1. 2008 General Meeting Assemblée générale 2008 Toronto, Ontario 2008 General Meeting Assemblée générale 2008 Toronto, Ontario Canadian Institute of Actuaries Canadian Institute of Actuaries L’Institut canadien des actuaires L’Institut canadien des actuaires

2. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 CLIFR Topics: Update on Equity Return Sub-committee Goal: Develop Educational Note for establishing investment return assumption for non-fixed income assets Sub-Committee Members: David Campbell, Edward Gibson, Leonard Pressey, Jim Snell

3. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Applicable Standards Paragraph 2340 of the SOP (Non-fixed income assets: investment return) –.11 The actuary’s best estimate of investment return on a non-fixed income asset would not be more favourable than a benchmark based on historical performance of assets of its class and characteristics. –.12 The low and high margins for adverse deviations in the assumptions of common share dividends and real estate rental income are respectively 5% and 20%.

4. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Applicable Standards Paragraph 2340 of the SOP –.13 The margin for adverse deviations in the assumption of common share and real estate capital gains is 20% of the best estimate plus an assumption that those assets change in value at the time when the change is most adverse. That time would be determined by testing, but usually is the time when their book value is largest. The assumed change as a percentage of market value – of a diversified portfolio of North American common shares is 30%, and – of any other portfolio is in the range of 25% to 40% depending on the relative volatility of the two portfolios.

5. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Focus on Common Stocks Non-fixed income assets include: –Equities: broad-based Canadian portfolios –Real Estate: commercial properties –Other assets: futures, exchange traded funds Educational Note focuses on broad portfolios of common stocks

6. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Significant Impact on Valuation Valuation of $1,000 Maturity Benefit Term100% Fixed @ 5.5% 100% Equity @ 9.97%* Ratio 10$585$663113% 20$343$308 90% 30$201$143 71% 40$117$66 56% 50 $69$31 45% * with 20% margin and 30% market drop

7. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Historical Benchmark Return When using deterministic scenarios, the historical benchmark return is the geometric average of the historical returns Update annually, ideally at the end of the same month for consistency Portfolio should hold at least 30 stocks or represent at least 50% of an index’s market capitalization to be an appropriate benchmark

8. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Reliable Benchmarks Characteristics of a “reliable” benchmark include: –well known, broad-based index based on industry experience similar geography similar breadth –Available for historical period of 30 years or longer

9. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Reliable Benchmarks “Reliable” benchmarks include: –S&P/TSX Composite index –S&P 500 index –DJIA –NASDAQ –FTSE –MCSI EAFE –Nikkei –Hang Seng

10. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Portfolios with Unreliable Historical Experience Net return after margin would be no greater than the Canadian equity benchmark return after margins (Not actuary’s selected assumption for Canadian equity portfolio) –Reduce best estimate growth rate assumption –Alternatively, consider selection of market drop greater than 40% (subject to SOP 1330)

11. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Allocation of Dividends and Capital Appreciation Needs to be appropriate balance between dividend and capital appreciation Selected margin for dividends may be lower than for capital appreciation Consider preferred tax status of dividends in Canada or for foreign investments. Consider impact of market drop on dividend projections, i.e., constant dollar dividend, constant dividend percentage, or grading to lower percentage

12. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Market Drop Assumption - Canada For the TSX Composite Index, a deterministic assumption for equities with a 20% margin for dividend and capital appreciation and a 30% market drop assumption produces net returns which are approximately CTE(60)

13. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Canada - LN CTE Comparison

14. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Canada – RSLN CTE Comparison

15. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Market Drop Assumption – High Volatility or Less Developed Markets Portfolio based on a specific market sector or a less developed market may have volatility that is materially higher than a diversified North American portfolio For example, Malaysian volatility is approximately 2 times TSX volatility Consider selection of market drop greater than 40% (subject to SOP 1330) so net returns are approximately CTE(60)

16. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Malaysia – LN CTE Comparison

17. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Malaysia – RSLN CTE Comparison