.470 $ 1.211 $ 1.253 --------------------------------------------------- --------------------------------------------------- 11. Segmented Information Consolidated Operations For the three months ended September 30, 2010 United Lifeco Canada States Europe Corporate Total ------------------------------------------------------ Income: Premium income $ 2,299 $ 815 $ 1,199 $ - $ 4,313 Net investment income Regular net investment income 686 342 473 3 1,504 Changes in fair value on held for trading assets 1,114 348 1,133 - 2,595 ------------------------------------------------------ Total net investment income 1,800 690 1,606 3 4,099 Fee and other income 251 311 129 - 691 ------------------------------------------------------ Total income 4,350 1,816 2,934 3 9,103 ------------------------------------------------------ Benefits and expenses: Paid or credited to policyholders 3,401 1,330 2,586 - 7,317 Other 698 364 144 274 1,480 Amortization of finite life intangible assets 10 10 2 - 22 ------------------------------------------------------ Earnings before income taxes 241 112 202 (271) 284 Income taxes (8) 24 37 (68) (15) ------------------------------------------------------ Net earnings before non-controlling interests 249 88 165 (203) 299 Non-controlling interests (2) - 4 - 2 ------------------------------------------------------ Net earnings 251 88 161 (203) 297 Perpetual preferred share dividends 19 - 3 - 22 ------------------------------------------------------ Net earnings - common shareholders $ 232 $ 88 $ 158 $ (203) $ 275 ------------------------------------------------------ ------------------------------------------------------ For the three months ended September 30, 2009 United Lifeco Canada States Europe Corporate Total ------------------------------------------------------ Income: Premium income $ 2,243 $ 724 $ 1,369 $ - $ 4,336 Net investment income Regular net investment income 689 390 501 11 1,591 Changes in fair value on held for trading assets 1,012 671 2,051 - 3,734 ------------------------------------------------------ Total net investment income 1,701 1,061 2,552 11 5,325 Fee and other income 238 308 182 - 728 ------------------------------------------------------ Total income 4,182 2,093 4,103 11 10,389 ------------------------------------------------------ Benefits and expenses: Paid or credited to policyholders 3,353 1,618 3,716 - 8,687 Other 559 381 174 3 1,117 Amortization of finite life intangible assets 9 11 1 - 21 ------------------------------------------------------ Earnings before income taxes 261 83 212 8 564 Income taxes 39 15 38 6 98 ------------------------------------------------------ Net earnings before non-controlling interests 222 68 174 2 466 Non-controlling interests - - 4 - 4 ------------------------------------------------------ Net earnings 222 68 170 2 462 Perpetual preferred share dividends 10 - 3 4 17 ------------------------------------------------------ Net earnings - common shareholders $ 212 $ 68 $ 167 $ (2) $ 445 ------------------------------------------------------ ------------------------------------------------------ For the nine months ended September 30, 2010 United Lifeco Canada States Europe Corporate Total ------------------------------------------------------ Income: Premium income $ 6,795 $ 2,316 $ 4,027 $ - $ 13,138 Net investment income Regular net investment income 1,894 1,000 1,366 8 4,268 Changes in fair value on held for trading assets 1,722 1,044 2,422 - 5,188 ------------------------------------------------------ Total net investment income 3,616 2,044 3,788 8 9,456 Fee and other income 762 935 448 - 2,145 ------------------------------------------------------ Total income 11,173 5,295 8,263 8 24,739 ------------------------------------------------------ Benefits and expenses: Paid or credited to policyholders 8,359 3,867 7,284 - 19,510 Other 1,887 1,122 446 276 3,731 Amortization of finite life intangible assets 29 35 5 - 69 ------------------------------------------------------ Earnings before income taxes 898 271 528 (268) 1,429 Income taxes 121 60 70 (65) 186 ------------------------------------------------------ Net earnings before non-controlling interests 777 211 458 (203) 1,243 Non-controlling interests 21 1 8 - 30 ------------------------------------------------------ Net earnings 756 210 450 (203) 1,213 Perpetual preferred share dividends 54 - 10 - 64 ------------------------------------------------------ Net earnings - common shareholders $ 702 $ 210 $ 440 $ (203) $ 1,149 ------------------------------------------------------ ------------------------------------------------------ For the nine months ended September 30, 2009 United Lifeco Canada States Europe Corporate Total ------------------------------------------------------ Income: Premium income $ 6,560 $ 2,288 $ 4,861 $ - $ 13,709 Net investment income Regular net investment income 1,977 1,189 1,534 18 4,718 Changes in fair value on held for trading assets 1,495 996 1,548 - 4,039 ------------------------------------------------------ Total net investment income 3,472 2,185 3,082 18 8,757 Fee and other income 689 882 503 - 2,074 ------------------------------------------------------ Total income 10,721 5,355 8,446 18 24,540 ------------------------------------------------------ Benefits and expenses: Paid or credited to policyholders 8,121 3,925 7,480 - 19,526 Other 1,675 1,137 550 10 3,372 Amortization of finite life intangible assets 24 40 4 - 68 ------------------------------------------------------ Earnings before income taxes 901 253 412 8 1,574 Income taxes 202 55 35 6 298 ------------------------------------------------------ Net earnings before non-controlling interests 699 198 377 2 1,276 Non-controlling interests 31 6 3 - 40 ------------------------------------------------------ Net earnings 668 192 374 2 1,236 Perpetual preferred share dividends 31 - 10 11 52 ------------------------------------------------------ Net earnings - common shareholders $ 637 $ 192 $ 364 $ (9) $ 1,184 ------------------------------------------------------ ------------------------------------------------------ 12. Subsequent Events (a) Contingent liabilities (changes since December 31, 2009 annual report) The Ontario Superior Court of Justice released a decision on October 1, 2010 in regard to the involvement of the participating accounts of Lifeco subsidiaries London Life Insurance Company (London Life) and Great-West Life in the financing of the acquisition of London Insurance Group Inc. (LIG) in 1997. The Company believes there are significant aspects of the lower court judgment that are in error and a Notice of Appeal has been filed. Notwithstanding the foregoing, the Company has established an incremental provision in the third quarter 2010 in the amount of $225 after-tax ($204 and $21 attributable to the common shareholder and non-controlling interests, respectively). The Company now holds $310 in after-tax provisions for these proceedings. Regardless of the ultimate outcome of this case, all of the participating policy contract terms and conditions will continue to be honoured. Based on information presently known, the original decision, if sustained on appeal, is not expected to have a material adverse effect on the consolidated financial position of the Company. (b) Share capital On October 26, 2010 the Company invested $310 in common shares of its wholly-owned subsidiary Great-West Life which in turn invested $255 in common shares of its indirect wholly-owned subsidiary London Life. (c) Non-controlling interests On October 29, 2010, Great-West Life redeemed all of its outstanding 5.55% Non-Cumulative Preferred Shares Series O at a price of $25.00 per share. >>For further information: Marlene Klassen, APR, Assistant Vice-President, Communication Services (204) 946-7705