Americas financial review Americas financial review Darryl Button CFO Americas Analyst and Investor Day, New York City, December 2, 2009 1
Key messages o Reporting structure aligned with management changes o Earnings impacted by financial crisis – franchises intact and producing strong underlying earnings growth going forward o Institutional spread lending in run off – reduced exposure to credit risk over time o o Adjusted operating expenses down 10% Adjusted operating expenses down 10% o US impairment trend improving o Significant improvement in unrealized bond losses o Additional capital markets de-risking resulting in higher quality, consistent earnings going forward Local knowledge. Global power. 2
Agenda o Financial review o Business review Local knowledge. Global power. 3
Reporting structure - today Individual Pension Life and Institutional Life Savings and and Asset Underlying earnings Protection Products Reinsurance Retirement Management Accident Retail Institutional Fixed Variable BOLI / Life and mutual guaranteed Over / annuities annuities COLI health funds products (under) performance of fair value items Individual Pension Life and Institutional Life Savin s and Savings and g and Asset and Asset g Operating s P Protection rotect on i Products P ro ucts d R i Reinsurance e nsurance earnings Operatin Retirement Management earning Accident Retail Institutional Fixed Variable BOLI / Life and mutual guaranteed annuities annuities COLI health funds products o Gains / losses o Impairment charges o Other income o Income tax o Americas net income Local knowledge. Global power. 4
Reporting structure – aligned with management changes US Work Mon SVS AFP Canada EU site Japan Life TCM DIA LTC Argos Mexico BOLI TAM ADMS TRS Korea /COLI Mong TRM WFG Clark Brazil eral nderlying derlying arnings rnings Individual Employer Life and Alternative Life Savings and Solutions and Protection Markets Reinsurance ea Retirement Retirement Pensions Pensions Un e U o Over / (under) performance of fair value items o Run-off business o Gains / losses o Impairment charges o Other income o Income tax o Americas net income Local knowledge. Global power. 5
Development of underlying earnings before tax per quarter Pre-crisis Post-crisis Current <2008 >2010 Q3 2009 USD 700 million Earnings impacted by Earnings drivers USD o Run-off institutional o Growth of business 430* spread-based business o Cost savings million o Equity markets o Redeployment of cash o De-risking o Financial markets * Excluding exceptional items (USD 30 million) Local knowledge. Global power. 6
Quarterly run-rate underlying earnings before tax Pre-Crisis Current (<2008) Change (Q3 09) (USD million) (USD million) (USD million) Americas 630 (160) 470 (excluding IGP spread) IGP spread 70 (110) (40) Total Americas 700 (270) 430 o (70) lower equity based fees and higher DPAC amortization on variable Excluding IGP spread (160) annuity, mutual fund and pension businesses o (50) investment de-risking (reduced hedge funds, high yield, BBB and credit derivatives) o (40) employee pension plan expenses o Spread compression driven by shortening of institutional liabilities IGP spread (110) during financial crisis o IGP run-off loss follows maturity pattern of internally transferred assets and amortizes off over next four years Local knowledge. Global power. 7
Impact of run-off institutional spread-based business Spread balances (USD billion) 33 24 13 8 3 2 2008 Q3 2009 2010E 2012E 2014E 2016E o Institutional cash shortfall due to shortening of liabilities – 12 month notice putable funding agreements (USD 6 billion) – Municipal GICs (USD 5 billion) – Extendable MTNs (USD 1 billion) o Remainder of US businesses cash flow positive through the crisis Local knowledge. Global power. 8
Impact of run-off institutional spread-based business Pre-Crisis Current (<2008) Change (Q3 09) (USD million) (USD million) (USD million) IGP spread per quarter 70 (110) (40) o USD 10 billion internal asset transfer from institutional to other US portfolios in exchange for cash exchan e for cash g – Transfer pricing basis – what other portfolios priced for – Actual book value of USD 11.4 billion – Unrealized loss before tax of USD (1.4) billion amortized through run-off institutional earnings: • 2009 (0.3) billion • 2012 (0.2) billion • 2013 (0.2) billion • 2010 (0.3) billion • 2014 (0.1) billion • 2011 (0.3) billion o Run-off will reduce sensitivity to credit markets going forward and free up USD 0.8 billion of capital by the end of 2010 Local knowledge. Global power. 9
Mean reversion – equity return assumptions Negative DAC unlocking above cap � Corridor cap 15 00% 15.00% 15.00% . 11 00% . 10.0 % 0 9.00% 8.25% 8.25% 8.00% 7.50% 7.50% 7.25% 7.25% 6 25% . 6.25% 6.00% 5.00% 6.25% 5.75% 6.00% 4.75% 4.75% 4.75% 4.75% Corridor floor Corridor floor Positive DAC unlocking below floor � Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 '03 '04 '04 '04 '04 '05 '05 '05 '05 '06 '06 '06 '06 '07 '07 '07 '07 '08 '08 '08 '08 '09 '09 '09 o Equity return assumptions adjusted quarterly within the corridor o Corridor based on current information and management best estimate o Over last six years, corridor breached once in Q207 (floor) and then in Q308-Q109 (cap) o Underlying earnings impact is approximately USD 60 million per point change in equity growth rate assumption Local knowledge. Global power. 10
Proven ability to execute on cost reduction initiatives Adjusted operating expenses down 10% year to date Category 9M 2009 9M 2008 Change Total operating expenses 1,678 1,640 38 Less: employee pension plan costs (90) 76 (166) Less: restructuring charges (40) n/a (40) Adjusted operating expenses 1,548 1,716 (168) o Restructuring the organization resulted in charges during 2009; however, the efficiencies gained will result in reduced costs going forward o We are not done – we will continue to aggressively pursue expense savings initiatives throughout the organization Local knowledge. Global power. 11
Fair value items o GMWB (USD 14 billion) - delta / rho hedged Liabilities o Segregated funds (USD 3.4 billion) – 92% delta hedged o Total return annuities (USD 1.4 billion) – closed blocks o Hedge funds (USD 0.7 billion) o Hedge funds (USD 0.7 billion) – reduced by 1.7 billion – reduced by 1.7 billion o Private equity (USD 0.7 billion) and REAP (USD 0.7 billion) Assets o Credit derivatives – super senior program unwound o Capital protection – 50% of unhedged retail VA Macro o Total return swap (USD 1.3 billion) Hedge o Put options (USD 0.8 billion) Local knowledge. Global power. 12 Balances reflect ending balances as of September 30, 2009
Improved US impairment losses Gross impairments (USD million) US housing (ABS and RMBS) Corporate Bonds 550 US commercial mortgages (CMBS and CML) 516 491 Other 430 370 131 61 36 40 Q3 '07 Q3 '07 Q4 '07 Q4 '07 Q1 '08 Q1 '08 Q2 '08 Q2 '08 Q3 '08 Q3 '08 Q4 '08 Q4 '08 Q1 '09 Q1 '09 Q2 '09 Q2 '09 Q3 '09 Q3 '09 Recoveries (USD million) 49 38 24 20 18 5 4 3 3 Q3 '07 Q4 '07 Q1 '08 Q2 '08 Q3 '08 Q4 '08 Q1 '09 Q2 '09 Q3 '09 Local knowledge. Global power. 13
Reduced unrealized bond losses Revaluation account (USD billion) Q3 '07 Q4 '07 Q1 '08 Q2 '08 Q3 '08 Q4 '08 Q1 '09 Q2 '09 Q3 '09 (5) (10) (15) (20) (20) Gross Bond Unrealized Gain (Loss) Net Revaluation Reserve o Significant improvement in recent quarters o Not a proxy for actual impairments Local knowledge. Global power. 14
Agenda o Financial review o Business review Local knowledge. Global power. 15
Diversified mix of business Americas embedded value (full year 2008) 14% Life Accident and health 30% 4% Fixed annuities Variable annuities Variable annuities 9% Retail mutual funds Pensions and asset management 7% Institutional guaranteed products >1% 14% BOLI / COLI 6% Life reinsurance 16% Local knowledge. Global power. 16
Diversified product offering Individual Employer Life and Alternative Life Savings Solutions Markets Reinsurance Protection and Retirement and Pensions o Traditional life o Fixed annuities o 401(k) plans o Canadian life and o Term coinsurance segregated funds o Term life o Variable annuities o 403(b) plans o Annuities o Latin America life o Universal life o Mutual funds o Defined benefit o Product consulting insurance products and development o Equity indexed o Variable annuities o Bank and corporate universal life o Automated o Mutual funds owned life underwriting o Variable life o Variable life insurance insurance o o Synthetic GICs S th ti GIC yn e c s o Health and supplemental health o Long term care Local knowledge. Global power. 17
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