N@N

Great-West Lifeco reports first quarter 2010 results

^{Published on 2010-05-06 09:05:16 - Market Wire}
 

 FINANCIAL HIGHLIGHTS (unaudited) (in $ millions except per share amounts) As at or for the three months ended -------------------------------------- March 31 December 31 March 31 2010 2009 2009 ------------------------------------------------------------------------- Premiums and deposits: Life insurance, guaranteed annuities and insured health products $ 4,610 $ 4,324 $ 4,709 Self-funded premium equivalents (ASO contracts) 645 632 618 Segregated funds deposits: Individual products 1,790 2,036 1,258 Group products 1,730 1,626 2,696 Proprietary mutual funds and institutional deposits 6,191 6,042 5,280 -------------------------------------- Total premiums and deposits 14,966 14,660 14,561 -------------------------------------- Fee and other income 736 765 680 Paid or credited to policyholders 6,571 4,283 3,366 Net income - common shareholders 441 443 326 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Per common share Basic earnings 0.466 0.468 0.345 Dividends paid 0.3075 0.3075 0.3075 Book value 11.88 12.17 12.68 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Return on common shareholders' equity (12 months): Net income 15.0% 13.8% 9.3% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Total assets $ 126,842 $ 128,369 $ 129,596 Segregated funds net assets 87,349 87,495 76,903 Proprietary mutual funds and institutional net assets 123,665 123,504 126,377 ------------------------------------ Total assets under management 337,856 339,368 332,876 Other assets under administration 125,329 119,207 103,816 ------------------------------------ Total assets under administration $ 463,185 $ 458,575 $ 436,692 ------------------------------------ ------------------------------------ Share capital and surplus $ 12,907 $ 13,003 $ 13,299 ------------------------------------------------------------------------- ------------------------------------------------------------------------- SUMMARIES OF CONSOLIDATED OPERATIONS (unaudited) (in $ millions except per share amounts) For the three months ended -------------------------------------- March 31 December 31 March 31 2010 2009 2009 -------------------------------------- Income Premium income $ 4,610 $ 4,324 $ 4,709 Net investment income (note 2) Regular net investment income 1,422 1,461 1,511 Changes in fair value on held for trading assets 1,502 (549) (1,967) -------------------------------------- Total net investment income 2,924 912 (456) Fee and other income 736 765 680 -------------------------------------- 8,270 6,001 4,933 -------------------------------------- Benefits and expenses Policyholder benefits 3,888 3,915 4,609 Policyholder dividends and experience refunds 383 328 398 Change in actuarial liabilities 2,300 40 (1,641) -------------------------------------- Total paid or credited to policyholders 6,571 4,283 3,366 Commissions 363 391 307 Operating expenses 630 673 663 Premium taxes 65 65 55 Financing charges (note 4) 69 62 75 Amortization of finite life intangible assets 23 21 22 -------------------------------------- Income before income taxes 549 506 445 Income taxes - current 1 (162) 82 - future 85 209 (4) -------------------------------------- Net income before non-controlling interests 463 459 367 Non-controlling interests 2 (4) 24 -------------------------------------- Net income 461 463 343 Perpetual preferred share dividends 20 20 17 -------------------------------------- Net income - common shareholders $ 441 $ 443 $ 326 -------------------------------------- -------------------------------------- Earnings per common share (note 9) Basic $ 0.466 $ 0.468 $ 0.345 -------------------------------------- -------------------------------------- Diluted $ 0.465 $ 0.467 $ 0.345 -------------------------------------- -------------------------------------- CONSOLIDATED BALANCE SHEETS (unaudited) (in $ millions) March 31 December 31 March 31 2010 2009 2009 -------------------------------------- Assets Bonds (note 2) $ 65,862 $ 66,147 $ 66,715 Mortgage loans (note 2) 16,270 16,684 17,312 Stocks (note 2) 6,681 6,442 5,459 Real estate (note 2) 2,971 3,099 3,257 Loans to policyholders 6,824 6,957 7,842 Cash and cash equivalents 3,237 3,427 2,979 Funds held by ceding insurers 10,130 10,839 10,820 Goodwill 5,403 5,406 5,431 Intangible assets 3,168 3,238 3,582 Other assets 6,296 6,130 6,199 -------------------------------------- Total assets $ 126,842 $ 128,369 $ 129,596 -------------------------------------- -------------------------------------- Liabilities Policy liabilities Actuarial liabilities $ 96,759 $ 98,059 $ 97,245 Provision for claims 1,275 1,308 1,432 Provision for policyholder dividends 618 606 651 Provision for experience rating refunds 239 317 233 Policyholder funds 2,450 2,361 2,449 -------------------------------------- 101,341 102,651 102,010 Debentures and other debt instruments 4,222 4,142 3,960 Funds held under reinsurance contracts 319 186 191 Other liabilities 4,283 4,608 5,594 Repurchase agreements 737 532 521 Deferred net realized gains 124 133 153 -------------------------------------- 111,026 112,252 112,429 Preferred shares (note 5) - 203 748 Capital trust securities and debentures 538 540 755 Non-controlling interests Participating account surplus in subsidiaries 1,999 2,004 2,022 Preferred shares issued by subsidiaries 157 157 157 Perpetual preferred shares issued by subsidiaries 147 147 148 Non-controlling interests in capital stock and surplus 68 63 38 Share capital and surplus Share capital (note 5) Perpetual preferred shares 1,647 1,497 1,328 Common shares 5,782 5,751 5,737 Accumulated surplus 7,514 7,367 6,941 Accumulated other comprehensive loss (2,089) (1,664) (754) Contributed surplus 53 52 47 -------------------------------------- 12,907 13,003 13,299 -------------------------------------- Total liabilities, share capital and surplus $ 126,842 $ 128,369 $ 129,596 -------------------------------------- -------------------------------------- CONSOLIDATED STATEMENTS OF SURPLUS (unaudited) (in $ millions) For the three months ended March 31 ------------------------ 2010 2009 ------------------------ Accumulated surplus Balance, beginning of year $ 7,367 $ 6,906 Net income 461 343 Share issue costs (3) - Dividends to shareholders Perpetual preferred shareholders (20) (17) Common shareholders (291) (291) ------------------------ Balance, end of period $ 7,514 $ 6,941 ------------------------ ------------------------ Accumulated other comprehensive loss, net of income taxes Balance, beginning of year $ (1,664) $ (787) Other comprehensive income (loss) (425) 33 ------------------------ Balance, end of period $ (2,089) $ (754) ------------------------ ------------------------ Contributed surplus Balance, beginning of year $ 52 $ 44 Stock option expense Current period expense (note 7) 1 3 ------------------------ Balance, end of period $ 53 $ 47 ------------------------ ------------------------ SUMMARIES OF CONSOLIDATED COMPREHENSIVE INCOME (unaudited) (in $ millions) For the three months ended March 31 ------------------------ 2010 2009 ------------------------ Net income $ 461 $ 343 Other comprehensive income (loss) Unrealized foreign exchange gains (losses) on translation of foreign operations (479) 182 Unrealized gains (losses) on available for sale assets 54 (127) Income tax (expense) benefit (15) 27 Realized (gains) losses on available for sale assets (13) (15) Income tax (expense) benefit 3 3 Unrealized gains (losses) on cash flow hedges 34 (82) Income tax (expense) benefit (12) 29 Realized (gains) losses on cash flow hedges - 19 Income tax (expense) benefit - (7) Non-controlling interests 3 4 ------------------------ (425) 33 ------------------------ Comprehensive income $ 36 $ 376 ------------------------ ------------------------ CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (in $ millions) For the three months ended March 31 ------------------------ 2010 2009 ------------------------ Operations Net income $ 461 $ 343 Adjustments: Change in policy liabilities 2,323 (1,589) Change in funds held by ceding insurers 63 144 Change in funds held under reinsurance contracts 153 (8) Change in current income taxes payable (64) (107) Future income tax expense 85 (4) Changes in fair value of financial instruments (1,504) 1,968 Other (320) 8 ------------------------ Cash flows from operations 1,197 755 Financing Activities Issue of common shares 31 1 Issue of preferred shares 150 - Redemption of preferred shares (200) - Increase in line of credit in subsidiary 120 100 Repayment of debentures and other debt instruments (3) (2) Share issue costs (3) - Dividends paid (311) (308) ------------------------ (216) (209) Investment Activities Bond sales and maturities 4,584 4,997 Mortgage loan repayments 394 419 Stock sales 449 622 Real estate sales - 7 Change in loans to policyholders - (46) Change in repurchase agreements 221 184 Investment in bonds (5,614) (5,579) Investment in mortgage loans (290) (190) Investment in stocks (622) (793) Investment in real estate (57) (65) ------------------------ (935) (444) Effect of changes in exchange rates on cash and cash equivalents (236) 27 Increase (decrease) in cash and cash equivalents (190) 129 Cash and cash equivalents, beginning of period 3,427 2,850 ------------------------ Cash and cash equivalents, end of period $ 3,237 $ 2,979 ------------------------ ------------------------ 

 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 March 31, 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 first quarter, 2010 the Company did not adopt any changes in accounting policy that resulted in a material impact to the financial statements of the Company. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Company's annual report dated December 31, 2009. The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting period. The valuation of policy liabilities, certain financial assets and liabilities, goodwill and indefinite life intangible assets, income taxes and pension plans and other post retirement benefits are the most significant components of the Company's financial statements subject to management estimates. The year to date results of the Company reflect management's judgments regarding the impact of prevailing global credit, equity and foreign exchange market conditions. Financial instrument carrying values currently reflect the illiquidity of the markets and the liquidity premiums embedded in the market pricing methods the Company relies upon. The estimation of policy liabilities relies upon investment credit ratings. The Company's practice is to use third party independent credit ratings where available. Credit rating changes may lag developments in the current environment. Subsequent credit rating adjustments will impact policy liabilities. (a) Future Accounting Policies International Financial Reporting Standards (IFRS) -------------------------------------------------- The Canadian Accounting Standards Board has mandated that all Canadian publicly accountable entities are required to transition from Canadian generally accepted accounting principles (GAAP) to IFRS for fiscal years beginning on or after January 1, 2011. Consequently, the Company will adopt IFRS in its quarterly and annual reports starting with the first quarter of 2011 and will provide corresponding comparative information for 2010. The Company continues to evaluate the financial statement impact of transitioning from Canadian GAAP to IFRS and the related effect on its information systems and processes. Until this effort is complete, the impact of adopting IFRS and the related effects on the Company's consolidated financial statements cannot be reasonably determined. The IFRS standard that deals with the measurement of insurance contracts, also referred to as Phase II Insurance Contracts, is currently being developed and a final accounting standard is not expected to be implemented for several years. As a result, the Company will continue to measure insurance liabilities using 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: March 31, 2010 ------------------------------------------------------------ Held- Available- Loans Total Total for- for- and carrying fair trading sale receivables Other value value ------------------------------------------------------------ Bonds $ 51,716 $ 5,157 $ 8,989 $ - $ 65,862 $ 66,230 Mortgage loans - - 16,270 - 16,270 16,663 Stocks 5,256 1,098 - 327 6,681 6,764 Real estate - - - 2,971 2,971 2,997 ------------------------------------------------------------ $ 56,972 $ 6,255 $ 25,259 $ 3,298 $ 91,784 $ 92,654 ------------------------------------------------------------ ------------------------------------------------------------ December 31, 2009 ------------------------------------------------------------ Held- Available- Loans Total Total for- for- and carrying fair trading sale receivables 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 ------------------------------------------------------------ ------------------------------------------------------------ March 31, 2009 ------------------------------------------------------------ Held- Available- Loans Total Total for- for- and carrying fair trading sale receivables Other value value ------------------------------------------------------------ Bonds $ 51,552 $ 5,424 $ 9,739 $ - $ 66,715 $ 66,404 Mortgage loans - - 17,312 - 17,312 17,309 Stocks 3,712 1,418 - 329 5,459 5,406 Real estate - - - 3,257 3,257 2,993 ------------------------------------------------------------ $ 55,264 $ 6,842 $ 27,051 $ 3,586 $ 92,743 $ 92,112 ------------------------------------------------------------ ------------------------------------------------------------ (b) Included in portfolio investments are the following: (i) Impaired investments March 31, 2010 ----------------------------------- Gross Carrying amount Impairment amount ----------------------------------- Impaired amounts by type(1) Held for trading $ 590 $ (290) $ 300 Available for sale 57 (38) 19 Loans and receivables 169 (93) 76 ----------------------------------- Total $ 816 $ (421) $ 395 ----------------------------------- ----------------------------------- 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 ----------------------------------- ----------------------------------- March 31, 2009 ----------------------------------- Gross Carrying amount Impairment amount ----------------------------------- Impaired amounts by type(1) Held for trading $ 162 $ (145) $ 17 Available for sale 16 (16) - Loans and receivables 158 (80) 78 ----------------------------------- Total $ 336 $ (241) $ 95 ----------------------------------- ----------------------------------- Impaired investments include $52 gross amount of capital securities that have deferred coupons on a non-cumulative basis. (1) Excludes amounts in funds held by ceding insurers of $9 and impairment of $(2) at March 31, 2010 and $10 and $(4) at December 31, 2009 and $15 and $(14) at March 31, 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: March 31 December 31 March 31 2010 2009 2009 ------------------------------------ Bonds $ 24 $ 36 $ 35 Bonds with equity conversion features 166 169 - Mortgages 1 1 1 ------------------------------------ $ 191 $ 206 $ 36 ------------------------------------ ------------------------------------ (iii) Included in net income is the impact of other than temporary impairment (OTTI) as follows: For the three months ended March 31, 2010 -------------------------------------------------- Held- Available- Loans for- for- and trading sale receivables Other Total -------------------------------------------------- Impact on OTTI - Assets carried at market value $ (44) $ - $ - $ - $ (44) - Transfer from other comprehensive income - (4) - - (4) -------------------------------------------------- Gross impairment charges (44) (4) - - (48) Release of actuarial default provision and other 59 - - - 59 -------------------------------------------------- Net impairment (charges) recovery before income taxes $ 15 $ (4) $ - $ - $ 11 -------------------------------------------------- -------------------------------------------------- Net impairment (charges) recovery after income taxes $ 9 ---------- ---------- For the three months ended March 31, 2009 -------------------------------------------------- Held- Available- Loans for- for- and trading sale receivables Other Total -------------------------------------------------- Impact on OTTI - Assets carried at market value $ (7) $ - $ - $ - $ (7) - Assets carried at amortized cost - - (19) - (19) -------------------------------------------------- Gross impairment charges (7) - (19) - (26) Release of actuarial default provision and other - - - - - -------------------------------------------------- Net impairment (charges) recovery before income taxes $ (7) $ - $ (19) $ - $ (26) -------------------------------------------------- -------------------------------------------------- Net impairment (charges) recovery after income taxes $ (19) ---------- ---------- (c) Net investment income is comprised of the following: For the three months ended Mortgage Real March 31, 2010 Bonds loans Stocks estate Other Total ------------------------------------------------------------------------- Regular net investment income: Investment income earned $ 937 $ 221 $ 43 $ 45 $ 166 $1,412 Net realized gains (losses) (available for sale) 4 - 8 - - 12 Net realized gains (losses) (other classifications) 10 3 - - - 13 Amortization of net realized/unrealized gains (non-financial instruments) - - - 2 - 2 Other income and expenses - - - - (17) (17) ------------------------------------------------ 951 224 51 47 149 1,422 Changes in fair value on held for trading assets: Net realized/unrealized gains (losses) (classified held for trading) 15 - - - - 15 Net realized/unrealized gains (losses) (designated held for trading) 1,335 - 158 - (6) 1,487 ------------------------------------------------ 1,350 - 158 - (6) 1,502 ------------------------------------------------ Net investment income $2,301 $ 224 $ 209 $ 47 $ 143 $2,924 ------------------------------------------------ ------------------------------------------------ For the three months ended Mortgage Real March 31, 2009 Bonds loans Stocks estate Other Total ------------------------------------------------------------------------- Regular net investment income: Investment income earned $1,064 $ 235 $ 44 $ 45 $ 70 $1,458 Net realized gains (losses) (available for sale) 16 - (1) - - 15 Net realized gains (losses) (other classifications) (3) 4 76 - - 77 Amortization of net realized/unrealized gains (non-financial instruments) - - - (4) - (4) Net (provision) recovery for credit losses (loans and receivables) (12) (7) - - - (19) Other income and expenses - - - - (16) (16) ------------------------------------------------ 1,065 232 119 41 54 1,511 Changes in fair value on held for trading assets: Net realized/unrealized gains (losses) (classified held for trading) 9 - - - - 9 Net realized/unrealized gains (losses) (designated held for trading) (1,794) - (175) - (7) (1,976) ------------------------------------------------ (1,785) - (175) - (7) (1,967) ------------------------------------------------ Net investment income $ (720) $ 232 $ (56) $ 41 $ 47 $ (456) ------------------------------------------------ ------------------------------------------------ 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 Managment" 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: March 31, 2010 ----------------------------------------------- United Canada States Europe Total ----------------------------------------------- Bonds issued or guaranteed by: Canadian federal government $ 2,835 $ 1 $ 13 $ 2,849 Provincial, state and municipal governments 5,155 1,513 55 6,723 U.S. Treasury and other U.S. agencies 305 2,623 749 3,677 Other foreign governments 133 - 5,895 6,028 Government related 785 - 1,273 2,058 Sovereign 698 4 638 1,340 Asset-backed securities 2,602 3,300 812 6,714 Residential mortgage backed securities 49 810 78 937 Banks 2,414 469 2,237 5,120 Other financial institutions 1,032 1,345 1,425 3,802 Basic materials 149 530 194 873 Communications 596 264 477 1,337 Consumer products 1,470 1,400 1,522 4,392 Industrial products/ services 535 614 181 1,330 Natural resources 1,050 663 441 2,154 Real estate 601 - 1,187 1,788 Transportations 1,427 571 550 2,548 Utilities 3,102 2,174 2,569 7,845 Miscellaneous 1,569 564 184 2,317 ----------------------------------------------- Total long term bonds 26,507 16,845 20,480 63,832 Short term bonds 1,170 690 170 2,030 ----------------------------------------------- $ 27,677 $ 17,535 $ 20,650 $ 65,862 ----------------------------------------------- ----------------------------------------------- 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 ----------------------------------------------- ----------------------------------------------- March 31, 2009 ----------------------------------------------- United Canada States Europe Total ----------------------------------------------- Bonds issued or guaranteed by: Canadian federal government $ 2,216 $ 2 $ 10 $ 2,228 Provincial, state and municipal governments 4,559 1,513 79 6,151 U.S. Treasury and other U.S. agencies 314 3,759 944 5,017 Other foreign governments 154 - 6,537 6,691 Government related 735 - 1,265 2,000 Sovereign 752 7 912 1,671 Asset-backed securities 2,640 3,586 851 7,077 Residential mortgage backed securities 88 1,046 67 1,201 Banks 2,081 402 2,006 4,489 Other financial institutions 956 1,088 1,387 3,431 Basic materials 147 590 200 937 Communications 573 352 402 1,327 Consumer products 1,369 1,336 1,657 4,362 Industrial products/ services 613 737 273 1,623 Natural resources 906 585 571 2,062 Real estate 493 - 1,194 1,687 Transportations 1,297 646 681 2,624 Utilities 2,794 2,086 2,536 7,416 Miscellaneous 1,356 438 183 1,977 ----------------------------------------------- Total long term bonds 24,043 18,173 21,755 63,971 Short term bonds 1,997 578 169 2,744 ----------------------------------------------- $ 26,040 $ 18,751 $ 21,924 $ 66,715 ----------------------------------------------- ----------------------------------------------- (ii) Asset Quality Bond Portfolio Quality March 31 December 31 March 31 2010 2009 2009 ------------------------------------ AAA $ 22,481 $ 21,754 $ 24,668 AA 10,540 10,585 10,555 A 19,333 19,332 18,284 BBB 10,100 10,113 9,889 BB and lower 1,378 1,365 575 ------------------------------------ 63,832 63,149 63,971 Short term bonds 2,030 2,998 2,744 ------------------------------------ Total bonds $ 65,862 $ 66,147 $ 66,715 ------------------------------------ ------------------------------------ Derivative Portfolio Quality March 31 December 31 March 31 2010 2009 2009 ------------------------------------ Over-the-counter contracts (counterparty ratings): AAA $ 3 $ 5 $ 6 AA 404 338 135 A 433 374 343 ------------------------------------ Total $ 840 $ 717 $ 484 ------------------------------------ ------------------------------------ (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: March 31 December 31 March 31 2010 2009 2009 ------------------------------------ Less than 30 days $ 3 $ 45 $ 61 30 - 90 days 2 6 34 90 days and greater 8 9 3 ------------------------------------ Total $ 13 $ 60 $ 98 ------------------------------------ ------------------------------------ (iv) Performing Securities Subject to Deferred Coupons Payment Resumption Date ------------------------------------ less than 1 to 2 greater than 1 year years 2 years ------------------------------------ Coupon payment receivable $ - $ 2 $ - (b) Liquidity Risk Liquidity risk is the risk that the Company will not be able to meet all cash outflow obligations as they come due. The following policies and procedures are in place to manage this risk: - The Company closely manages operating liquidity through cash flow matching of assets and liabilities and forecasting earned and required yields, to ensure consistency between policyholder requirements and the yield of assets. - Management closely monitors the solvency and capital positions of its principal subsidiaries opposite liquidity requirements at the holding company. Additional liquidity is available through established lines of credit or the capital markets. (c) Market Risk Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate as a result of changes in market factors which include three types: currency risk, interest rate (including related inflation) risk and equity risk. (i) Currency Risk Currency risk relates to the Company operating in different currencies and converting non-Canadian earnings at different points in time at different foreign exchange levels when adverse changes in foreign currency exchange rates occur. If the assets backing policy liabilities are not matched by currency, changes in foreign exchange rates can expose the Company to the risk of foreign exchange losses not offset by liability decreases. - A 10% weakening of the Canadian dollar against foreign currencies would be expected to increase non- participating policy liabilities and their supporting assets by approximately the same amount resulting in an immaterial change to net income. 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 income. (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 income 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 $48 causing a decrease in net income of approximately $35. - The effect of an immediate 1% parallel decrease in the yield curve would be to increase these policy liabilities by approximately $167 causing a decrease in net income of approximately $113. In addition to above, if this change in the yield curve persisted for an extended period the range of the tested scenarios might change. The effect of an immediate 1% parallel decrease or increase in the yield curve persisting for a year would have immaterial additional effects on the reported policy liability. (iii) Equity Risk Equity risk is the uncertainty associated with the valuation of assets arising from changes in equity markets. To mitigate price risk, the Company has investment policy guidelines in place that provide for prudent investment in equity markets within clearly defined limits. The risks associated with segregated fund guarantees have been mitigated through a hedging program for lifetime Guaranteed Minimum Withdrawal Benefit guarantees consisting of purchasing equity futures, currency forwards, and interest rate swaps. For policies with segregated fund guarantees, the Company generally determines policy liabilities at a CTE75 (conditional tail expectation of 75) level. Some policy liabilities are supported by real estate, common stocks and private equities, for example segregated fund products and products with long-tail cash flows. Generally these liabilities will fluctuate in line with equity market values. There will be additional impacts on these liabilities as equity market values fluctuate. A 10% increase in equity markets would be expected to additionally decrease non-participating policy liabilities by approximately $38 causing an increase in net income of approximately $28. A 10% decrease in equity markets would be expected to additionally increase non-participating policy liabilities by approximately $71 causing a decrease in net income of approximately $51. 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 $325 causing an increase in net income of approximately $237. A 1% decrease in the best estimate assumption would be expected to increase non- participating policy liabilities by approximately $372 causing a decrease in net income of approximately $269. 4. Financing Charges Financing charges consist of the following: For the three months ended March 31 ----------------------- 2010 2009 ----------------------- Operating charges: Interest on long-term debentures and other debt instruments $ 1 $ 1 Financial charges: Interest on long-term debentures and other debt instruments 56 52 Dividends on preferred shares classified as liabilities 2 9 Net realized/unrealized losses (gains) on preferred shares classified as held for trading (2) 1 Other 4 2 Net interest on capital trust debentures and securities 8 10 ----------------------- 68 74 ----------------------- Total $ 69 $ 75 ----------------------- ----------------------- 5. Share Capital (a) Preferred Shares On March 4, 2010 the Company issued 6,000,000 Series M, 5.80% Non-Cumulative First Preferred Shares at $25 per share. The shares are redeemable at the option of the Company on or after March 31, 2015 for $25 per share plus a premium if redeemed prior to March 31, 2019, in each case with all declared and unpaid dividends to but excluding the date of redemption. On March 31, 2010 the Company redeemed all of the remaining outstanding Series D First Preferred shares at a redemption price of $25.25 per share. The Company had designated outstanding Preferred Shares Series D as held for trading on the Consolidated Balance Sheets with changes in fair value reported in the Summaries of Consolidated Operations. In connection with the transaction the Company recognized unrealized gains of $2 in the Summaries of Consolidated Operations. As a result the Company no longer has any outstanding preferred shares classified as liabilities. (b) Common Shares Issued and outstanding March 31, 2010 December 31, 2009 March 31, 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 (exercised) 2,369,420 31 1,157,971 15 143,215 1 -------------------------------------------------------------- Balance, end of period 947,409,896 $5,782 945,040,476 $5,751 944,025,720 $5,737 -------------------------------------------------------------- -------------------------------------------------------------- 6. Capital Management At the holding company level, the Company monitors the amount of consolidated capital available, and the amounts deployed in its various operating subsidiaries. The amount of capital deployed in any particular company or country is dependent upon local regulatory requirements as well as the Company's internal assessment of capital requirements in the context of its operational risks and requirements, and strategic plans. Since the timing of available funds cannot always be matched precisely to commitments, imbalances may arise when demands for funds exceed those on hand. Also, a demand for funds may arise as a result of the Company taking advantage of current investment opportunities. The sources of the funds that may be required in such situations include bank financing and the issuance of debentures and equity securities. The Company's practice is to maintain the capitalization of its regulated operating subsidiaries at a level that will exceed the relevant minimum regulatory capital requirements in the jurisdictions in which they operate. The capitalization of the Company and its operating subsidiaries will also take into account the views expressed by the various credit rating agencies that provide financial strength and other ratings to the Company. In Canada, 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 Great-West Life: March 31 December 31 March 31 2010 2009 2009 ------------------------------------ Capital Available: Net Tier 1 Capital $ 6,907 $ 7,014 $ 6,426 ------------------------------------ Tier 2 Capital Allowed 1,723 1,856 2,342 ------------------------------------ Total Available Capital $ 8,630 $ 8,870 $ 8,768 ------------------------------------ ------------------------------------ Capital Required: Total Capital Required $ 4,263 $ 4,354 $ 4,268 ------------------------------------ ------------------------------------ MCCSR ratios: Tier 1 162% 161% 151% ------------------------------------ ------------------------------------ Total 202% 204% 205% ------------------------------------ ------------------------------------ In the United States, 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 March 31, 2010 and 2009 the Company maintained capital levels above the minimum local requirements in its other foreign operations. The Company is both a user and a provider of reinsurance, including both traditional reinsurance, which is undertaken primarily to mitigate against assumed insurance risks, and financial or finite reinsurance, under which the amount of insurance risk passed to the reinsurer or its reinsureds may be more limited. The Company is required to put amounts on deposit for certain reinsurance transactions. These amounts on deposit are presented in funds held by ceding insurers on the Consolidated Balance Sheets. Some of these amounts on deposit support surplus. 7. Stock Based Compensation 863,000 options were granted under the Company's stock option plan for the three months ended March 31, 2010, (No options were granted during the first quarter of 2009). The weighted fair value of options granted during the three months ended March 31, 2010 was $4.34 per option. Compensation expense of $1 after-tax has been recognized in the Summaries of Consolidated Operations for the three months ended March 31, 2010 ($3 after-tax for the three months ended March 31, 2009). 8. Pension Plans and Other Post-Retirement Benefits The total benefit costs included in operating expenses are as follows: For the three months ended March 31 ------------------------- 2010 2009 ------------------------- Pension benefits $ 16 $ 16 Other benefits 3 3 ------------------------- Total $ 19 $ 19 ------------------------- ------------------------- 9. Earnings per Common Share The following table provides the reconciliation between basic and diluted earnings per common share: For the three months ended March 31 ------------------------- 2010 2009 ------------------------- Earnings Net income $ 461 $ 343 Perpetual preferred share dividends 20 17 ------------------------- Net income - common shareholders $ 441 $ 326 ------------------------- ------------------------- Number of common shares Average number of common shares outstanding 946,097,743 943,916,502 Add: - Potential exercise of outstanding stock options 1,812,421 303,303 ------------------------- Average number of common shares outstanding - diluted basis 947,910,164 944,219,805 ------------------------- ------------------------- Basic earnings per common share $ 0.466 $ 0.345 ------------------------- ------------------------- Diluted earnings per common share $ 0.465 $ 0.345 ------------------------- ------------------------- 10. Segmented Information Consolidated Operations For the three months ended March 31, 2010 United Lifeco Canada States Europe Corporate Total ------------------------------------------------------ Income: Premium income $ 2,268 $ 826 $ 1,516 $ - $ 4,610 Net investment income Regular net investment income 619 334 468 1 1,422 Changes in fair value on held for trading assets 421 292 789 - 1,502 ------------------------------------------------------ Total net investment income 1,040 626 1,257 1 2,924 Fee and other income 256 317 163 - 736 ------------------------------------------------------ Total income 3,564 1,769 2,936 1 8,270 ------------------------------------------------------ Benefits and expenses: Paid or credited to policyholders 2,680 1,290 2,601 - 6,571 Other 587 378 162 - 1,127 Amortization of finite life intangible assets 9 12 2 - 23 ------------------------------------------------------ Income before income taxes 288 89 171 1 549 Income taxes 39 20 26 1 86 ------------------------------------------------------ Net income before non- controlling interests 249 69 145 - 463 Non-controlling interests (1) 1 2 - 2 ------------------------------------------------------ Net Income 250 68 143 - 461 Perpetual preferred share dividends 17 - 3 - 20 ------------------------------------------------------ Net income - common shareholders $ 233 $ 68 $ 140 $ - $ 441 ------------------------------------------------------ ------------------------------------------------------ For the three months ended March 31, 2009 United Lifeco Canada States Europe Corporate Total ------------------------------------------------------ Income: Premium income $ 2,074 $ 955 $ 1,680 $ - $ 4,709 Net investment income Regular net investment income 547 442 521 1 1,511 Changes in fair value on held for trading assets (322) (221) (1,424) - (1,967) ------------------------------------------------------ Total net investment income 225 221 (903) 1 (456) Fee and other income 222 283 175 - 680 ------------------------------------------------------ Total income 2,521 1,459 952 1 4,933 ------------------------------------------------------ Benefits and expenses: Paid or credited to policyholders 1,683 944 739 - 3,366 Other 531 389 177 3 1,100 Amortization of finite life intangible assets 7 14 1 - 22 ------------------------------------------------------ Income before income taxes 300 112 35 (2) 445 Income taxes 62 32 (16) - 78 ------------------------------------------------------ Net income before non- controlling interests 238 80 51 (2) 367 Non-controlling interests 19 5 - - 24 ------------------------------------------------------ Net Income 219 75 51 (2) 343 Perpetual preferred share dividends 11 - 3 3 17 ------------------------------------------------------ Net income - common shareholders $ 208 $ 75 $ 48 $ (5) $ 326 ------------------------------------------------------ ------------------------------------------------------