Canadian Institute of Actuaries L’Institut canadien des actuaires 2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009

2009 Seminar for the Appointed Actuary Agenda 2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009 Earnings Volatility Required Capital Volatility Product Scrutiny

Earnings Volatility 18.8% drop from June 30th, 2008

2009 Seminar for the Appointed Actuary Earnings Volatility 2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009 The volatility of Guarantee Liabilities due to the decreased markets are significantly impacted by your current inforce business: 75/75 Guarantees with no resets and long-dated maturities 100/100 Guarantees with resets and 10-year maturity structure GMWB with deferral bonuses and resets There may be additional impacts due to: Scenario generator parameter updates Changes in policyholder behaviour Decrease in the yield curve The volatility of Guarantee Liabilities may be mitigated by hedging programs Deferred Acquisitions Costs (DAC) may need to be written down

26% decrease year-over-year Earnings Volatility Average TSX level over 2008 26% decrease year-over-year Average TSX level in 2009

Required Capital Volatility 2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009 In late 2008, OSFI implemented a new temporary “Alternative Method” for calculating Required Capital: Three bucket structure for CFs: Year 1, Years 2 to 5, Years 5+ CTE determination of CTE(98), CTE(95) and CTE(90), respectively Year 5+ bucket is pulled back to CTE(95) over time (subject to maximum and minimums) This may provide Required Capital relief if the insurer had significant guarantee cash flows over 5 years from the valuation date; however, it may increase Required Capital for companies with shorter term cash flows Complex interpretation and implementation: Allocation of Actuarial Liabilities between the three buckets Transitioning formula for the Year 5+ bucket Difficult interpretation and additional volatility if the term of your liability changes

2009 Seminar for the Appointed Actuary Impacts on the Future 2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009 Insurers are taking a long look at the feasibility and risk of various product designs Products are being discontinued Fund shelves are being altered Restriction of deposits to existing policies Guaranteed fees are being increased Expected product offerings are being reconsidered OSFI has shown increased interest in Segregated Funds, since the market declines: OSFI Data Request OSFI Benchmarking Study – Phase I Moratorium on Model Modifications

Impacts on the Future Source: Statistics Canada, CANSIM, table 052-0004 and Catalogue no. 91-520-X. Last modified: 2008-06-26 This table presents results from medium growth scenario 3.

2009 Seminar for the Appointed Actuary Impacts on the Future 2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009 An insurer should consider the following risks when looking at their Segregated Fund product shelf: Product Design and Pricing Risk Insurance Risk Mortality Policyholder Behaviour Market Risk Equity returns and volatility Interest Rates Currency Operational Risk

2009 Seminar for the Appointed Actuary Impacts on the Future 2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009 Risk mitigation strategies can be applied to inforce or new business to help mitigate all or part of the risk: Reinsurance Limited capacity Unattractive prices Hedging What to hedge? How do hedging programs work? Basis Risk Increased cost of hedging Increased operational risk Limited Capital Relief