TSX:GWO
Readers are referred to the cautionary note regarding Forward-Looking
Information and Non-GAAP Financial Measures at the end of this Release.
WINNIPEG, May 1, 2008 /CNW/ - Great-West Lifeco Inc. (Lifeco) has reported net income attributable to common shareholders of $654 million for the three months ended March 31, 2008, up 27% compared to net income of $514 million reported a year ago.
The 2008 results include two non-recurring items that totaled $118 million, after-tax, or $0.132 per common share, as described in the United States section of this Release. Excluding these items, adjusted net income attributable to common shareholders was $536 million for the three months ended March 31, 2008, up 4% over 2007. On a per share basis, this represents $0.600 per common share for the three months ended March 31, 2008 compared to $0.576 per common share for 2007.
Compared to the first quarter of 2007, the increase in the foreign exchange value of the Canadian dollar opposite the Company's major operating currencies has reduced reported net income in the quarter by approximately $0.051 per common share, or $46 million. On a constant currency basis, adjusted net income attributable to common shareholders increased 13% over 2007.
Highlights
- Quarterly dividends declared were $0.2925 per common share payable
June 30, 2008. Dividends paid on common shares for the three months
ended March 31, 2008 were 15% higher than a year ago.
- On April 1, Lifeco announced that the sale of its U.S. Healthcare
business had been completed. Lifeco has applied approximately
$1.1 billion of the sale proceeds to reduce its outstanding bank
bridge facility.
- Adjusted return on common shareholders' equity was 21.1% for the
twelve months ended March 31, 2008.
Consolidated net income for Lifeco is comprised of the net income of The Great-West Life Assurance Company (Great-West Life), Canada Life Financial Corporation (CLFC), London Life Insurance Company (London Life), Great-West Life & Annuity Insurance Company (GWL&A), and Putnam Investments, LLC (Putnam), together with Lifeco's corporate results.
CANADA
Net income attributable to common shareholders for the first quarter of 2008 was $249 million compared to $225 million in 2007, an increase of 11%. Individual Insurance & Investment Products earnings at $175 million were up 13% while Group Insurance earnings of $100 million were up 16%. Earnings in the Corporate segment were $10 million lower than 2007 due to the mark-to-market adjustment of two series of Lifeco preferred shares.
Total sales for the three months ended March 31, 2008 were $2,297 million compared to $2,636 million in 2007, a decrease of 13%. The decrease reflects strong segregated and mutual fund sales in 2007 that were not repeated because of a weak market environment in 2008.
Total assets under administration at March 31, 2008 were $100.8 billion, compared to $101.0 billion at December 31, 2007.
UNITED STATES
Net income attributable to common shareholders for the first quarter of 2008 increased 67% to $237 million from $142 million for the first quarter of 2007.
In the quarter, two non-recurring items contributed approximately $118 million to earnings. A gain of approximately $176 million was realized in connection with the termination of a long-standing assumption reinsurance agreement under which GWL&A had reinsured a block of U.S. participating policies. This gain was partly mitigated by an increase in policy reserves to provide for an increase in overhead costs expected to be absorbed as a result of the sale of Great-West Healthcare.
Net income for the quarter includes $43 million in 2008 and $56 million in 2007 in connection with Lifeco's U.S. healthcare business, which has been designated as discontinued operations.
Compared to the first quarter of 2007, the increase in the foreign exchange value of the Canadian dollar opposite the United States dollar has reduced reported net income in the quarter by approximately $0.022 per common share, or $20 million. On a constant currency basis, adjusted net income attributable to common shareholders decreased 2% over 2007.
Total sales for the three months ended March 31, 2008 were $15.5 billion compared to $1.2 billion in 2007. Putnam's asset management business is included in the 2008 results.
Total assets under administration at March 31, 2008 were $221.8 billion compared to $231.4 billion at December 31, 2007. Included in assets under administration were $173.4 billion of mutual fund and institutional account assets managed by Putnam.
EUROPE
Net income attributable to common shareholders for the first quarter of 2008 was $175 million compared to $147 million for the first quarter of 2007, an increase of 19%.
Compared to the first quarter of 2007, the increase in the foreign exchange value of the Canadian dollar opposite the British pound, the euro and the United States dollar has reduced reported net income in the quarter by approximately $0.029 per common share, or $26 million. On a constant currency basis, net income attributable to common shareholders increased 36% over 2007.
Total sales for the three months ended March 31, 2008 were $1,204 million compared to $1,636 million in 2007, a decrease of 26%.
Total assets under administration at March 31, 2008 were $76.0 billion, compared to $61.7 billion at December 31, 2007.
CORPORATE
Corporate net income for Lifeco attributable to common shareholders was a charge of $7 million for the first quarter of 2008 compared to nil for the first quarter of 2007.
MANAGEMENT APPOINTMENTS
-----------------------
At Great-West Lifeco's annual meeting, held today in Winnipeg,
Robert Gratton indicated his decision to step down as Chairman of the
Boards of Great-West Lifeco, Great-West Life, London Life, Canada Life,
Great-West Life & Annuity and Canada Life Capital Corporation.
Raymond L. McFeetors has been appointed to succeed him as Chairman of the
Boards of Great-West Lifeco, Great-West Life, London Life, Canada Life,
Great-West Life & Annuity and Canada Life Capital Corporation.
The following Management appointments were announced at the annual
meeting:
- D. Allen Loney, formerly Executive Vice-President, Chief Actuary /
Capital Management, was appointed President and CEO of Great-West
Lifeco, Great-West Life, London Life and Canada Life.
- William L. Acton, formerly President and Chief Operating Officer,
Europe was appointed President and Chief Executive Officer, Canada
Life Capital Corporation, the holding company for the European
operations.
- Mitchell T.G. Graye, formerly Executive Vice-President and Chief
Financial Officer, United States, was appointed President and Chief
Executive Officer, Great-West Life & Annuity in the United States.
- Denis J. Devos, President and Chief Operating Officer, Canada, has
indicated his intention to retire following 35 years of distinguished
service. To succeed him the Board appointed Paul Mahon President and
Chief Operating Officer, Canada.
- William W. Lovatt, formerly Executive Vice-President and Chief
Financial Officer, Canada, was appointed Executive Vice-President and
Chief Financial Officer of Great-West Lifeco, Great-West Life, London
Life and Canada Life.
QUARTERLY DIVIDENDS
At its meeting today, the Board of Directors approved a quarterly dividend of $0.2925 per share on the common shares of the Company payable June 30, 2008 to shareholders of record at the close of business June 2, 2008.
In addition, the Directors approved quarterly dividends on: - Series D First Preferred Shares of $0.293750 per share; - Series E First Preferred Shares of $0.30 per share; - Series F First Preferred Shares of $0.36875 per share; - Series G First Preferred Shares of $0.325 per share; - Series H First Preferred Shares of $0.30313 per share; and - Series I First Preferred Shares of $0.28125 per share; all payable June 30, 2008 to shareholders of record at the close of business June 2, 2008.
For purposes of the Income Tax Act (Canada), and any similar provincial legislation, the dividends referred to above are eligible dividends.
GREAT-WEST LIFECO
Great-West Lifeco Inc. (TSX:GWO) is a financial services holding company with interests in the life insurance, health insurance, retirement savings, investment management and reinsurance businesses. The Company has operations in Canada, the United States, Europe and Asia through The Great-West Life Assurance Company, London Life Insurance Company, The Canada Life Assurance Company, Great-West Life & Annuity Insurance Company and Putnam Investments, LLC. Lifeco and its companies have over $398 billion in assets under administration. Great-West Lifeco is a member of the Power Financial Corporation group of companies.
Cautionary note regarding Forward-Looking Information
This release contains some forward-looking statements about the Company, including its business operations, strategy and expected financial performance and condition. Forward-looking statements include statements that are predictive in nature, depend upon or refer to future events or conditions, or include words such as "expects," "anticipates," "intends," "plans," "believes," "estimates" or negative versions thereof and similar expressions. In addition, any statement that may be made concerning future financial performance (including revenues, earnings or growth rates), ongoing business strategies or prospects, and possible future Company action is also a forward-looking statement. 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 listed in other filings with securities regulators, including factors set out under "Risk Management and Control Practices" in the Company's 2007 Annual Management's Discussion and Analysis, which, along with other filings, is available for review at www.sedar.com. The reader is also cautioned to consider these and other factors carefully and to not place undue reliance on forward-looking statements. Other than as specifically required by applicable law, the Company has no intention to update any forward-looking statements whether as a result of new information, future events or otherwise.
Cautionary note regarding Non-GAAP Financial Measures
This release contains some non-GAAP financial measures. Terms by which non-GAAP financial measures are identified include but are not limited to "earnings before restructuring charges", "adjusted net income", "earnings before adjustments", "net income on a constant currency basis", "premiums and deposits", "sales", and other similar expressions. Non-GAAP financial measures are used to provide management and investors with additional measures of performance. However, non-GAAP financial measures do not have standard meanings prescribed by GAAP and are not directly comparable to similar measures used by other companies. Please refer to the appropriate reconciliations of these non-GAAP financial measures to measures prescribed by GAAP.
Further information
Selected financial information is attached.
Great-West Lifeco's first quarter analyst teleconference will be held Thursday, May 1 at 3:00 p.m. (Eastern). The call can be accessed through www.greatwestlifeco.com or by phone at:
- Participants in the Toronto area: 416-406-6419
- Participants from North America: 1-888-575-8232
- Participants from Overseas: Dial international access code first,
then 800-9559-6849
A replay of the call will be available from May 1 until May 8, 2008, and can be accessed by calling 1-800-408-3053 or 416-695-5800 in Toronto (passcode: 3258989 followed by the number sign).
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)
2008 2007 % Change
-------------------------------------------------------------------------
For the three months ended March 31
Premiums:
Life insurance, guaranteed annuities
and insured health products $ 16,790 $ 5,342 -
Self-funded premium equivalents
(ASO contracts) 585 568 3%
Segregated funds deposits:
Individual products 2,018 2,701 -25%
Group products 1,541 1,716 -10%
Proprietary mutual funds deposits(1) 8,844 220 -
-----------------------------------
Total premiums and deposits 29,778 10,547 182%
-----------------------------------
Fee and other income 797 553 44%
Paid or credited to policyholders 16,284 5,341 -
Net income - common shareholders
Continuing operations -
adjusted(3) 493 458 8%
Discontinued operations(2) 43 56 -23%
-----------------------------------
Net income - adjusted(3) 536 514 4%
Adjustments after tax(3) 118 - -
Net income 654 514 27%
-------------------------------------------------------------------------
Per common share
Basic earnings - adjusted(3) $ 0.600 $ 0.576 4%
Adjustments after tax 0.132 - -
Basic earnings 0.732 0.576 27%
Dividends paid 0.2925 0.255 15%
Book value 11.80 11.31 4%
-------------------------------------------------------------------------
Return on common shareholders'
equity (12 months):
Net income - adjusted(3) 21.1% 20.4%
Net income 21.3% 20.4%
-------------------------------------------------------------------------
At March 31
Total assets $ 133,740 $ 121,439 10%
Segregated funds net assets 89,092 92,663 -4%
Proprietary mutual funds net assets 175,880 2,098 -
-----------------------------------
Total assets under administration $ 398,712 $ 216,200 84%
-----------------------------------
-----------------------------------
Share capital and surplus $ 11,651 $ 11,191 4%
-------------------------------------------------------------------------
(1) Includes Putnam Investments, LLC mutual funds deposits.
(2) Represents the operating results of Great-West Life & Annuity
Insurance Company's (GWL&A), an indirect wholly-owned subsidiary of
Lifeco, health care business which was sold effective April 1, 2008.
(3) During the first quarter of 2008, net income attributable to common
shareholders was increased by $118 or $0.132 per common share as a
result of the following items in the Company's United States segment:
(a) A gain realized in connection with the termination of a long-
standing assumption reinsurance agreement ($176 after tax or
$0.197 per common share) as described in Note 8 to the interim
consolidated financial statements;
(b) Reserve strengthening in GWL&A's continuing operations (($58)
after tax or ($0.065) per common share) as described in note 2 to
the interim consolidated financial statements;
Net income, basic earnings per common share and return on common
shareholders' equity are presented on an adjusted basis, as a non-
GAAP financial measure of earnings performance. Return on common
shareholders' equity for 2008 is restated excluding third quarter
2007 non-recurring items.
SUMMARY OF CONSOLIDATED OPERATIONS (unaudited)
(in $ millions except per share amounts)
For the three months
ended March 31
-----------------------
2008 2007
----------- -----------
Income
Premium income $ 16,790 $ 5,342
Net investment income (note 4)
Regular net investment income 1,352 1,394
Changes in fair value on held for trading
assets (940) (417)
----------- -----------
Total net investment income 412 977
Fee and other income 797 553
----------- -----------
17,999 6,872
----------- -----------
Benefits and expenses
Policyholder benefits 3,689 5,200
Policyholder dividends and experience refunds 347 165
Change in actuarial liabilities 12,248 (24)
----------- -----------
Total paid or credited to policyholders 16,284 5,341
Commissions 322 340
Operating expenses 648 457
Premium taxes 52 57
Financing charges (note 6) 106 51
Amortization of finite life intangible assets 10 8
----------- -----------
Net income from continuing operations before
income taxes 577 618
Income taxes - current 120 124
- future (11) (11)
----------- -----------
Net income from continuing operations before
non-controlling interests 468 505
Non-controlling interests (note 8) (157) 33
----------- -----------
Net income from continuing operations 625 472
Net income from discontinued operations (note 2) 43 56
----------- -----------
Net income 668 528
Perpetual preferred share dividends 14 14
----------- -----------
Net income - common shareholders $ 654 $ 514
----------- -----------
----------- -----------
Earnings per common share (note 13)
Basic $ 0.732 $ 0.576
----------- -----------
----------- -----------
Diluted $ 0.728 $ 0.572
----------- -----------
----------- -----------
CONSOLIDATED BALANCE SHEETS (unaudited)
(in $ millions)
March 31, December 31, March 31,
2008 2007 2007
----------- ----------- -----------
Assets
Bonds (note 4) $ 66,935 $ 65,069 $ 74,586
Mortgage loans (note 4) 16,358 15,869 15,356
Stocks (note 4) 6,415 6,543 5,621
Real estate (note 4) 2,691 2,547 2,224
Loans to policyholders 6,521 6,317 6,731
Cash and cash equivalents 3,416 3,650 2,693
Funds held by ceding insurers 14,393 1,512 1,866
Assets of operations held for sale
(note 2) 670 697 828
Goodwill 6,325 6,295 5,391
Intangible assets 4,023 3,917 1,560
Other assets 5,993 5,972 4,583
----------- ----------- -----------
Total assets $ 133,740 $ 118,388 $ 121,439
----------- ----------- -----------
----------- ----------- -----------
Liabilities
Policy liabilities
Actuarial liabilities $ 102,195 $ 87,681 $ 92,689
Provision for claims 1,340 1,315 1,231
Provision for policyholder dividends 622 600 578
Provision for experience rating
refunds 218 310 174
Policyholder funds 2,292 2,160 2,163
----------- ----------- -----------
106,667 92,066 96,835
Debentures and other debt instruments
(note 7) 5,155 5,241 1,960
Funds held under reinsurance contracts 169 164 1,964
Other liabilities 5,129 5,211 3,939
Liabilities of operations held for
sale (note 2) 396 428 602
Repurchase agreements 689 344 896
Deferred net realized gains 180 179 188
----------- ----------- -----------
118,385 103,633 106,384
Preferred shares (note 9) 797 786 825
Capital trust securities and debentures 636 639 634
Non-controlling interests
Participating account surplus in
subsidiaries 1,952 2,103 2,042
Preferred shares issued by
subsidiaries 157 157 209
Perpetual preferred shares issued
by subsidiaries 151 152 154
Non-controlling interests in capital
stock and surplus 11 10 -
Share capital and surplus
Share capital (note 9)
Perpetual preferred shares 1,099 1,099 1,099
Common shares 4,714 4,709 4,687
Accumulated surplus 6,992 6,599 5,772
Accumulated other comprehensive income (1,190) (1,533) (396)
Contributed surplus 36 34 29
----------- ----------- -----------
11,651 10,908 11,191
----------- ----------- -----------
Total liabilities, share capital and
surplus $ 133,740 $ 118,388 $ 121,439
----------- ----------- -----------
----------- ----------- -----------
CONSOLIDATED STATEMENTS OF SURPLUS (unaudited)
(in $ millions)
For the three months
ended March 31
-----------------------
2008 2007
----------- -----------
Accumulated surplus
Balance, beginning of year $ 6,599 $ 5,858
Change in accounting policy - (373)
Net income 668 528
Dividends to shareholders
Perpetual preferred shareholders (14) (14)
Common shareholders (261) (227)
----------- -----------
Balance, end of period $ 6,992 $ 5,772
----------- -----------
----------- -----------
Accumulated other comprehensive income, net
of income taxes (note 14)
Balance, beginning of year $ (1,533) $ (547)
Change in accounting policy - 262
Other comprehensive income 343 (111)
----------- -----------
Balance, end of period $ (1,190) $ (396)
----------- -----------
----------- -----------
Contributed surplus
Balance, beginning of year $ 34 $ 28
Stock option expense
Current year expense 2 1
----------- -----------
Balance, end of period $ 36 $ 29
----------- -----------
----------- -----------
SUMMARY OF CONSOLIDATED COMPREHENSIVE INCOME (unaudited)
(in $ millions)
For the three months
ended March 31
-----------------------
2008 2007
----------- -----------
Net income $ 668 $ 528
Other comprehensive income (loss), net of
income taxes
Unrealized foreign exchange gains (losses) on
translation of foreign operations 456 (75)
Unrealized gains (losses) on available for sale
assets (49) (15)
Reclassification of realized (gains) losses on
available for sale assets (10) (21)
Unrealized gains (losses) on cash flow hedges (46) -
Non-controlling interests (8) -
----------- -----------
343 (111)
----------- -----------
Comprehensive income $ 1,011 $ 417
----------- -----------
----------- -----------
Income tax (expense) benefit included in other comprehensive income
For the three months
ended March 31
-----------------------
2008 2007
----------- -----------
Unrealized foreign exchange gains (losses) on
translation of foreign operations $ - $ -
Unrealized gains (losses) on available for sale
assets 22 4
Reclassification of realized (gains) losses on
available for sale assets 3 7
Unrealized gains (losses) on cash flow hedges 25 -
Non-controlling interests 2 -
----------- -----------
$ 52 $ 11
----------- -----------
----------- -----------
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in $ millions)
For the three months
ended March 31
-----------------------
2008 2007
----------- -----------
Operations
Net income $ 668 $ 528
Adjustments:
Change in policy liabilities (250) (52)
Change in funds held by ceding insurers (18) 288
Change in funds held under reinsurance
contracts (1) 26
Change in current income taxes payable (171) (44)
Future income tax expense (11) (11)
Changes in fair value of financial
instruments 951 415
Other (385) (972)
----------- -----------
Cash flows from operations 783 178
Financing Activities
Issue of common shares 5 11
Repayments on credit facility (235) -
Increase in line of credit in subsidiary 80 -
Repayment of debentures and other debt
instruments (2) (9)
Dividends paid (275) (241)
----------- -----------
(427) (239)
Investment Activities
Bond sales and maturities 4,644 6,532
Mortgage loan repayments 376 469
Stock sales 389 353
Real estate sales 100 19
Change in loans to policyholders (37) (34)
Change in repurchase agreements 369 (427)
Investment in bonds (5,342) (5,943)
Investment in mortgage loans (712) (594)
Investment in stocks (448) (572)
Investment in real estate (100) (113)
----------- -----------
(761) (310)
Effect of changes in exchange rates on cash
and cash equivalents 168 (16)
Decrease in cash and cash equivalents (237) (387)
Cash and cash equivalents from continuing ($3,650)
and discontinued operations ($26), beginning of
year 3,676 3,083
Cash and cash equivalents from discontinued
operations, end of period (23) (3)
----------- -----------
Cash and cash equivalents from continuing
operations, end of period $ 3,416 $ 2,693
----------- -----------
----------- -----------
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 March 31, 2008 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, 2007 except as noted below. These interim
consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto in the
Company's annual report dated December 31, 2007.
(a) Changes in Accounting Policy
Capital Disclosures
-------------------
Effective January 1, 2008, the Company adopted the Canadian
Institute of Chartered Accountants (CICA) Handbook Section 1535,
Capital Disclosures. The section establishes standards for
disclosing information that enables users of financial statements
to evaluate the entity's objectives, policies and processes for
managing capital. The new requirements are for disclosure only
and did not impact the financial results of the Company.
Financial Instrument Disclosure and Presentation
------------------------------------------------
Effective January 1, 2008, the Company adopted the CICA Handbook
Section 3862, Financial Instruments - Disclosures, and
Section 3863, Financial Instruments - Presentation. These
sections replace existing Section 3861, Financial Instruments -
Disclosure and Presentation. Presentation standards are carried
forward unchanged. Disclosure standards are enhanced and expanded
to complement the changes in accounting policy adopted in
accordance with Section 3855, Financial Instruments - Recognition
and Measurement during 2007.
(b) Comparative Figures
Certain of the 2007 amounts presented for comparative purposes
have been reclassified to conform with the presentation adopted
in the current year.
2. Disposals
On April 1, 2008, Lifeco announced that Great-West Life & Annuity
Insurance Company (GWL&A) has completed the sale of its health care
business, Great-West Healthcare. As part of the transaction GWL&A has
received U.S. $1.5 billion in cash and will retain an estimated
U.S. $750 million representing the amount of equity invested in the
business at the closing date. In accordance with CICA Handbook
Section 3475, Disposal of Long-lived Assets and Discontinued
Operations the operating results and assets and liabilities of the
health care business have been presented as discontinued operations
in the financial statements of the Company.
After tax net income of the health care business presented as
discontinued operations on the Summary of Consolidated Operations is
comprised of the following:
March 31, March 31,
2008 2007
----------- -----------
Income
Premium income $ 224 $ 271
Net investment income 11 25
Fee and other income 164 211
----------- -----------
399 507
----------- -----------
Benefits and expenses
Paid or credited to policyholders and
beneficiaries including policyholder
dividends and experience refunds 191 243
Other 145 183
----------- -----------
Net income from discontinued operations
before income taxes 63 81
Income taxes 20 25
----------- -----------
Net income from discontinued operations $ 43 $ 56
----------- -----------
----------- -----------
As a result of the sale of its health care business, GWL&A recognized
a charge of $58 after-tax relating to the strengthening of reserves
in its continuing operations.
On the Consolidated Balance Sheets assets and liabilities of
operations held for sale are comprised of the following:
March 31, December 31, March 31,
2008 2007 2007
----------- ----------- -----------
Assets
Bonds $ 184 $ 241 $ 275
Cash and cash equivalents 23 26 3
Goodwill 49 47 49
Intangible assets 11 11 6
Other assets 403 372 495
----------- ----------- -----------
Assets of operations held for
sale $ 670 $ 697 $ 828
----------- ----------- -----------
----------- ----------- -----------
Liabilities
Policy liabilities $ 231 $ 248 $ 333
Other liabilities 165 180 247
Repurchase agreements - - 22
----------- ----------- -----------
Liabilities of operations held
for sale $ 396 $ 428 $ 602
----------- ----------- -----------
----------- ----------- -----------
3. Restructuring Costs
Following the acquisition of Putnam Investments, LLC (Putnam) on
August 3, 2007, the Company developed a plan to restructure and exit
certain operations of Putnam. The Company expects the restructuring
to be substantially complete by the end of 2009. Costs of $184
(U.S. $175) are expected to be incurred as a result by the U.S.
operating segment and consist primarily of restructuring and exit
activities involving operations and systems, compensation and
facilities costs. Accrued restructuring costs are included in other
liabilities in the Consolidated Balance Sheets and restructuring
charges are included in the Summary of Consolidated Operations. The
costs include approximately $154 (U.S $146) that was recognized as
part of the purchase equation of Putnam and costs of approximately
$30 (U.S. $29) will be charged to income as incurred.
The following details the amount and status of restructuring program
costs:
Changes
in
Expected Amounts Amounts foreign Balance
total utilized utilized exchange March
costs - 2007 - 2008 rates 31, 2008
--------- --------- --------- --------- ---------
Compensation
costs $ 133 $ (27) $ (15) $ (6) $ 85
Exiting and
consolidating
operations 22 (6) - - 16
Eliminating
duplicate
systems 29 (1) - - 28
--------- --------- --------- --------- ---------
$ 184 $ (34) $ (15) $ (6) $ 129
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Accrued on
acquisition $ 154 $ (34) $ (15) $ (6) $ 99
Expense as
incurred 30 - - - 30
--------- --------- --------- --------- ---------
$ 184 $ (34) $ (15) $ (6) $ 129
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
4. Portfolio Investments
(a) Carrying values of portfolio investments are as follows:
March 31, 2008
-----------------------------------
Carrying Value & Market Value
-----------------------------------
Held for trading(1)
Available ------------------------
for sale Designated Classified
----------- ----------- -----------
Bonds
- government $ 1,895 $16,892 $ 645
- corporate 2,917 34,781 1,053
----------- ----------- -----------
4,812 51,673 1,698
----------- ----------- -----------
Mortgage loans
- residential - - -
- non-
residential - - -
----------- ----------- -----------
- - -
----------- ----------- -----------
Stocks 1,426 4,666 -
Real estate - - -
----------- ----------- -----------
$ 6,238 $56,339 $ 1,698
----------- ----------- -----------
----------- ----------- -----------
March 31, 2008
-----------------------------------------------------------
Amortized Cost Total
----------------------------------------------- -----------
Carrying Market Carrying Market
Value Value Value Non- Value Non-
Loans and Loans and financial financial Carrying
receivables receivables instruments instruments value
----------- ----------- ----------- ----------- -----------
Bonds
- government $ 1,786 $ 1,951 $ - $ - $21,218
- corporate 6,966 7,141 - - 45,717
----------- ----------- ----------- ----------- -----------
8,752 9,092 - - 66,935
----------- ----------- ----------- ----------- -----------
Mortgage loans
- residential 7,066 7,271 - - 7,066
- non-
residential 9,292 9,405 - - 9,292
----------- ----------- ----------- ----------- -----------
16,358 16,676 - - 16,358
----------- ----------- ----------- ----------- -----------
Stocks - - 323 416 6,415
Real estate - - 2,691 2,940 2,691
----------- ----------- ----------- ----------- -----------
$25,110 $25,768 $ 3,014 $ 3,356 $92,399
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
December 31, 2007
-----------------------------------
Carrying Value & Market Value
-----------------------------------
Held for trading(1)
Available ------------------------
for sale Designated Classified
----------- ----------- -----------
Bonds
- government $ 1,541 $16,554 $ 635
- corporate 2,504 34,030 1,005
----------- ----------- -----------
4,045 50,584 1,640
----------- ----------- -----------
Mortgage loans
- residential - - -
- non-
residential - - -
----------- ----------- -----------
- - -
----------- ----------- -----------
Stocks 1,432 4,791 -
Real estate - - -
----------- ----------- -----------
$ 5,477 $55,375 $ 1,640
----------- ----------- -----------
----------- ----------- -----------
December 31, 2007
-----------------------------------------------------------
Amortized Cost Total
----------------------------------------------- -----------
Carrying Market Carrying Market
Value Value Value Non- Value Non-
Loans and Loans and financial financial Carrying
receivables receivables instruments instruments value
----------- ----------- ----------- ----------- -----------
Bonds
- government $ 1,775 $ 1,877 $ - $ - $20,505
- corporate 7,025 7,130 - - 44,564
----------- ----------- ----------- ----------- -----------
8,800 9,007 - - 65,069
----------- ----------- ----------- ----------- -----------
Mortgage loans
- residential 7,121 7,127 - - 7,121
- non-
residential 8,748 8,879 - - 8,748
----------- ----------- ----------- ----------- -----------
15,869 16,006 - - 15,869
----------- ----------- ----------- ----------- -----------
Stocks - - 320 461 6,543
Real estate - - 2,547 2,844 2,547
----------- ----------- ----------- ----------- -----------
$24,669 $25,013 $ 2,867 $ 3,305 $90,028
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
March 31, 2007
-----------------------------------
Carrying Value & Market Value
-----------------------------------
Held for trading(1)
Available ------------------------
for sale Designated Classified
----------- ----------- -----------
Bonds
- government $ 1,879 $21,319 $ 1,013
- corporate 3,097 36,813 615
----------- ----------- -----------
4,976 58,132 1,628
----------- ----------- -----------
Mortgage loans
- residential - - -
- non-
residential - - -
----------- ----------- -----------
- - -
----------- ----------- -----------
Stocks 896 4,416 -
Real estate - - -
----------- ----------- -----------
$ 5,872 $62,548 $ 1,628
----------- ----------- -----------
----------- ----------- -----------
March 31, 2007
-----------------------------------------------------------
Amortized Cost Total
----------------------------------------------- -----------
Carrying Market Carrying Market
Value Value Value Non- Value Non-
Loans and Loans and financial financial Carrying
receivables receivables instruments instruments value
----------- ----------- ----------- ----------- -----------
Bonds
- government $ 2,240 $ 2,275 $ - $ - $26,451
- corporate 7,610 8,405 - - 48,135
----------- ----------- ----------- ----------- -----------
9,850 10,680 - - 74,586
----------- ----------- ----------- ----------- -----------
Mortgage loans
- residential 7,259 7,435 - - 7,259
- non-
residential 8,097 8,203 - - 8,097
----------- ----------- ----------- ----------- -----------
15,356 15,638 - - 15,356
----------- ----------- ----------- ----------- -----------
Stocks - - 309 449 5,621
Real estate - - 2,224 2,689 2,224
----------- ----------- ----------- ----------- -----------
$25,206 $26,318 $ 2,533 $ 3,138 $97,787
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
(1) Investments can be held for trading in two ways: designated as held
for trading at the option of management; or, classified as held for
trading if they are actively traded for the purpose of earning
investment income.
(b) Included in portfolio investments are the following:
(i) Non-performing loans:
March 31, December 31, March 31,
2008 2007 2007
----------- ----------- -----------
Bonds $ 19 $ 33 $ 77
Mortgage loans 9 9 25
----------- ----------- -----------
$ 28 $ 42 $ 102
----------- ----------- -----------
----------- ----------- -----------
Non-performing loans include non-accrual loans and foreclosed
real estate held for sale. Bond and mortgage investments are
reviewed on a loan by loan basis to determine non-performing
status. Loans are classified as non-accrual when they are deemed
to have an other than temporary impairment as a result of:
(1) payments are 90 days or more in arrears, except in those
cases where, in the opinion of management, there is
justification to continue to accrue interest; or
(2) the Company no longer has reasonable assurance of timely
collection of the full amount of the principal and interest
due; or
(3) modified/restructured loans are not performing in accordance
with the contract.
Where appropriate, provisions are established or write-offs made
to adjust the carrying value to the net realizable amount.
Wherever possible the fair value of collateral underlying the
loans or observable market price is used to establish net
realizable value. For non-performing available for sale loans,
recorded at fair value, the accumulated loss recorded in
accumulated other comprehensive income is reclassified to net
investment income. Once an impairment loss on an available for
sale asset is recorded to income it is not reversed.
(ii) Changes in the allowance for credit losses are as follows:
For the three months For the three months
ended March 31, 2008 ended March 31, 2007
----------------------- -----------------------
Mortgage Mortgage
Bonds Loans Total Bonds Loans Total
------- ------- ------- ------- ------- -------
Balance, beginning of
year $ 34 $ 19 $ 53 $ 44 $ 30 $ 74
Net provision
(recoveries) for credit
losses - in year - - - (1) - (1)
Write-offs, net of
recoveries (6) - (6) - - -
Other (including foreign
exchange rate changes) 1 1 2 (1) - (1)
------- ------- ------- ------- ------- -------
Balance, end of period $ 29 $ 20 $ 49 $ 42 $ 30 $ 72
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
(c) Net investment income is comprised of the following:
For the three months Mortgage Real
ended March 31, 2008 Bonds loans Stocks estate Other Total
------------------------- ------- ------- ------- ------- ------- -------
Regular net
investment income:
Investment income
earned $ 890 $ 228 $ 45 $ 35 $ 128 $1,326
Net realized gains
(losses) (available
for sale) 13 - - - - 13
Net realized gains
(losses) (other
classifications) 6 6 5 - - 17
Amortization of net
realized/unrealized
gains (non-financial
instruments) - - - 11 - 11
Other income and expenses - - - - (15) (15)
------- ------- ------- ------- ------- -------
909 234 50 46 113 1,352
Changes in fair value on
held for trading assets:
Net realized/unrealized
gains (losses)
(classified held for
trading) 21 - - - - 21
Net realized/unrealized
gains (losses)
(designated held for
trading) (683) (242) - - (36) (961)
------- ------- ------- ------- ------- -------
(662) (242) - - (36) (940)
------- ------- ------- ------- ------- -------
Net investment income $ 247 $ (8) $ 50 $ 46 $ 77 $ 412
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
For the three months Mortgage Real
ended March 31, 2007 Bonds loans Stocks estate Other Total
------------------------- ------- ------- ------- ------- ------- -------
Regular net investment
income:
Investment income earned $ 903 $ 224 $ 43 $ 35 $ 152 $1,357
Net realized gains
(losses) (available for
sale) 25 - 3 - - 28
Net realized gains
(losses) (other
classifications) 2 6 - - - 8
Amortization of deferred
net realized gains - - - 19 - 19
Other income and expenses - - - - (18) (18)
------- ------- ------- ------- ------- -------
930 230 46 54 134 1,394
Changes in fair value on
held for trading assets:
Net realized/unrealized
gains (losses)
(classified held for
trading) (3) - - - - (3)
Net realized/unrealized
gains (losses)
(designated held for
trading) (481) - 79 - (12) (414)
------- ------- ------- ------- ------- -------
(484) - 79 - (12) (417)
------- ------- ------- ------- ------- -------
Net investment income $ 446 $ 230 $ 125 $ 54 $ 122 $ 977
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
Investment income earned is comprised of income from investments that
are classified or designated as held for trading, classified as
available for sale and classified as loans and receivables.
5. Financial Instrument Risk Management
The Company has enterprise-wide policies relating to the
identification, measurement, monitoring, mitigating, and controlling
of risks associated with financial instruments. The key risks related
to financial instruments are credit risk, liquidity risk and market
risk (currency, interest rate and equity). The following sections
describe how the Company manages each of these risks.
(a) Credit Risk
Credit risk is the risk of financial loss resulting from the
failure of debtors making payments when due. The following
policies and procedures are in place to manage this risk:
- Investment guidelines are in place that require only the
purchase of investment-grade assets and minimize undue
concentration of assets in any single geographic area, industry
and company.
- Investment guidelines specify minimum and maximum limits for
each asset class. Credit ratings are determined by recognized
external credit rating agencies and/or internal credit review.
- Investment guidelines also specify collateral requirements.
- Portfolios are monitored continuously, and reviewed regularly
with the Boards of Directors or the Investment Committees of
the Boards of Directors.
- Credit risk associated with derivative instruments is evaluated
quarterly on a current exposure method, using practices that
are at least as conservative as those recommended by
regulators.
- The Company is exposed to credit risk relating to premiums due
from policyholders during the grace period specified by the
insurance policy or until the policy is paid up or terminated.
Commissions paid to agents and brokers are netted against
amounts receivable, if any.
- Reinsurance is placed with counterparties that have a good
credit rating and concentration of credit risk is avoided by
following policy guidelines set each year by the Board of
Directors. Management continuously monitors and performs an
assessment of creditworthiness of reinsurers.
(i) Maximum Exposure to Credit Risk
The following table summarizes the Company's maximum
exposure to credit risk related to financial instruments.
The maximum credit exposure is the carrying value of the
asset net of any allowances for losses.
March 31,
2008
-----------
Cash and cash equivalents $ 3,439
Bonds
Held for trading 53,460
Available for sale 4,907
Amortized cost 8,752
Mortgage loans 16,358
Loans to policyholders 6,521
Other financial assets 27,769
Derivative assets 710
-----------
Total balance sheet maximum credit exposure $ 121,916
-----------
-----------
Credit risk is also mitigated by entering into collateral
agreements. The amount and type of collateral required
depends on an assessment of the credit risk of the
counterparty. Guidelines are implemented regarding the
acceptability of types of collateral and the valuation
parameters. Management monitors the value of the
collateral, requests additional collateral when needed and
performs an impairment valuation when applicable.
(ii) Concentration of Credit Risk
Concentrations of credit risk arise from exposures to a
single debtor, a group of related debtors or groups of
debtors that have similar credit risk characteristics in
that they operate in the same geographic region or in
similar industries. The characteristics are similar in that
changes in economic or political environments may impact
their ability to meet obligations as they come due.
The following table provides details of the carrying value
of bonds by industry sector and geographic distribution:
March 31,
2008
-----------
Bonds issued or guaranteed by:
Canadian federal government $ 1,610
Canadian provincial and municipal governments 4,795
U.S. Treasury and other U.S. agencies 4,619
Other foreign governments 8,688
-----------
Total government issued or government bonds 19,712
Corporate bonds by industry sector:
Asset-backed securities 8,117
Communications 1,370
Consumer staples and discretionary 4,428
Financials 14,653
Healthcare 1,270
Industrials 2,613
Utilities and energy 8,435
Other 3,848
-----------
Total corporate 44,734
Short term bonds 2,489
-----------
$ 66,935
-----------
-----------
Canada $ 25,241
United States 16,771
Europe/Reinsurance 24,923
-----------
$ 66,935
-----------
-----------
The following table provides details of the carrying value
of mortgage loans by geographic location:
March 31, 2008
-----------------------------------------------
Single Multi-
family family
residential residential Commercial Total
----------- ----------- ----------- -----------
Canada $ 1,791 $ 4,712 $ 5,441 $ 11,944
United States - 527 1,211 1,738
Europe/
Reinsurance - 31 2,645 2,676
----------- ----------- ----------- -----------
Total
mortgages $ 1,791 $ 5,270 $ 9,297 $ 16,358
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
(iii) Asset Quality
Bond Portfolio Quality
March 31,
2008
-----------
AAA $ 28,518
AA 10,716
A 16,965
BBB 7,799
BB and lower 448
-----------
64,446
Short term bonds 2,489
-----------
Total bonds $ 66,935
-----------
-----------
Derivative Portfolio Quality
March 31,
2008
-----------
Over-the-counter contracts (counterparty
ratings):
AAA $ 2
AA 460
A 249
-----------
Total $ 711
-----------
-----------
Derivative instruments are either exchange traded or over-
the-counter contracts negotiated between counterparties. At
March 31, 2008, the Company held assets of $8 pledged as
collateral for derivative contracts. The assets pledged
consist of cash, cash equivalents and short-term
securities.
(b) Liquidity Risk
Liquidity risk is the risk that the Company will not be able to
meet all cash outflow obligations as they come due. The following
policies and procedures are in place to manage this risk:
- The Company closely manages operating liquidity through cash
flow matching of assets and liabilities.
- Management monitors the use of line of credit on a regular
basis, and assesses the ongoing availability of these and
alternative forms of operating credit.
- Management closely monitors the solvency and capital positions
of its principal subsidiaries opposite liquidity requirements
at the holding company. Additional liquidity is available
through established lines of credit and the Company's
demonstrated ability to access capital markets for funds. The
Company maintains a $200 million committed line of credit with
a Canadian chartered bank.
In the normal course of business the Company enters into
contracts that give rise to commitments of future minimum
payments that impact short-term and long-term liquidity. The
following table summarizes the principal repayment schedule of
certain of the Company's financial liabilities.
Payments due by period
-------------------------------------------------------
over
Total 1 year 2 years 3 years 4 years 5 years 5 years
-------------------------------------------------------
Debentures and
other debt
instruments $5,153 $1,845 $ 1 $ 1 $ 1 $ 716 $2,589
Preferred share
liabilities 756 - - - - 557 199
Capital trust
debentures(1) 800 - - - - - 800
-------------------------------------------------------
$6,709 $1,845 $ 1 $ 1 $ 1 $1,273 $3,588
-------------------------------------------------------
-------------------------------------------------------
(1) Payments due have not been reduced to reflect the Company held
capital trust securities of $175 principal amount ($191 carrying
value).
(c) Market Risk
Market risk is the risk that the fair value or future cash flows
of a financial instrument will fluctuate as a result of changes
in market factors. Market factors include three types of risks:
currency risk, interest rate risk and equity risk.
(i) Currency Risk
Currency risk relates to the Company operating in different
currencies and converting non-Canadian earnings at
different points in time at different foreign exchange
levels when adverse changes in foreign currency exchange
rates occur. The following policies and procedures are in
place to mitigate the Company's exposure to currency risk.
- Management, from time to time, utilizes forward foreign
currency contracts to mitigate the volatility arising
from the movement of rates as they impact the translation
of operating results denominated in foreign currency.
- The Company uses financial measures such as constant
currency calculations to monitor the effect of currency
translation fluctuations.
- Investments are normally made in the same currency as the
liabilities supported by those investments.
- Foreign currency assets acquired to back liabilities are
normally converted back to the currency of the liability
using foreign exchange contracts.
- A 10% increase in foreign currency rates would be
expected to additionally increase non-participating
actuarial liabilities by approximately $20. A 10%
decrease in foreign currency rates would be expected to
additionally decrease non-participating actuarial
liabilities by approximately $20.
(ii) Interest Rate Risk
Interest rate risk exists if asset and liability cash flows
are not closely matched and interest rates change causing a
difference in value between the asset and liability. The
following policies and procedures are in place to mitigate
the Company's exposure to interest rate risk.
- The Company utilizes a formal process for managing the
matching of assets and liabilities. This involves
grouping general fund assets and liabilities into
segments. Assets in each segment are managed in relation
to the liabilities in the segment.
- Interest rate risk is managed by investing in assets that
are suitable for the products sold.
- For products with fixed and highly predictable benefit
payments, investments are made in fixed income assets
that closely match the liability product cash flows.
Protection against interest rate change is achieved as
any change in the fair market value of the assets will be
offset by a similar change in the fair market value of
the liabilities.
- For products with less predictable timing of benefit
payments, investments are made in fixed income assets
with cash flows of a shorter duration than the
anticipated timing of benefit payments, or equities as
described below.
- The risk associated with the mismatch in portfolio
duration and cash flow, asset prepayment exposure and the
pace of asset acquisition are quantified and reviewed
regularly.
Projected cash flows from the current assets and
liabilities are used in the Canadian Asset Liability Method
(CALM) to determine actuarial liabilities. Cash flows from
assets are reduced to provide for potential asset default
losses. Testing under several interest rate scenarios
(including increasing and decreasing rates) is done to
provide for reinvestment risk.
One way of measuring the interest rate risk associated with
this assumption is to determine the effect on the present
value of the projected net asset and liability cash flows
of the non-participating business of the Company of an
immediate and permanent 1% increase or an immediate and
permanent 1% decrease in the level of interest rates at
each future duration. These interest rate changes will
impact the projected cash flows.
- The effect of an immediate and permanent 1% increase in
interest rates at each future duration would be to
decrease the present value of these net projected cash
flows by approximately $28.
- The effect of an immediate and permanent 1% decrease in
interest rates at each future duration would be to
decrease the present value of these net projected cash
flows by approximately $150.
(iii) Equity Risk
Equity risk is the uncertainty associated with the
valuation of assets arising from changes in equity markets.
To mitigate price risk, the Company has investment policy
guidelines in place that provide for prudent investment in
equity markets within clearly defined limits.
Some policy liabilities are supported by equities, for
example segregated fund products and products with long-
tail liabilities. Generally these liabilities will
fluctuate in line with equity market values. There will be
additional impacts on these liabilities as equity market
values fluctuate. A 10% increase in equity markets would be
expected to additionally decrease non-participating
actuarial liabilities by approximately $55. A 10% decrease
in equity markets would be expected to additionally
increase non-participating actuarial liabilities by
approximately $64.
6. Financing Charges
Financing charges consist of the following:
For the three months
ended March 31
-----------------------
2008 2007
----------- -----------
Interest on long-term debentures and other
debt instruments $ 75 $ 30
Dividends on preferred shares classified as
liabilities 9 9
Unrealized (gains) losses on preferred shares
classified as held for trading 11 (2)
Other 2 5
Interest on capital trust debentures 12 12
Distributions on capital trust securities held
by consolidated group as temporary investments (3) (3)
----------- -----------
Total $ 106 $ 51
----------- -----------
----------- -----------
7. Debentures and Other Debt Instruments
On January 24, 2008, a subsidiary of Putnam LLC executed a demand
promissory note in the amount of U.S. $150 with a Canadian Chartered
Bank. On January 24, 2008, Putnam LLC drew U.S. $150 on the note. On
March 26, 2008, a subsidiary of Putnam LLC executed a U.S. $200
revolving credit facility with a Canadian Chartered Bank and used
proceeds from the line to repay the U.S. $150 demand promissory note.
There was U.S. $80 outstanding under the line of credit at March 31,
2008.
During the first quarter of 2008, the Company repaid $235 on its one
year credit facility with a Canadian chartered bank. The outstanding
balance of this credit facility at March 31, 2008 and December 31,
2007 respectively was $1,664 ($998 Canadian and U.S. $647) and $1,873
($1,233 Canadian and U.S. $647).
8. Non-Controlling Interests
During the first quarter of 2008, non-controlling interests decreased
by approximately $176 in connection with the termination of a long-
standing assumption reinsurance agreement under which GWL&A had
reinsured a block of U.S. participating policies.
9. Share Capital
(a) Preferred Shares
The Company has designated outstanding Preferred Shares Series D
and Series E as held for trading on the Consolidated Balance
Sheets with changes in fair value reported in the Summary of
Consolidated Operations. During the three months ended March 31,
2008 the Company recognized unrealized gains (losses) of $1 for
Series D and $(12) for Series E (for the three months ended
March 31, 2007, $2 for Series D and $0 for Series E). The
redemption price at maturity is $25 per share plus accrued
dividends.
(b) Common Shares
Issued and outstanding
March 31, 2008 December 31, 2007
------------------------- ------------------------
Carrying Carrying
Number Value Number Value
------------ ----------- ----------- -----------
Common shares:
Balance, beginning
of year 893,761,639 $ 4,709 891,151,789 $ 4,676
Issued under Stock
Option Plan 358,243 5 2,609,850 33
------------ ----------- ----------- -----------
Balance, end of
period 894,119,882 $ 4,714 893,761,639 $ 4,709
------------ ----------- ----------- -----------
------------ ----------- ----------- -----------
March 31, 2007
-------------------------
Carrying
Number Value
------------ -----------
Common shares:
Balance, beginning
of year 891,151,789 $ 4,676
Issued under Stock
Option Plan 993,457 11
------------ -----------
Balance, end of
period 892,145,246 $ 4,687
------------ -----------
------------ -----------
10. Capital Management
At the holding company level, the Company monitors the amount of
consolidated capital available, and the amounts deployed in its
various operating subsidiaries. The amount of capital deployed in any
particular company or country is dependent upon local regulatory
requirements as well as the Company's internal assessment of capital
requirements in the context of its operational risks and
requirements, and strategic plans.
The Company's practice is to maintain the capitalization of its
regulated operating subsidiaries at a level that will exceed the
relevant minimum regulatory capital requirements in the jurisdictions
in which they operate.
In Canada, the Office of the Superintendent of Financial Institutions
(OSFI) has established a capital adequacy measurement for life
insurance companies incorporated under the Insurance Companies Act
(Canada) and their subsidiaries, known as the Minimum Continuing
Capital and Surplus Requirements (MCCSR).
For Canadian regulatory reporting purposes, capital is defined by
OSFI in its MCCSR guideline. The following table provides the MCCSR
information and ratios for The Great-West Life Assurance Company
(Great-West Life):
March 31, December 31, March 31,
2008 2007 2007
----------- ----------- -----------
Capital Available:
Tier 1 Capital
Common shares $ 6,116 $ 6,116 $ 6,116
Shareholder surplus 4,921 4,672 4,081
Qualifying non-controlling
interests 151 152 154
Innovative instruments 634 636 631
Other Tier 1 Capital Elements 1,621 1,337 1,775
----------- ----------- -----------
Gross Tier 1 Capital 13,443 12,913 12,757
Deductions from Tier 1:
Goodwill & intangible assets in
excess of limit 5,708 5,724 5,725
Other deductions 1,347 1,219 1,132
----------- ----------- -----------
Net Tier 1 Capital 6,388 5,970 5,900
Tier 2 Capital
Tier 2A 447 456 548
Tier 2B allowed 501 502 502
Tier 2C 1,322 1,262 1,178
----------- ----------- -----------
Tier 2 Capital Allowed 2,270 2,220 2,228
Total Tier 1 and Tier 2 Capital 8,658 8,190 8,128
Less: Deductions/Adjustments 124 101 205
----------- ----------- -----------
Total Available Capital $ 8,534 $ 8,089 $ 7,923
Capital Required:
Assets Default & market risk $ 1,487 $ 1,457 $ 1,336
Insurance Risks 1,735 1,675 1,690
Interest Rate Risks 1,026 888 872
Other (57) (76) (135)
----------- ----------- -----------
Total Capital Required $ 4,191 $ 3,944 $ 3,763
MCCSR ratios:
Tier 1 152% 151% 157%
----------- ----------- -----------
----------- ----------- -----------
Total 204% 205% 211%
----------- ----------- -----------
----------- ----------- -----------
In the United States, GWL&A is subject to comprehensive state and
federal regulation and supervision throughout the United States. The
National Association of Insurance Commissioners (NAIC) has adopted
risk-based capital rules and other financial ratios for U.S. life
insurance companies. At the end of 2007 GWL&A has estimated the risk-
based capital (RBC) ratio to be 586%, well in excess of that required
by NAIC.
The capitalization of the Company and its operating subsidiaries will
also take into account the views expressed by the various credit
rating agencies that provide financial strength and other ratings to
the Company.
The Company has also established policies and procedures designed to
identify, measure and report all material risks. Management is
responsible for establishing capital management procedures for
implementing and monitoring the capital plan. The Board of Directors
reviews and approves all capital transactions undertaken by
management pursuant to the annual capital plan. The capital plan is
designed to ensure that the Company maintains adequate capital,
taking into account the Company's strategy and business plans.
11. Stock Based Compensation
110,000 options were granted under the Company's stock option plan
for the three months ended March 31, 2008 (1,749,000 options were
granted during the first quarter of 2007). The weighted fair value of
options granted during the three months ended March 31, 2008 were
$3.13 per option ($7.49 per option during the three months ended
March 31, 2007). Compensation expense of $2 after-tax has been
recognized in the Summary of Consolidated Operations for the three
months ended March 31, 2008 ($1 after-tax for the three months ended
March 31, 2007).
12. 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
------------------------
2008 2007
----------- -----------
Pension benefits $ 13 $ 11
Other benefits 3 5
----------- -----------
Total $ 16 $ 16
----------- -----------
----------- -----------
13. Earning per Common Share
The following table provides the reconciliation between basic and
diluted earnings per common share:
For the three months
ended March 31
-------------------------
2008 2007
------------ ------------
(a) Earnings
Net income from continuing operations $ 625 $ 472
Net income from discontinued operations 43 56
------------ ------------
Net income $ 668 $ 528
Perpetual preferred share dividends 14 14
------------ ------------
Net income - common shareholders $ 654 $ 514
------------ ------------
------------ ------------
(b) Number of common shares
Average number of common shares
outstanding 893,862,214 891,567,961
Add:
- Potential exercise of outstanding
stock options 4,838,672 6,958,935
------------ ------------
Average number of common shares
outstanding - diluted basis 898,700,886 898,526,896
------------ ------------
------------ ------------
Basic earnings per common share
From continuing operations $ 0.684 $ 0.513
From discontinued operations 0.048 0.063
------------ ------------
$ 0.732 $ 0.576
------------ ------------
------------ ------------
Diluted earnings per common share
From continuing operations $ 0.680 $ 0.510
From discontinued operations 0.048 0.062
------------ ------------
$ 0.728 $ 0.572
------------ ------------
------------ ------------
14. Accumulated Other Comprehensive Income
For the three months ended March 31, 2008
--------------------------------------------------------------
Unrealized Unreal-
foreign ized Unreal-
exchange gains ized
gains (losses) gains
(losses) on on (losses) Non-
translation available on control-
of foreign for sale cash flow ling Share-
operations assets hedges Total interest holder
--------- --------- --------- --------- --------- ---------
Balance,
beginning
of year $ (1,801) $ 174 $ 13 $ (1,614) $ 81 $ (1,533)
Other
comprehensive
income 456 (84) (71) 301 (10) 291
Income tax - 25 25 50 2 52
--------- --------- --------- --------- --------- ---------
456 (59) (46) 351 (8) 343
--------- --------- --------- --------- --------- ---------
Balance, end
of period $ (1,345) $ 115 $ (33) $ (1,263) $ 73 $ (1,190)
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
For the three months ended March 31, 2007
-------------------------------------------------------------
Unrealized Unreal-
foreign ized Unreal-
exchange gains ized
gains (losses) gains
(losses) on on (losses) Non-
translation available on control-
of foreign for sale cash flow ling Share-
operations assets hedges Total interest holder
--------- --------- --------- --------- --------- ---------
Balance,
beginning
of year $ (591) $ - $ - $ (591) $ 44 $ (547)
Opening
transition
adjustment - 383 - 383 (19) 364
Income tax - (107) - (107) 5 (102)
--------- --------- --------- --------- --------- ---------
- 276 - 276 (14) 262
Other
comprehensive
income (75) (47) - (122) - (122)
Income tax - 11 - 11 - 11
--------- --------- --------- --------- --------- ---------
(75) (36) - (111) - (111)
--------- --------- --------- --------- --------- ---------
Balance, end
of period $ (666) $ 240 $ - $ (426) $ 30 $ (396)
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
15. Reinsurance Transaction
On February 14, 2008, the Company's indirect wholly-owned Irish
reinsurance subsidiary, Canada Life International Re Limited, signed
an agreement with Standard Life Assurance Limited, a U.K. based
provider of life, pension and investment products, to assume by way
of indemnity reinsurance, a large block of U.K. payout annuities. The
reinsurance transaction increased premium income, paid or credited to
policyholders, funds held by ceding insurers and policy liabilities
by $12.5 billion.
16. Segmented Information
Consolidated Operations
For the three months ended March 31, 2008
United Lifeco
Canada States Europe Corporate Total
-------- -------- -------- -------- --------
Income:
Premium income $ 1,977 $ 853 $13,960 $ - $16,790
Net investment
income
Regular net
investment
income 624 316 419 (7) 1,352
Changes in fair
value on held
for trading
assets (88) (220) (632) - (940)
-------- -------- -------- -------- --------
Total net
investment income 536 96 (213) (7) 412
Fee and other
income 265 378 154 - 797
-------- -------- -------- -------- --------
Total income 2,778 1,327 13,901 (7) 17,999
-------- -------- -------- -------- --------
Benefits and expenses:
Paid or credited to
policyholders 1,868 914 13,502 - 16,284
Other 546 396 185 1 1,128
Amortization of
finite life
intangible assets 4 5 1 - 10
-------- -------- -------- -------- --------
Net operating income
before income taxes 360 12 213 (8) 577
Income taxes 81 (7) 36 (1) 109
-------- -------- -------- -------- --------
Net income before
non-controlling
interests 279 19 177 (7) 468
Non-controlling
interests 19 (175) (1) - (157)
-------- -------- -------- -------- --------
Net income from
continuing
operations 260 194 178 (7) 625
Net income from
discontinued
operations - 43 - - 43
-------- -------- -------- -------- --------
Net Income 260 237 178 (7) 668
Perpetual preferred
share dividends 11 - 3 - 14
-------- -------- -------- -------- --------
Net income - common
shareholders $ 249 $ 237 $ 175 $ (7) $ 654
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
For the three months ended March 31, 2007
United Lifeco
Canada States Europe Corporate Total
-------- -------- -------- -------- --------
Income:
Premium income $ 1,805 $ 603 $ 2,934 $ - $ 5,342
Net investment
income
Regular net
investment
income 625 357 411 1 1,394
Changes in fair
value on held
for trading
assets (31) 37 (423) - (417)
-------- -------- -------- -------- --------
Total net
investment income 594 394 (12) 1 977
Fee and other
income 255 136 162 - 553
-------- -------- -------- -------- --------
Total income 2,654 1,133 3,084 1 6,872
-------- -------- -------- -------- --------
Benefits and expenses:
Paid or credited
to policyholders 1,768 846 2,727 - 5,341
Other 578 155 171 1 905
Amortization of
finite life
intangible
assets 4 3 1 - 8
-------- -------- -------- -------- --------
Net operating income
before income taxes 304 129 185 - 618
Income taxes 44 37 32 - 113
-------- -------- -------- -------- --------
Net income before
non-controlling
interests 260 92 153 - 505
Non-controlling
interests 24 6 3 - 33
-------- -------- -------- -------- --------
Net income from
continuing
operations 236 86 150 - 472
Net income from
discontinued
operations - 56 - - 56
-------- -------- -------- -------- --------
Net Income 236 142 150 - 528
Perpetual preferred
share dividends 11 - 3 - 14
-------- -------- -------- -------- --------
Net income - common
shareholders $ 225 $ 142 $ 147 $ - $ 514
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
17. Subsequent Events
(a) On April 1, 2008, GWL&A completed the previously announced sale
of its health care business, Great-West Healthcare (refer to
note 2).
(b) On April 18, 2008, the Company repaid $1,085 ($730 Canadian and
U.S. $345) on its one year credit facility with a Canadian
chartered bank. As a result, the outstanding balance of the
credit facility is $579 ($268 Canadian and U.S. $302).
