Full report - SGI Canada

Due to the strength of the capital markets and the success of the investment manager in selecting stocks,
investment write-downs were a minor consideration in 2010. Securities previously in significant unrealized
loss positions recovered strongly resulting in only limited write-downs during the year, totaling $0.5 million
for 2010 (2009 – $4.0 million).
Of note for 2010 is the large increase in net realized gains on sale of investments, reversing the trend of
the last few years. Realized gains are dependent on investment market conditions and trading activity of
the investment manager. Improving economic fundamentals created a positive environment for equity
markets, while continued low interest rates produced strong bond results. The Canadian equity market
again led the strong performance driven by gains in commodity stocks.
Performance relative to the benchmark portfolio varies from year-to-year, but over rolling four-year periods,
investment performance remains satisfactory as illustrated in the following graph:
Four-Year-Market based Returns to December 31
Annual index returns ending December 31
Asset Class Benchmark Index 2010 2009
Canadian equities S&P/TSX Composite 17.6% 35.1%
U.S. equities S&P 500 ($C) 9.1% 7.4%
Non-North American equities MSCI EAFE ($C) 2.1% 11.9%
Bonds DEX Universe Bond 6.7% 5.4%
Short-term bonds DEX Short-term Bond 3.6% 4.5%
Equity market gains in 2010 were widespread with the TSX Composite Index increasing 17.6%, the S&P
500 rising 15.1% (9.1% in Canadian dollar terms) and non-North American equities, the EAFE Index, rising
4.8% in aggregate local currency terms (2.1% in Canadian dollar terms). While foreign equities markets
were strong during 2010, the corresponding increase in the Canadian dollar limited gains for Canadian
investors.
For purposes of portfolio management, a market-based rate of return is calculated that captures all interest
and dividend income, as well as the impact of the change in market value of securities, both realized
and unrealized. In 2010, the SGI CANADA portfolio’s market-based return was 7.6% compared to 9.9% in
2009. In addition, the 2010 return was ahead of the benchmark portfolio return of 6.8% by 0.8% (2009
outperformed the benchmark by 0.6%). Although the return in 2010 was lower than experienced in 2009,
the strong performance was a result of large positive returns in each of Canadian and U.S. equities as well
as fixed income. Value added over the benchmark in 2010 of 0.8% was due to strong relative fixed income
and Canadian equity returns. Similar performance trends were seen in the portfolios for SGI CANADA
Insurance Services Limited, Coachman Insurance Company and Insurance Company of
Prince Edward Island.
The primary investment performance objective of the portfolio is to earn a market-based return in excess
of a benchmark portfolio return. The asset mix for the benchmark portfolio is set by the Board to be
consistent with SGI CANADA’s risk profile and is reviewed on an annual basis. In addition, each subsidiary
has its own investment portfolio with a policy consistent with its risk profile. The investment manager is
permitted to vary the actual asset class weights around the benchmark portfolio, within the policy asset
mix guidelines. The benchmark portfolio return is calculated by applying the benchmark portfolio weights
to capital market index returns. While the portfolio’s rate of return is compared to the benchmark portfolio
return on a quarterly basis, the performance measure is expected to be met over four years, a long enough
period to capture a full market cycle. This longer-term measure is appropriate as it recognizes that the
effectiveness of investment management styles varies depending on the market environment.
Income taxes
The Corporation’s out-of-province legal entities, SGI CANADA Insurance Services Ltd., Coachman and
ICPEI are subject to corporate income tax, while SGI CANADA is not. On a consolidated basis,
SGI CANADA recorded a tax expense of $2.5 million in 2010 compared to an expense of $1.0 million in
2009. Excluding Saskatchewan operations, which are non-taxable, this results in a tax rate of 31.8%,
compared to the expected tax rate of 30.2%. The primary reasons for the difference is that changes in the
statutory tax rates have decreased the value of the future tax asset resulting in a corresponding increase
to income tax expense, and there was additional tax related to the sale of equity accounted investments.
However, these are partially offset by investment income, specifically Canadian dividend revenue, which is
not subject to tax.
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