ANNUAL REPORT 2010 GREAT-WEST LIFECO GREAT-WEST LIFE + LONDON LIFE + CANADA LIFE GREAT-WEST LIFE & ANNUITY + PUTNAM IGM FINANCIAL INVESTORS GROUP + MACKENZIE PARGESA THE PHOTOGRAPHS IN THIS ANNUAL REPORT ON THE COVER HIGHLIGHT EXAMPLES OF ARCHITECTURE IN SEVERAL OF THE COUNTRIES IN WHICH POWER FINANCIAL GROUP COMPANIES ARE PRESENT. This Annual Report is designed to provide interested shareholders and other interested persons with selected information concerning Power Financial Corporation. For further information concerning the Corporation, share holders and other interested persons should consult the Corporation’s disclosure documents such as its Annual Information Form and Management’s Discussion and Analysis of Operating Results. Copies of the Corporation’s continuous disclosure documents can be obtained at www.sedar.com, on the Corporation’s Web site at www.powerfinancial.com or from the Office of the Secretary at the addresses shown at the end of this report. Readers should also review the note further in this report, in the Review of Financial Performance section, concerning the use of Forward-Looking Statements, which applies to the entirety of this Annual Report. In addition, selected information concerning the business, operations, financial condition, priorities, ongoing objectives, strategies and outlook of Power Financial Corporation’s subsidiaries and investment at equity is derived from public information published by such subsidiaries and investment at equity and is provided here for the convenience of the shareholders of Power Financial Corporation. For further information concerning such subsidiaries and investment at equity, shareholders and other interested persons should consult the Web sites of, and other publicly available information published by, such subsidiaries and investment at equity. The selected performance measures shown on pages 2, 3, 5, 10, 12, 14, 16, 18, 20, 21, 22, 24, 25 and 26 are as of December 31, 2010 unless otherwise noted. MONTREAL MUSEUM OF FINE ARTS, JEAN-NOËL DESMARAIS PAVILION MONTRÉAL, QUÉBEC, CANADA PHOTOGRAPHY © ANDRÉ RIDER / 2M2 AGENCY PAGE 7 GRANDE BIBLIOTHÈQUE MONTRÉAL, QUÉBEC, CANADA PHOTOGRAPHY © ANDRÉ RIDER / 2M2 AGENCY PAGE 15 DENVER ART MUSEUM, FREDERIC C. HAMILTON BUILDING DENVER, COLORADO, UNITED STATES PHOTOGRAPHY © ERNIE SANTELLA PAGE 19 THE GREAT COURT, BRITISH MUSEUM LONDON, ENGLAND © THE TRUSTEES OF THE BRITISH MUSEUM PAGE 23 UNION STATION WINNIPEG, MANITOBA, CANADA PHOTOGRAPHY © DEZENE HUBER PAGE 27 LA GRANDE ARCHE PARIS, FRANCE © JOHAN OTTO VON SPRECKELSEN PHOTOGRAPHY © MASTERFILE The following abbreviations are used throughout this report: Power Financial Corporation (Power Financial or the Corporation); Great-West Life & Annuity Insurance Company (Great-West Life & Annuity or GWL&A); Great-West Lifeco Inc. (Great-West Lifeco or Lifeco); Groupe Bruxelles Lambert (GBL); IGM Financial Inc. (IGM Financial or IGM); Imerys S.A. (Imerys); Investment Planning Counsel Inc. (Investment Planning Counsel); Investors Group Inc. (Investors Group); Lafarge S.A. (Lafarge); London Life Insurance Company (London Life); Mackenzie Financial Corporation (Mackenzie Financial or Mackenzie); Pargesa Holding SA (Pargesa); Parjointco N.V. (Parjointco); Pernod Ricard S.A. (Pernod Ricard); Power Corporation of Canada (Power Corporation); Putnam Investments, LLC (Putnam Investments or Putnam); Suez Environnement Company (Suez Environnement); The Canada Life Assurance Company (Canada Life); The Great-West Life Assurance Company (Great-West Life); Total S.A. (Total). In addition, Canadian GAAP or GAAP refers to Canadian generally accepted accounting principles, while EBITDA is the abbreviation used herein for earnings before interest, taxes, depreciation and amortization. FINANCIAL HIGHLIGHTS FOR THE YEARS ENDED DECEMBER 31 [in millions of Canadian dollars, except per share amounts] Revenues Operating earnings Operating earnings per common share Net earnings Net earnings per common share Dividends declared per common share Total assets Total assets and assets under management Shareholders’ equity Book value per common share Common shares outstanding (in millions) 2010 32,427 1,733 2.31 1,584 2.10 1.40 143,255 490,839 13,184 15.79 708.0 2009 32,697 1,533 2.05 1,439 1.92 1.40 140,231 471,775 13,207 16.27 705.7 The Corporation uses operating earnings as a performance measure in analysing its financial performance. For a discussion of the Corporation’s use of non-GAAP financial measures, please refer to the Review of Financial Performance section in this Annual Report. TA B L E O F CO N T EN T S F I N A N C I A L H I G H L I G H T S G R O U P O R G A N I Z AT I O N C H A R T B U S I N E S S S U M M A R Y D I R E C T O R S ’ R E P O R T T O S H A R E H O L D E R S G R E AT- W E S T L I F E C O G R E AT- W E S T L I F E , L O N D O N L I F E , C A N A D A L I F E C A N A D A L I F E — E U R O P E G R E AT- W E S T L I F E & A N N U I T Y P U T N A M I N V E S T M E N T S 1 2 4 6 14 16 18 2 0 2 1 I G M F I N A N C I A L I N V E S T O R S G R O U P M A C K E N Z I E F I N A N C I A L P A R G E S A G R O U P R E V I E W O F F I N A N C I A L P E R F O R M A N C E F I N A N C I A L S TAT E M E N T S A N D N O T E S F I V E - Y E A R F I N A N C I A L S U M M A R Y B O A R D O F D I R E C T O R S O F F I C E R S C O R P O R AT E I N F O R M AT I O N 2 2 24 2 5 26 29 47 89 9 0 91 92 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT 1 GROUP ORGANIZATION CHART POWER FINANCIAL < 4.0% 68.3% GREAT‑WEST LIFECO 2010 OPERATING EARNINGS ATTRIBUTABLE TO COMMON SHAREHOLDERS $1,861 MILLION 2010 RETURN ON SHAREHOLDERS’ EQUITY 16.0% TOTAL ASSETS UNDER ADMINISTRATION $483.9 BILLION PUTNAM INVESTMENTS GREAT‑WEST LIFE & ANNUITY LONDON LIFE CANADA LIFE GREAT‑WEST LIFE Power Financial Corporation is a diversified management and holding company that has interests, directly or indirectly, in companies in the financial services sector in Canada, the United States and Europe. It also has substantial holdings in a diversified industrial group based in Europe. 2 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT CORPORATION 57.0% IGM FINANCIAL 2010 OPERATING EARNINGS AVAILABLE TO COMMON SHAREHOLDERS $734 MILLION 2010 RETURN ON SHAREHOLDERS’ EQUITY 17.0% TOTAL ASSETS UNDER MANAGEMENT $129.5 BILLION 3.5% > 50.0% PARJOINTCO 54.1% PARGESA 2010 OPERATING EARNINGS SF464.8 MILLION NET ASSET VALUE SF8.4 BILLION INVESTORS GROUP MACKENZIE FINANCIAL 94.2% INVESTMENT PLANNING COUNSEL 50.0% > GROUPE BRUXELLES LAMBERT GDF SUEZ < 5.2% TOTAL < 4.0% LAFARGE < 21.1% 25.6% > IMERYS < 30.7% PERNOD RICARD < 9.9% SUEZ ENVIRONNEMENT < 7.1% Companies are wholly owned unless otherwise noted. Percentages denote participating equity interest as at December 31, 2010. Operating earnings is a non‑GAAP financial measure. Return on shareholders’ equity is calculated using operating earnings. 2010 OPERATING EARNINGS $1,733 MILLION 2010 RETURN ON SHAREHOLDERS’ EQUITY TOTAL ASSETS AND ASSETS UNDER MANAGEMENT TOTAL ASSETS UNDER ADMINISTRATION 14.6% $490.8 BILLION $613.4 BILLION POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT 3 BUSINESS SUMMARY GREAT‑WEST LIFECO GREAT‑WEST LIFE LONDON LIFE FREEDOM 55 FINANCIAL™ CANADA LIFE GREAT‑WEST LIFE & ANNUITY PUTNAM INVESTMENTS PRODUCTS & SERVICES CANADA > Life, disability and critical illness insurance for individuals, business owners and families > Retirement savings and income plans for individuals and groups > Fund management, investment and advisory services > Comprehensive benefit solutions for small, medium and large employer groups > Creditor insurance, including life, disability, job loss and critical illness coverage > Life, health, accident and critical illness insurance for members of affinity groups UNITED STATES > Employer‑sponsored defined contribution plans > Administrative and record‑keeping services for financial institutions and retirement plans > Fund management, investment and advisory services > Individual and business‑owned life insurance, annuities and executive benefits products > Global asset management in mutual funds and institutional portfolios > 401(k)s, IRAs, other retirement plans and variable annuities EUROPE > Protection and wealth management products and related services in the United Kingdom, the Isle of Man, Ireland and Germany > Reinsurance and retrocession business, primarily in the United States and European markets IGM FINANCIAL INVESTORS GROUP MACKENZIE FINANCIAL INVESTMENT PLANNING COUNSEL PARGESA PRODUCTS & SERVICES > Financial advice and planning for individual Canadians > Family of exclusive mutual funds with multiple sub‑brands > Institutional asset management mandates > Insurance, Solutions Banking, mortgage and trust company products and services PRODUCTS & SERVICES > Core shareholder investing in Europe > Concentrated positions in a limited number of large industrial companies based in Europe > Seeking to exercise significant influence or control over its investments 4 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT DISTRIBUTION CHANNELS MARKET POSITION > Gold Key financial security advisors associated > Serves the financial security needs of more than 12 million Canadians with Great‑West Life > 26% market share of individual life insurance measured by premium [ 1 ] > Freedom 55 Financial™ and Wealth & Estate > 26% market share of individual living benefits measured by premium [ 1 ] Planning Group financial security advisors > 26% market share of individual segregated funds [2] associated with London Life > 22% market share of group insurance [3] > Independent advisors associated with > 20% market share of group capital accumulation plans, managing general agencies serving 1.2 million member accounts [4] > National accounts, including Investors Group > Leading market share for creditor insurance revenue premium > Great‑West Life group insurance and retirement sales and service staff in offices across Canada that support independent advisors, brokers and benefit consultants distributing its group products [ 1 ] As at September 30, 2010 [ 2 ] As at December 31, 2010 [ 3 ] As at December 31, 2009 [ 4 ] As at June 30, 2010; Benefits Canada 2010 CAP report data > Brokers, consultants, advisors and > 10.9 million U.S. customers third‑party administrators > Financial institutions > 4.4 million U.S. participant accounts in defined contribution plans > Putnam earned the No. 1 ranking in the 2009 Lipper/Barron’s Fund Families Survey > Sales and service staff and specialized consultants based on dramatic gains by individual funds and advancements across the entire > Services institutional and retail clients and fund complex, and was again ranked among the top 15 U.S. mutual fund families consultants worldwide through joint ventures, by Lipper/Barron’s in their 2010 Fund Families report. dedicated account management teams and > Over 165,000 advisors distribute Putnam funds intermediary relationships > Independent financial advisors and employee U.K. and Isle of Man [ 1 ] 33% share of group life market benefit consultants in the U.K. and Isle of Man > Independent brokers and direct sales force in Ireland > Independent brokers and multi‑tied agents in Germany > Independent reinsurance brokers > Direct placements > > > 20% share of group income protection market 16% share of offshore single premium investment > Among the top insurers in payout annuities, product market with 7% market share Ireland [ 1 ] > Among top six insurers by new business market share Germany [ 1 ] > Among the top eight in the overall unit‑linked market > 5% of life assurance market > Among top ten life reinsurers in the U.S. by assumed business [ 1 ] Market shares for Europe as at September 30, 2010 DISTRIBUTION CHANNELS MARKET POSITION > Investors Group network of 4,686 consultants > $129.5 billion in assets under management > Mackenzie sales and service for financial advisors > Market‑share leader in long‑term mutual fund assets under management across all wealth management channels > $24.9 billion in institutional, sub‑advised and other mandates with Mackenzie (over 30,000 financial advisors) > Investment Planning Counsel has over 900 independent financial planners > Institutional asset management sales force > Relationship with Canadian Medical Association GROUP HOLDINGS PERFORMANCE RECORD Lafarge > One of the world leaders in cement, aggregates, > Strong and consistent dividend payout; concrete and gypsum A world leader in industrial minerals An international integrated oil and gas company $2.5 billion over 15 years > Consistent outperformance of relevant equity market indices over the long term A leading energy provider in electricity and natural gas > Fifteen‑year total return to shareholders of 10.2% (SF), Suez Environnement An international water and waste management company compared with 6.9% (SF) for the Swiss SPI index and Pernod Ricard The world co‑leader in wines and spirits 7.7% (€) for the French CAC 40 index Imerys Total GDF Suez > > > > > GREAT‑WEST LIFECO GREAT‑WEST LIFE LONDON LIFE FREEDOM 55 FINANCIAL™ CANADA LIFE GREAT‑WEST LIFE & ANNUITY PUTNAM INVESTMENTS PRODUCTS & SERVICES CANADA > Life, disability and critical illness insurance for individuals, business owners and families > Retirement savings and income plans for individuals and groups > Fund management, investment and advisory services > Comprehensive benefit solutions for small, medium and large employer groups > Creditor insurance, including life, disability, job loss and critical illness coverage > Life, health, accident and critical illness insurance for members of affinity groups UNITED STATES > Employer‑sponsored defined contribution plans > Administrative and record‑keeping services for financial institutions and retirement plans > Fund management, investment and advisory services > Individual and business‑owned life insurance, annuities and executive benefits products > Global asset management in mutual funds and institutional portfolios > 401(k)s, IRAs, other retirement plans and variable annuities EUROPE > Protection and wealth management products and related services in the United Kingdom, the Isle of Man, Ireland and Germany > Reinsurance and retrocession business, primarily in the United States and European markets IGM FINANCIAL INVESTORS GROUP MACKENZIE FINANCIAL INVESTMENT PLANNING COUNSEL PARGESA PRODUCTS & SERVICES > Financial advice and planning for individual Canadians > Family of exclusive mutual funds with multiple sub‑brands > Institutional asset management mandates > Insurance, Solutions Banking, mortgage and trust company products and services PRODUCTS & SERVICES > Core shareholder investing in Europe > Concentrated positions in a limited number of large industrial companies based in Europe > Seeking to exercise significant influence or control over its investments DISTRIBUTION CHANNELS MARKET POSITION > Gold Key financial security advisors associated with Great‑West Life > Freedom 55 Financial™ and Wealth & Estate Planning Group financial security advisors associated with London Life > Independent advisors associated with > Serves the financial security needs of more than 12 million Canadians > 26% market share of individual life insurance measured by premium [ 1 ] > 26% market share of individual living benefits measured by premium [ 1 ] > 26% market share of individual segregated funds [2] > 22% market share of group insurance [3] > 20% market share of group capital accumulation plans, managing general agencies serving 1.2 million member accounts [4] > National accounts, including Investors Group > Great‑West Life group insurance and retirement sales and service staff in offices across Canada that support independent advisors, brokers and benefit consultants distributing its group products > Leading market share for creditor insurance revenue premium [ 1 ] As at September 30, 2010 [ 2 ] As at December 31, 2010 [ 3 ] As at December 31, 2009 [ 4 ] As at June 30, 2010; Benefits Canada 2010 CAP report data > Brokers, consultants, advisors and third‑party administrators > Financial institutions > Sales and service staff and specialized consultants > Services institutional and retail clients and consultants worldwide through joint ventures, dedicated account management teams and intermediary relationships > 10.9 million U.S. customers > 4.4 million U.S. participant accounts in defined contribution plans > Putnam earned the No. 1 ranking in the 2009 Lipper/Barron’s Fund Families Survey based on dramatic gains by individual funds and advancements across the entire fund complex, and was again ranked among the top 15 U.S. mutual fund families by Lipper/Barron’s in their 2010 Fund Families report. > Over 165,000 advisors distribute Putnam funds > Independent financial advisors and employee benefit consultants in the U.K. and Isle of Man > Independent brokers and direct sales force in Ireland > Independent brokers and multi‑tied agents in Germany > Independent reinsurance brokers > Direct placements U.K. and Isle of Man [ 1 ] > > > > 33% share of group life market 20% share of group income protection market 16% share of offshore single premium investment product market Among the top insurers in payout annuities, with 7% market share Ireland [ 1 ] Germany [ 1 ] > Among top six insurers by new business market share > 5% of life assurance market > Among the top eight in the overall unit‑linked market > Among top ten life reinsurers in the U.S. by assumed business [ 1 ] Market shares for Europe as at September 30, 2010 DISTRIBUTION CHANNELS MARKET POSITION > Investors Group network of 4,686 consultants > Mackenzie sales and service for financial advisors across all wealth management channels (over 30,000 financial advisors) > Investment Planning Counsel has over 900 independent financial planners > Institutional asset management sales force > Relationship with Canadian Medical Association > $129.5 billion in assets under management > Market‑share leader in long‑term mutual fund assets under management > $24.9 billion in institutional, sub‑advised and other mandates with Mackenzie GROUP HOLDINGS Lafarge Imerys Total GDF Suez Suez Environnement Pernod Ricard > > > > > > One of the world leaders in cement, aggregates, concrete and gypsum A world leader in industrial minerals An international integrated oil and gas company A leading energy provider in electricity and natural gas An international water and waste management company The world co‑leader in wines and spirits PERFORMANCE RECORD > Strong and consistent dividend payout; $2.5 billion over 15 years > Consistent outperformance of relevant equity market indices over the long term > Fifteen‑year total return to shareholders of 10.2% (SF), compared with 6.9% (SF) for the Swiss SPI index and 7.7% (€) for the French CAC 40 index POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT 5 DIRECTORS’ REPORT TO SHAREHOLDERS During 2010, Power Financial and its subsidiaries experienced higher sales, gains in market share and increased levels of profitability. The companies in the group benefited by having continued to invest in their distribution and product capabilities throughout the financial crisis and by the financial strength and stability they have demonstrated during these past several years. Strengthening economic activity and stronger financial market levels helped drive higher revenues in 2010, which, coupled with the group’s long-standing focus on cost containment and good investment quality, resulted in the increase in profitability. The improvements in profitability and sales were experienced across most business units of Great-West Lifeco and IGM Financial. The companies in the Pargesa group also experienced improvements in their operating results following the difficult economic environment of the previous year. While economic recovery and confidence continue to progress, a number of structural challenges remain for the global economy. Initiatives by financial regulators in developed nations to avoid future financial crises, although well intentioned and in many cases welcomed, have created their own uncertainty for financial services companies with respect to a number of issues such as required levels of capital in the future. In this environment, the companies in the Power Financial group have been focused on growing sales and profitability within their given markets, while maintaining financial strength at all times. In this regard, a number of capital market issues were R. JEFFREY ORR President and Chief Executive Officer, Power Financial Corporation undertaken in 2010 to extend and diversify debt maturities and ensure healthy liquidity levels across the group. Dividends paid in 2010 were also kept at the levels paid in 2009. F I N A N C I A L R E S U LT S Power Financial’s operating earnings for the year ended December 31, 2010 were $1,733 million or $2.31 per share, compared with $1,533 million or $2.05 per share in the corresponding period in 2009. This represents an increase of 12.8 per cent on a per share basis. The increase in operating earnings reflects primarily the increase in the contribution from the Corporation’s subsidiaries, Great-West Lifeco and IGM Financial. Other items for 2010 were a charge of $149 million and consisted mainly of Power Financial’s share of a litigation provision established by Lifeco in the third quarter. In 2009, other items were a charge of $94 million and consisted essentially of the Corporation’s share of non-recurring amounts recorded by IGM and Pargesa. Net earnings including other items were $1,584 million or $2.10 per share for the year ended December 31, 2010, compared with $1,439 million or $1.92 per share in 2009. Dividends paid by Power Financial Corporation totalled $1.40 per common share in 2010, unchanged from 2009. 6 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT During 2010, Power Financial and its subsidiaries experienced higher sales, gains in market share and increased levels of profitability. G RO U P C O M PA N I E S ’ R E S U LT S G R E AT- W E S T L IF E CO Great-West Lifeco experienced strong earnings and sales results in 2010 from all business segments despite the continued currency headwinds due to the strengthening of the Canadian dollar against the U.S. dollar, British pound and euro during the year. Great-West Lifeco’s capital base and liquidity position are strong, and the company is well positioned for continued growth. Great-West Lifeco reported operating earnings attributable to common shareholders of $1,861 million for 2010, compared with $1,627 million for 2009, an increase of 14.4 per cent. This represents $1.964 per common share for 2010, compared with $1.722 per common share in 2009. Operating earnings, a non-GAAP financial measure, exclude the impact of an incremental litigation provision established in the third quarter of 2010 in the amount of $225 million after tax ($204 million attributable to the common shareholders of Great-West Lifeco and $21 million to its non-controlling interests). Return on common shareholders’ equity was 16.0 per cent based on operating earnings and 14.4 per cent on net earnings. POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT 7 DIRECTORS’ REPORT TO SHAREHOLDERS CONTINUED Premiums and deposits were $59.1 billion, compared with $56.7 billion in 2009. General fund assets increased from $128.4 billion to $131.6 billion in 2010. Total assets under administration at December 31, 2010 were $483.9 billion, compared with $458.6 billion a year ago. The dividend on Great-West Lifeco’s common shares remained unchanged in 2010. Great-West Lifeco’s capital position remains very strong. Its Canadian operating subsidiary, Great-West Life, reported a Minimum Continuing Capital and Surplus Requirements (MCCSR) ratio of 203 per cent at December 31, 2010. At December 31, 2010 Great-West Lifeco held, at the holding company level, approximately $800 million in liquid assets derived from capital-raising initiatives since the fourth quarter of 2008, which is not reflected in the Great-West Life MCCSR ratio. In Canada, Great-West Lifeco’s companies maintained leading market positions in their individual and group businesses. The Canadian operations continue to experience strong organic growth by focusing on diversified distribution, product and R AYMOND L. MCFEETORS service enhancements and expense management. Vice‑Chairman, Power Financial Corporation and Chairman of the Board, Great‑West Lifeco In Canada, net earnings attributable to Great-West Lifeco’s common shareholders for 2010 were $940 million, compared with $883 million in 2009. Total sales in Canada for 2010 were up 23 per cent to $9.5 billion, compared with $7.7 billion after adjusting the 2009 twelve-month period for the impact of the group retirement assets acquired from Fidelity Investments Canada. This growth was driven by strong sales of proprietary retail investment funds which were up 31 per cent, payout annuity products which were up 11 per cent, and individual life product sales which increased 26 per cent, compared to the twelve-month period in 2009. Total assets under administration at December 31, 2010 were $125.5 billion, compared with $114.6 billion at December 31, 2009. In the United States, Great-West Lifeco’s Financial Services businesses continued to grow, with a 34 per cent increase in sales over 2009 on a constant currency basis. Strong sales across defined contribution markets and of single-premium life and business-owned life insurance led to record sales in both business segments. Net earnings attributable to common shareholders for 2010 were $343 million, compared with $228 million in 2009. Total sales for 2010 were $38.1 billion, compared with $32.4 billion in 2009. As a result of currency movement, net earnings were negatively impacted by $32 million compared to 2009. 8 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT Total assets under administration at December 31, 2010 were $293.7 billion, compared with $277.8 billion at December 31, 2009. In 2010, Putnam Investments and its clients enjoyed another year of excellent investment performance which, together with innovative product launches, resulted in very strong market share gains in U.S. mutual fund sales. Putnam’s assets under management, including PanAgora, increased to US$121 billion at year-end from US$115 billion a year earlier. Putnam’s suite of absolute return funds, first offered in 2009, reached US$2.7 billion at the end of 2010. Putnam continued to introduce new products and services across its offering in 2010. A key area of focus and investment is the defined contribution marketplace, and in particular 401(k) plans, where Putnam’s award- winning offering is experiencing strong momentum with U.S. employers. In Europe, net earnings attributable to common shareholders increased to $578 million, compared with $529 million in 2009, in spite of currency movements which negatively impacted results by $71 million compared to 2009. In 2010, Great-West Lifeco’s European Operations continued to face challenging credit markets as well as a general loss of consumer confidence in investments, due to a sharp decline in equity markets in late 2008 and early 2009. Although conditions continued to generally improve in 2010, these pressures affected sales volumes in a number of areas. Earnings were impacted by the required strengthening of reserves for future asset default risk and asset impairments. Total sales for 2010 were $4.5 billion, compared with $4.0 billion in 2009. Sales increased by 27 per cent in local currency; however, this was partly offset by the negative effect of currency movement. Total assets under administration in Europe at December 31, 2010 were $64.7 billion, compared with $66.2 billion at December 31, 2009. I G M F IN A N C I A L IGM Financial and its operating companies experienced an increase in total assets under management during 2010. Net earnings for the company grew substantially compared with 2009. Investors Group and Mackenzie Financial, IGM’s principal businesses, generated business growth through product innovation, investment management success, resource management and distribution expansion throughout the year. Operating earnings available to common shareholders of IGM for 2010 were $734 million or $2.79 per share, compared with $622 million or $2.35 per share in 2009. This represents an increase of 18.7 per cent on a per share basis. Net earnings available to common shareholders were $726 million or $2.76 per share in 2010, compared with $559 million or $2.12 per share in 2009. POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT 9 DIRECTORS’ REPORT TO SHAREHOLDERS CONTINUED Total assets under management at December 31, 2010 were $129.5 billion, an increase of 7.4 per cent. Return on average common equity based on operating earnings for 2010 was 17.0 per cent, compared with 14.8 per cent in 2009. Dividends declared remained unchanged in 2010. The Investors Group consultant network expanded to 4,686 consultants at December 31, 2010, up from 4,633 at December 31, 2009. Investors Group’s mutual fund sales for the year were $5.7 billion, compared with $5.0 billion in the prior year, and mutual fund net sales were $253 million, compared with $404 million a year ago. Mutual fund assets under management at December 31, 2010 were $61.8 billion, compared with $57.7 billion at December 31, 2009, an increase of 7.2 per cent. Mackenzie’s total sales for 2010 were $12.2 billion, compared with $11.6 billion in the prior year. Total net redemptions were $1.5 billion, compared with total net redemptions of $1.4 billion a year ago. Investment performance of Mackenzie’s mutual fund family remained strong, with 60 per cent of its fund assets ranked in the first or second quartile of their respective asset categories PAUL over the last three years. DESMAR AIS, JR., o.c., o.q. Co‑Chairman of the Board, Power Financial Corporation Mackenzie’s total assets under management at December 31, 2010 were $68.3 billion, compared with $63.6 billion at December 31, 2009, an increase of 7.5 per cent. Mutual fund assets under management at the 2010 year-end were $43.5 billion, compared with $40.6 billion a year earlier, an increase of 7.0 per cent. PA RG E S A The Pargesa group holds significant positions directly and through the Belgian holding company Groupe Bruxelles Lambert (GBL) in six large companies based in Europe: Lafarge, which produces cement and building materials; Imerys, a producer of industrial minerals; Total, in the oil and gas industry; GDF Suez, in electricity and gas; Suez Environnement, in water and waste management; and Pernod Ricard, a leading producer of wines and spirits. The Pargesa group’s strategy is to establish a limited number of substantial interests in which it can acquire a position of control or significant influence. In 2010, there were no major changes in Pargesa’s investment portfolio. Overall, the companies in the group experienced improvements in operating performance, following the very difficult economic conditions of 2009. 17.7% ANNUAL COMPOUND TOTAL RETURN TO SHAREHOLDERS OVER FIFTEEN YEARS $2.9 TO $21.8 BILLION FIFTEEN‑YEAR GROWTH IN MARKET CAPITALIZATION $7.3 BILLION AGGREGATE DIVIDENDS PAID TO SHAREHOLDERS OVER FIFTEEN YEARS 10 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT During 2010, Pargesa and GBL carried out several transactions designed to extend their debt maturity profile and reduce borrowing costs. In June, GBL issued a €350 million 7.5-year 3.7 per cent bond and, during the course of the year, repurchased convertible bonds for €126 million. In October, Pargesa issued bonds bearing interest at 2.5 per cent per annum with a six-year term for SF150 million, and repurchased convertible bonds for SF6 million due in 2013 and SF132 million due in 2014. Also in 2010, GBL purchased €122 million of Pernod Ricard shares in the marketplace, raising its equity interest to 9.9 per cent as at December 31, 2010. Pargesa’s net operating earnings declined 9.2 per cent in 2010 to €465 million, mainly due to an 8.5 per cent decrease in the euro against the Swiss franc, the reporting currency used in Pargesa’s financial statements. The 2009 results also reflected a number of non-recurring items, including an exceptional dividend from GDF Suez. At the end of December 2010, Pargesa’s adjusted net asset value was SF8.4 billion. This represents a value of SF99.8 per Pargesa share, compared with SF127.1 at the end of 2009, a decrease of 21.5 per cent expressed in Swiss francs. At the annual meeting of shareholders of Pargesa, scheduled for May 5, 2011, its board of directors will propose maintaining the dividend at SF2.72 per bearer share, for a total distribution of SF230 million. G RO U P D E V E LO P M E N T S The companies in the Power Financial group were active in the capital markets in 2010, with the goal of improving the quality of capital or extending debt maturities. ANDRÉ DESMAR AIS, o.c., o.q. Co‑Chairman of the Board, Power Financial Corporation In June, Power Financial issued $280 million of 4.40% non-cumulative rate reset First Preferred Shares, Series P. In July, the Corporation redeemed all $150 million of its outstanding 4.70% Series J First Preferred Shares, and in October it redeemed all $150 million of its outstanding 5.20% Series C First Preferred Shares. Great-West Lifeco issued 4.65% debentures in the amount of $500 million due in 2020, and redeemed $200 million of outstanding 6.75% debentures due 2015. It also issued $250 million of First Preferred Shares, Series M, and $150 million of First Preferred Shares, Series N, and redeemed $198 million of First Preferred Shares, Series D. During 2010, IGM issued $200 million of 6.0% 30-year debentures. POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT 11 DIRECTORS’ REPORT TO SHAREHOLDERS CONTINUED I N D U S T RY M ATT E R S Power Financial and its subsidiaries are engaged in dialogue throughout Canada with regard to a number of important topics which impact the well-being of Canadians and the financial services industry. These topics include the public debate regarding the retirement readiness of Canadians and a number of related matters. Canada’s retirement system is among the strongest in the OECD, both in terms of income adequacy and system sustainability. One of its key strengths is that it is well balanced between government- provided programs, employer-sponsored plans and individual savings. Notwithstanding the system’s relative strength, research suggests that a number of Canadians across different age and income brackets may still not be adequately prepared for retirement. The public debate about retirement is therefore required and welcome. Enhancements to the system can and should be made, but should be based upon well-founded research and should seek to build upon the many elements of the current system which are already working well. $1,733 MILLION OPERATING EARNINGS IN 2010 Canadians’ use of financial advisors is an important factor in enabling them to plan for and live comfortably in retirement. Research by the Investment Funds Institute of Canada demonstrates that people who use a financial advisor have substantially higher investment assets than non- advised households, in each income range and age bracket. Advised households also have approximately double the participation rate in tax-advantaged programs such as RRSPs and are more confident they will have enough money to retire comfortably. $13,184 MILLION SHAREHOLDERS’ EQUITY $490.8 BILLION TOTAL ASSETS AND ASSETS UNDER MANAGEMENT Mutual funds are one of the principal investment vehicles used by Canadians to save. A comprehensive research study commissioned by Mackenzie Financial and conducted by Bain Consulting demonstrates that for mutual funds purchased with financial advice, the cost of mutual fund ownership for the vast majority of investors in Canada is comparable with their counterparts in the United States. A number of other published studies have failed to account for the significant differences in the way in which mutual fund fees are reported in the two countries and for differences in the manner in which mutual funds are distributed. The company believes that mutual funds, together with the advice of a professional financial advisor, will remain a very effective way for millions of Canadians to provide for their financial futures. Power Financial and its subsidiaries believe the current public debate about the retirement readiness of Canadians is important and beneficial. A combination of public and private initiatives can build upon an already successful system to increase the number of Canadians who are financially prepared for the future. 12 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT B OA R D O F D I R E C TO R S At the May 2011 Annual Meeting, shareholders will be asked to elect Mr. Timothy Ryan to the Board. Mr. Ryan is President and Chief Executive Officer of SIFMA, the Securities Industry and Financial Markets Association, the leading trade association representing global financial market participants. He is also a director of Great-West Lifeco and several of its major subsidiaries, and has had broad international involvement in the financial services industry. T H E P OW E R F I N A N C I A L G RO U P Power Financial is focused on the economic drivers underlying demand for protection products, retirement savings, asset management and core shareholder investing. Our governance model involves a high degree of engagement in all of our companies through their boards of directors. And as we emerge from challenging times, your Directors believe that Power Financial’s business model will continue to serve our shareholders well. Our companies have strong balance sheets, strategic distribution channels, competitive products and effective growth strategies. Your Directors and Management team seek to provide attractive long-term shareholder returns. We believe that the results of this effort are reflected in the improvement in profitability, the maintenance of our dividend throughout the crisis and our strong and very stable credit ratings. Our companies have strong balance sheets, strategic distribution channels, competitive products and effective growth strategies. Significant effort is being directed by the management teams throughout the group at pursuing growth opportunities in their markets, while continuing to position their balance sheets and liquidity positions prudently. Your Directors wish to express gratitude on behalf of the shareholders for the important contribution of the management and employees of our Corporation and its associated companies to the successful results achieved in 2010 in an improving but challenging operating environment. ON BEHALF OF THE BOARD OF DIRECTORS, Signed R. Jeffrey Orr President and Chief Executive Officer March 10, 2011 Signed Signed Paul Desmarais, Jr., O.C., O.q. André Desmarais, O.C., o.q. Co-Chairman of the Board Co-Chairman of the Board POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT 13 GREAT WEST LIFECO Great-West Lifeco is a financial services holding company with interests in the life insurance, health insurance, retirement savings, investment management and reinsurance businesses. Lifeco has operations in Canada, the United States, Europe and Asia through Great-West Life, London Life, Canada Life, Great-West Life & Annuity and Putnam Investments. Lifeco and its companies have approximately $484 billion in assets under administration. Great-West Lifeco experienced strong earnings and sales results in 2010 from all business segments despite the continued currency headwinds caused by the strengthening of the Canadian dollar against the U.S. dollar, British pound and euro during the year. Lifeco’s capital base and liquidity position remain strong, and the company is well positioned for continued growth. Operating earnings attributable to common shareholders were $1.9 billion, or $1.964 per share, compared with $1.6 billion or $1.722 per share in 2009. Operating earnings, a non-GAAP financial measure, exclude the impact of an incremental litigation provision. Great-West Lifeco’s return on equity (ROE) of 16.0 per cent on operating earnings and 14.4 per cent on net earnings for the twelve months ended December 31, 2010 continued to rank among the strongest in the financial services sector. The quarterly dividend on Lifeco’s common shares remained unchanged in 2010. D. ALLEN LONEY President and Chief Executive Officer, Great‑West Lifeco Other measures of Lifeco’s performance in 2010 include: > Premiums and deposits were $59.1 billion, compared with $56.7 billion in 2009. > General fund assets increased from $128.4 billion to $131.6 billion in 2010. > Total assets under administration at December 31, 2010 were $483.9 billion, compared with $458.6 billion a year ago. Great-West Lifeco’s companies have benefited from their prudent and conservative investment policies and practices with respect to the management of their consolidated assets. In addition, conservative product underwriting standards and a disciplined approach to introducing new products have proven beneficial for Lifeco and its companies over the long term. In Canada, Lifeco’s companies continue to offer segregated fund guarantees in a prudent and disciplined manner, thereby limiting risk exposure. As a result of these disciplines, Lifeco’s balance sheet is one of the strongest in the industry. The Minimum Continuing Capital and Surplus Requirements (MCCSR) ratio for Great-West Life was 203 per cent on a consolidated basis at December 31, 2010. This measure of capital strength remains at the upper end of the company’s target operating range. 17.7% ANNUAL COMPOUND TOTAL RETURN TO SHAREHOLDERS OVER FIFTEEN YEARS $2.3 TO $25.0 BILLION FIFTEEN‑YEAR GROWTH IN MARKET CAPITALIZATION $8.4 BILLION AGGREGATE DIVIDENDS PAID TO SHAREHOLDERS OVER FIFTEEN YEARS 14 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT Great-West Lifeco experienced strong earnings and sales results in 2010 from all business segments despite the currency headwinds caused by the strengthening of the Canadian dollar. At December 31, 2010, Great-West Lifeco held cash and cash equivalents of approximately $800 million, the net result of capital transactions since the third quarter of 2008. As this cash is held at the holding company, it is not reflected in the regulatory capital ratios of Lifeco’s operating subsidiaries. It augments Great-West Lifeco’s capital and liquidity position, thereby enhancing its capability to take advantage of market opportunities. The companies have a high-quality bond portfolio, with 98 per cent rated investment grade at December 31, 2010. Credit ratings are another important indicator of Great-West Lifeco’s financial strength. Relative to its peer group in North America, Great-West Lifeco and its major operating subsidiaries enjoy strong ratings from five major rating agencies. GEOGRAPHICAL DISTRIBUTION CANADA GREAT‑WEST LIFE LONDON LIFE CANADA LIFE UNITED STATES GREAT‑WEST LIFE & ANNUITY PUTNAM INVESTMENTS EUROPE CANADA LIFE PUTNAM INVESTMENTS ASIA PUTNAM INVESTMENTS POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT 15 C ANADA GREAT‑WEST LIFE | LONDON LIFE | CANADA LIFE $125.5 BILLION IN ASSETS UNDER ADMINISTRATION IN CANADA 3.3 MILLION INDIVIDUAL POLICYHOLDERS IN CANADA G R E AT-W E S T L I F E Great-West Life is a leading Canadian insurer, with interests in the life and health insurance, investment, savings and retirement income and reinsurance businesses, primarily in Canada and Europe. In Canada, Great-West Life and its subsidiaries, London Life and Canada Life, offer a broad portfolio of financial and benefit plan solutions and serve the financial security needs of more than 12 million people. Great-West Life’s products include a wide range of investment, savings and retirement income plans, and payout annuities, as well as life, disability, critical illness and health insurance for individuals and families. These products and services are distributed through a diverse network of financial security advisors and brokers associated with Great-West Life; financial security advisors associated with London Life’s Freedom 55 Financial™ division and the Wealth & Estate Planning Group; and the channels Canada Life supports, including independent advisors associated with managing general agencies, as well as national accounts, including Investors Group. For large and small businesses and organizations, Great-West Life offers a variety of group benefit plan solutions featuring options such as life, healthcare, dental care, critical illness, disability and wellness, and international benefit plans, plus PAUL A. MAHON President and Chief Operating Officer, Canada convenient online services. Great-West Life also offers group retirement and savings plans that are tailored to the unique needs of businesses and organizations. These products and services are distributed through financial security advisors associated with Great-West Life and its subsidiaries, as well as independent advisors, brokers and consultants. In 2010, Great-West Life and its subsidiaries continued to see strong sustained performance in their Canadian businesses. Their individual life insurance business grew significantly faster than the market; the group retirement services business recorded strong growth; the group insurance business continued to experience strong persistency; and the individual segregated fund and mutual fund businesses maintained positive net deposits. The Canadian operations continued to focus on enhancing their distribution capabilities throughout 2010 with refinement of their multi-channel strategy, including enhanced support for advisors in the exclusive and independent distribution channels. 16 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT LO N D O N L I F E London Life offers financial security advice and planning through its more than 3,300-member Freedom 55 Financial division. Freedom 55 Financial offers London Life’s own brand of investment, savings and retirement income, annuity, life insurance and mortgage products. Within Freedom 55 Financial, the Wealth & Estate Planning Group is a specialized segment of advisors focused on meeting the complex needs of affluent Canadians. In addition, financial security advisors associated with London Life offer a broad range of financial products from other financial institutions. These include individual disability insurance and critical illness insurance underwritten by Great-West Life. A London Life subsidiary, Quadrus Investment Services Ltd., offers 43 exclusive mutual funds under the Quadrus Group of Funds™ brand and over 3,500 third-party mutual funds. Recruiting and retention of financial security advisors continued to be a significant focus in 2010, with Freedom 55 Financial showing consistent growth in the number of advisors year over year. In 2010, London Life’s strong growth in individual life insurance sales significantly outpaced that of the industry. Together, London Life, Great-West Life and Canada Life remain Canada’s number one provider of individual life insurance. London Life has the largest number of participating life insurance policies in Canada. In addition to its domestic operations, London Life participates in international reinsurance markets through London Reinsurance Group. C A N A DA L I F E In Canada, Canada Life offers a broad range of insurance and wealth management products and services for individuals, families and business owners from coast to coast. These include investments, savings and retirement income, and annuities, as well as life, disability and critical illness insurance. Canada Life’s products are distributed through independent advisors associated with managing general agencies, as well as national accounts, including Investors Group. In 2010, Canada Life continued to see strong sustained performance in all lines of business. The company’s individual life insurance and living benefits businesses grew faster than the market, while its individual retirement and investment services businesses maintained positive net cash flows. Together, Canada Life, Great-West Life and London Life remain Canada’s number one provider of individual life insurance and a leading provider of individual segregated funds. Canada Life, together with Great-West Life, is a leading provider of individual disability insurance and critical illness insurance for Canadians. Canada Life is the leading provider of creditor insurance in Canada for mortgages, loans, credit cards, lines of credit and leases through leading financial institutions, automobile dealerships and other lending institutions. Canada Life is a leading provider of traditional mortality, structured and annuity reinsurance solutions for life insurers in the U.S. and in international markets through its Canada Life Reinsurance Division. POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT 17 EUROPE CANADA LIFE Canada Life, with roots in Europe dating back to 1903, provides individuals and their families with a broad range of insurance and wealth management products. These include: payout annuities, investments and group insurance in the United Kingdom, distributed through independent financial advisors and employee benefit consultants; savings and individual insurance in the Isle of Man, distributed through independent financial advisors in the United Kingdom and other selected territories; individual insurance and savings, and pension products in Ireland, distributed through independent brokers and a direct sales force; and fund-based pensions, critical illness and essential ability insurance in Germany, distributed through independent brokers and multi-tied agents. In 2010, Canada Life continued to face challenging credit markets as well as a general loss of consumer confidence in investments, due to a sharp decline in equity markets in late 2008 and early 2009. Although conditions continued to generally improve in 2010, these pressures continued to affect sales volumes. As well, earnings were again impacted by the required strengthening of reserves for future asset default risk and asset impairments. As a result of Canada Life’s continued focus on credit and expense controls, Canada Life’s European operations were in a strong position coming into 2010, and this focus was maintained WILLIAM L. AC TON President and Chief Executive Officer, Canada Life Capital Corporation throughout the year. Additionally, there was a renewed focus on risk and risk management as the company prepared for the advent of Solvency II in Europe. In Germany, Canada Life operates in the independent broker market and is one of the leading insurers for guaranteed unit-linked products in the broker segment. In 2010, Canada Life launched a series of new pension products which improved the company’s market competitiveness, and increased sales towards the end of the year. Canada Life’s industry-leading guaranteed withdrawal benefit product, launched in 2009, continued to gain support and became the leading product in its category, as reported in a recent poll of insurance intermediaries. In the U.K., Canada Life continued to grow premium volumes, especially in the Isle of Man product range, despite economic challenges which adversely affected Canada Life’s Group insurance business. Sales of payout annuities were very strong in the early part of 2010, though competitive pressures and a lack of quality investment opportunities resulted in slower sales throughout the rest of the year. $64.7 BILLION IN ASSETS UNDER ADMINISTRATION IN EUROPE $9.3 BILLION IN ANNUAL PREMIUMS AND DEPOSITS IN EUROPE IN 2010 4.2 MILLION INDIVIDUALS COVERED IN EUROPE 18 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT Great-West Lifeco’s companies have benefited from their prudent and conservative investment policies and practices. Canada Life is a leading provider of traditional mortality, financial and annuity reinsurance solutions to life insurers in the U.S. and in international markets through its Canada Life Reinsurance division. In 2010, reinsurance demand remained strong, although growth rates moderated in light of improving economic and capital conditions. Canada Life continued to leverage its financial strength, disciplined risk management practices and excellent client relationships to achieve strong business results. POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT 19 UNITED STATES GREAT-WEST LIFE & ANNUITY In the United States, Great-West Life & Annuity is a leading provider of employer-sponsored retirement savings plans. It also provides annuities and life insurance for individuals and businesses, as well as fund management, investment and advisory services. Its products and services are marketed nationwide through its sales force, brokers, consultants, advisors, third-party administrators and financial institutions. In its Retirement Services segment, GWL&A offers retirement savings products and services for public, non-profit and corporate employers, as well as private label record-keeping, administrative and asset management services for other providers of defined contribution plans. GWL& A also provides business-owned life insurance, executive benefits products, and individual life insurance and annuity products through its Individual Markets segment. In 2010, strong sales across defined contribution markets and of single-premium life and business-owned life insurance led to record sales results in both of GWL&A’s business segments. Higher account balances resulting from an overall rise in the U.S. equities market contributed to increased fee income. Robust sales in the corporate 401(k) and large-case public/non- profit markets helped increase GWL&A’s number of retirement participant accounts to 4.4 million. Contracts with three additional states resulted in an industry-leading total of 18 state governmental 457 plans. MITCHELL T.G. GR AYE President and Chief Executive Officer, Great-West Life & Annuity The introduction of Maxim® SecureFoundationSM funds, a guaranteed lifetime withdrawal benefit product, builds upon a strategy to enhance GWL&A’s retirement product array and increase assets under management. The Maxim Lifetime Asset Allocation Series®, a suite of target date funds (TDFs) introduced in 2009, exceeded $1 billion in assets. Combined assets in those funds and the Maxim SecureFoundation target date portfolios propelled GWL&A subsidiary Maxim Series Fund, Inc. into the top 10 U.S. fund families by TDF net asset flow in 2010, according to Morningstar Direct data. GWL&A also completed a comprehensive planning process which identified a number of key initiatives across the organization to accelerate the growth of the business. Its asset portfolio continued to perform well, following a two-year period during which investment losses from bonds and mortgages were among the lowest of U.S. life insurance companies as a percentage of invested assets, according to Moody’s Investors Service. US$172 BILLION IN ASSETS UNDER ADMINISTRATION 4.9 MILLION U.S. CUSTOMERS NO. 1 RANKING IN STATE 457 PLANS 20 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT PUTNAM INVESTMENTS UNITED STATES EUROPE I A SIA Putnam Investments is a global asset manager and retirement plan record keeper serving individual and institutional investors worldwide through its offices and strategic alliances in North America, Europe and Asia. Since 1937, the firm has practised an active approach to pursuing client mandates. Today, Putnam provides investment services across a range of fixed income, equity, absolute return and alternative strategies, and distributes those services primarily through intermediaries, including pension consultants and financial advisors. Putnam was recognized by a number of industry observers for excellent performance in 2010. The firm was named “Mutual Fund Manager of the Year” by Institutional Investor magazine, and—based on its asset-weighted performance—was again ranked among the top 15 U.S. mutual fund families by Barron’s in their “Best Fund Families in 2010” report. Putnam enhanced its equity product line during the year with the introduction of Putnam Global Sector Fund, a fund of funds employing the full breadth of Putnam’s global sector expertise. The firm also launched a suite of multi-cap equity funds that provides investors with exposure to a dynamic array of U.S. stocks within the value, core/blend and growth styles. Building on its strategic alliances, Putnam signed an exclusive agreement with the state of Nevada to manage its 529 college savings plan, Putnam 529 for AmericaSM, on an advisor-sold platform. Outside the United States, Putnam extended its agreement to distribute funds in Japan through Nissay Asset Management, and was awarded several new institutional mandates by sovereign wealth managers. ROBERT L. REYNOLDS President and Chief Executive Officer, Putnam Investments US$121 BILLION TOTAL ASSETS UNDER MANAGEMENT APPROXIMATELY 6 MILLION SHAREHOLDERS AND RETIREMENT PLAN PARTICIPANTS Putnam strengthened its commitment to the retirement market in 2010 through new products and services for 401(k)s and other defined contribution plans, earning 25 “Best-in-Class” awards in PLANSPONSOR magazine’s 2010 survey of defined contribution plan sponsors. Putnam also 130 INSTITUTIONAL MANDATES led the industry by announcing prior to a U.S. Department of Labor mandate that it will offer comprehensive disclosure of fees and expenses to participants in the 401(k) plans it administers. Upholding a heritage of service excellence, Putnam won a DALBAR Service Award for the 21st consecutive year for providing the highest levels of investor service to mutual fund shareholders. OVER 165,000 ADVISORS DISTRIBUTE PUTNAM PRODUCTS POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT 21 IGM FINANCIAL IGM Financial and its operating companies experienced an increase in total assets under management during 2010. Net earnings for the company grew substantially compared with 2009. Investors Group and Mackenzie Financial, IGM Financial’s principal businesses, continued to generate business growth through product innovation, investment management, resource management and distribution expansion throughout the year. The company is well diversified through its multiple distribution channels, product types, investment management units and fund brands. Assets under management are diversified by country of investment, industry sector, security type and management style. A primary theme in IGM Financial’s business approach is to support financial advisors as they work with clients to plan for and achieve their financial goals. The importance of financial advice became clearer throughout the financial industry in 2010 based on emerging research and continued public interest in enhanced financial literacy. The scope of its business and association with other members of the Power Financial Corporation group of companies have placed the company in a position of leadership and strength in the financial services industry. Together, these elements will enable IGM Financial to create long-term value for its clients, consultants, advisors, employees and shareholders over time. Market fluctuations since 2008 have left investors with many questions on how best to manage their resources for the future. In this context, a strong relationship with an advisor to keep focused on long-term financial goals is important. The significant role of an advisor in helping with financial planning is appreciated by the vast majority of investing Canadians. The Investment Funds Institute of Canada (IFIC) has now published five annual surveys since 2006 indicating that approximately 85 per cent of mutual fund investors preferred to invest through an advisor and they highly rated the support and advice provided by their advisors. The positive impact that financial advisors have on Canadians’ preparations for retirement and the lives of Canadians in retirement is particularly noteworthy. The Organization for Economic Co-operation and Development (OECD) recently revealed that Canada is among the world leaders in income replacement after retirement. The Investors Group consultant network continued to expand to its highest level on record of 4,686 consultants at December 31, 2010. Since June 30, 2004, there has been 26 consecutive calendar quarters of net growth in the consultant network. With a further six region office openings announced in 2010, it has 101 region offices across Canada. Investors Group continued to respond to the complex financial needs of its clients by delivering a diverse range of products and services in the context of personalized financial advice. 15.3% ANNUAL COMPOUND TOTAL RETURN TO SHAREHOLDERS OVER FIFTEEN YEARS $1.8 TO $11.3 BILLION FIFTEEN-YEAR GROWTH IN MARKET CAPITALIZATION $4.1 BILLION AGGREGATE DIVIDENDS PAID TO SHAREHOLDERS OVER FIFTEEN YEARS 22 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT A primary theme in IGM Financial’s business approach is to support financial advisors as they work with clients to plan for and achieve their financial goals. Mackenzie Financial maintained its focus on delivering consistent long-term investment performance true to the multiple styles deployed in the investment process, while emphasizing product innovation and communication with advisors and investors. Its focus is evidenced by the strength of Mackenzie’s relationships with financial advisors, the work undertaken with investor and advisor education programs and its commitment to focusing on active investment management strategies. During 2010, Mackenzie broadened its investment choices for Canadians by adding several new funds and more options, including tax-deferred solutions. IGM Financial continues to build its business through a strategic focus on multiple distribution opportunities delivering high-quality advice, innovative investment and service solutions for investors. POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT 23 INVESTORS GROUP Investors Group is committed to comprehensive planning delivered through long-term client and consultant relationships. The company provides advice and services through a network of approximately 4,700 consultants to nearly one million Canadians. In 2010, Investors Group continued to make progress in a number of key areas. Growth in the consultant network, combined with industry-low redemption rates, is strong evidence of client and consultant satisfaction with the calm and steady approach being taken to their long-term financial planning needs. The company’s commitment to training and support is integral to its consultants’ ability to deliver effective financial advice in an increasingly complex and volatile market. The Investors Group culture provides consultants with an entrepreneurial environment and unique support structure to deliver person- alized service and knowledgeable advice to their clients, who enhance their financial literacy and gain financial confidence as the company’s consultants assist them with the development and deployment of their financial plans. Investors Group is committed to the ongoing evolution and expansion of its product and service offering. In November 2009, working jointly with Great-West Life, Investors Group introduced a new line of segregated fund policies known as Investors Group Guaranteed Investment Funds which provide long-term investment growth potential with protective guarantee features to help minimize risk. In July two new equity mandates sub- MURR AY J. TAYLOR President and Chief Executive Officer, Investors Group and Co-President and Chief Executive Officer, IGM Financial advised by Fidelity Investments Canada ULC, through its affiliate Pyramis Global Advisors, LLC, were introduced. In December the company announced a new fixed income mandate—Investors Fixed Income Flex Portfolio—which provides current income by investing in a diversified set of underlying funds that invest primarily in fixed income securities with the flexibility to adapt to a changing environment by adjusting the underlying type of investments as the interest rate and credit environment evolves. Investors Group continues to focus on its strengths as building blocks for the future. In 2010, the consultant network growth, the active engagement of over 1,600 employees, increased communication in response to the global financial situation, the continual refinement of financial planning, and the expanding product and service offerings demonstrate the company’s commitment to meet the evolving financial needs of Canadians. $61.8 BILLION MUTUAL FUND ASSETS UNDER MANAGEMENT PROVIDING PERSONAL FINANCIAL SERVICES TO CLOSE TO 1 MILLION CANADIANS 4,686 INVESTORS GROUP CONSULTANTS 24 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT MACKENZIE FINANCIAL Mackenzie Financial provides investment advisory services utilizing proprietary investment research and experienced investment professionals. The company distributes its services through multiple distribution channels focused on the provision of independent financial planning through a wide range of investment solutions to meet investor needs. In 2010, Mackenzie and its subsidiaries continued to focus on business growth, product innovation, client service effectiveness and strategic partnerships. Mackenzie’s product lineup continued to evolve with a number of fund launches during the year, including the Mackenzie Universal Gold Bullion Class, the Mackenzie All-Sector Canadian Balanced Fund and three Saxon corporate funds: Mackenzie Saxon Balanced Class, Mackenzie Saxon Stock Class and Mackenzie Saxon Small Cap Class. Specifically designed for taxable investors, the corporate funds are designed to maximize after-tax returns by minimizing taxable distributions and investors have the flexibility to switch between more than 50 Mackenzie corporate funds on a tax-deferred basis. The Mackenzie Founders Global Equity Class was added to Mackenzie’s product shelf in November. Mackenzie expanded $68.3 BILLION TOTAL ASSETS UNDER MANAGEMENT its relationship with existing strategic partners by offering a CHARLES R. SIMS segregated fund offering in partnership with Canada Life. President and OVER The strength of Mackenzie’s retail distribution network is built on long-standing and expanding relationships with financial advisors and representatives across the breadth of distribution channels. These relationships allow the company’s products to be efficiently distributed through retail brokers, financial advisors, insurance Chief Executive Officer, Mackenzie Financial and Co-President and Chief Executive Officer, IGM Financial 30,000 INDEPENDENT FINANCIAL ADVISORS agents, banks, and financial institutions, giving Mackenzie one of the broadest retail distribution platforms of any investment company in Canada. With the adjustments to the distribution model, Mackenzie now has dedicated sales teams focused in the traditional retail wholesale channel working with financial advisors; the platform, sub-advisory and strategic partnership group; and its institutional team, focused on the needs of pension plan sponsors, foundations, trusts and other institutional investors. PROVIDING INVESTMENT ADVISORY SERVICES TO MORE THAN 1.4 MILLION CANADIANS Mackenzie products are distributed widely through the financial advice channel and the company is proud of the partnership it has established with financial advisors over its history. Through the dedicated efforts of employees, these relationships continue to grow as Mackenzie now reaches more than 30,000 advisors and 1.4 million investors across Canada. POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT 25 PARGESA GROUP The Pargesa group holds significant positions in six large companies based in Europe: Lafarge (cement and building materials), Imerys (industrial minerals), Total (oil and gas), GDF Suez (electricity and gas), Suez Environnement (water and waste management) and Pernod Ricard (wines and spirits). Power Financial, through its wholly owned subsidiary, Power Financial Europe B.V., and the Frère family group of Belgium each hold a 50 per cent interest in Parjointco, a Netherlands-based company. Parjointco’s principal holding is a 54.1 per cent equity interest (62.9 per cent of the voting rights) in Pargesa Holding SA, the Pargesa group’s parent company based in Geneva, Switzerland. The Pargesa group’s strategy is to establish a limited number of substantial interests in which it can acquire a position of control or significant influence. In 2010, there were no major changes in Pargesa’s investment portfolio. Overall, the companies in the Pargesa group experienced improvements in operating performance, following the very difficult economic conditions of 2009. According to the economic presentation of the group’s results, net operating earnings declined 9.2 per cent in 2010 to €465 million, impacted by an 8.5 per cent decrease in the euro against the Swiss franc, the reporting currency used in Pargesa’s JACQUES DRIJARD Managing Director, Pargesa financial statements. The 2009 results also included a number of non-recurring items, including an exceptional dividend from GDF Suez. IM ERY S A world leader in mineral processing, Imerys holds leading positions in each of its sectors: Performance and Filtration Minerals; Materials and Monolithics; Pigments for Papers; Ceramics, Refractaries, Abrasives and Foundry. Imerys’ markets improved in 2010 even though, overall, 2010 volumes remained about 15 per cent lower than pre-crisis levels. In these circumstances, sales grew by 20.7 per cent to €3.3 billion, current operating income rose 68.4 per cent to €419 million and net income, after non-recurring items, stood at €241 million, compared with €41 million in 2009. L A FA RG E With operations in more than 78 countries, Lafarge holds leading positions in each of its markets: it is the world’s largest producer of cement, second largest producer of aggregates and third largest producer of ready-mix concrete and gypsum. 10.2% ANNUAL COMPOUND TOTAL RETURN TO SHAREHOLDERS OVER FIFTEEN YEARS (SF) $7.2 BILLION MARKET CAPITALIZATION $2.5 BILLION AGGREGATE DIVIDENDS PAID TO SHAREHOLDERS OVER FIFTEEN YEARS 26 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT The companies in the Pargesa group experienced improvements in operating performance following the very difficult economic conditions of 2009. In 2010, sales edged up by 1.8 per cent to €16.2 billion, sustained by upward trending volumes for the cement and aggregates branches, favourable exchange rates and new capacities in Brazil. Current operating income slipped 1.5 per cent to €2.4 billion. Net income, after non-recurring items, was €827 million, compared with €736 million in 2009. TO TA L Created from the successive mergers of Total, PetroFina and Elf Aquitaine, Total is one of the largest international oil and gas groups and a major player in chemicals. Conditions were more favorable to the oil business in 2010. The price of crude oil shot up 29 per cent from the previous year to reach an average of $79.5/barrel, the European Refinery Margin Indicator moved up to $27.4/tonne from $17.8/tonne in 2009 and the average gas selling price was stable. Also fuelled by 4.3 per cent growth in hydrocarbon production, net income stood at €10.6 billion, compared with €8.4 billion in 2009. POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT 27 PARGESA GROUP CONTINUED G D F SU E Z GDF Suez, created from the 2008 merger of Suez and Gaz de France, is an international industrial and services group active across the entire energy value chain, in electricity and natural gas, upstream to downstream. GDF Suez develops its core business in electricity and heat generation, trading, transmission and distribution of electricity and gas (natural and liquified), and energy and industrial services. The company reported growth in results in 2010, despite the impact of the decorrelation of gas and oil prices on the Global Gas and LNG business line. Sales grew by 5.7 per cent to €84.5 billion, EBITDA reached €15.1 billion, a 7.7 per cent increase, and net income was up 3.1 per cent to €4.6 billion. With key positions on domestic markets, GDF Suez stepped up its international development in 2010 and announced that it was combining its international operations with International Power plc, a leading independent power generation company. SU E Z EN V IRO N N EM EN T Suez Environnement integrates water and waste management operations that were formerly within the scope of Suez before it merged with Gaz de France. In the Water sector, the group designs and manages drinking water production and distribution systems and wastewater treatment systems, carries out engineering work and supplies a wide range of services to industry. In the Waste sector, Suez Environnement is active in managing (collecting, sorting, recycling, treating, recovering and storing) industrial and household waste. In 2010, in a gradually reviving economy, the group’s sales stood at €13.9 billion, up 12.8 per cent from the previous year. Net operating income totalled €2.3 billion, an increase of 13.6 per cent. Net income, after non-recurring items, stood at €565 million, compared with €403 million in 2009. P ER N O D R I C A R D Since the creation of Pernod Ricard in 1975, significant organic growth and a series of acquisitions, particularly Seagram in 2001, Allied Domecq in 2005 and Vin & Sprit in 2008, have made the company the world co-leader in wines and spirits. In 2009–2010, Pernod Ricard’s sales declined 1.7 per cent to €7.1 billion, up 1.8 per cent at constant exchange rates and scope of consolidation. The gross margin after logistics costs was stable at €4.2 billion. Net income stood at €951 million, compared with €945 million the previous year. 28 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT REVIEW OF FINANCIAL PERFORMANCE All tabular amounts are in millions of Canadian dollars, unless otherwise noted. M A RC H 10, 2011 This Annual Report is designed to provide interested shareholders and others with selected information concerning Power Financial Corporation. For further information concerning the Corporation, shareholders and other interested persons should consult the Corporation’s disclosure documents such as its Annual Information Form and Management’s Discussion and Analysis of Operating Results (MD&A). Copies of the Corporation’s continuous disclosure documents can be obtained at www.sedar.com, on the Corpo ration’s Web site at www.powerfinancial.com, or from the office of the Secretary at the addresses shown at the end of this report. FORWARD-LOOKING STATEMENTS > Certain statements in this document, other than statements of historical fact, are forward-looking statements based on certain assumptions rates, global equity and capital markets, management of market liquidity and funding risks, changes in accounting policies and methods used to report financial condition and reflect the Corporation’s and its subsidiaries’ current expectations. Forward-looking (including uncertainties associated with critical accounting assumptions and estimates), statements are provided for the purposes of assisting the reader in understanding the the effect of applying future accounting changes (including adoption of International Corporation’s financial position and results of operations as at and for the periods ended Financial Reporting Standards), business competition, operational and reputational risks, on certain dates and to present information about management’s current expectations technological change, changes in government regulation and legislation, changes in tax and plans relating to the future and the reader is cautioned that such statements may laws, unexpected judicial or regulatory proceedings, catastrophic events, the Corporation’s not be appropriate for other purposes. These statements may include, without limitation, and its subsidiaries’ ability to complete strategic transactions, integrate acquisitions and statements regarding the operations, business, financial condition, expected financial implement other growth strategies, and the Corporation’s and its subsidiaries’ success results, performance, prospects, opportunities, priorities, targets, goals, ongoing objectives, in anticipating and managing the foregoing factors. The reader is cautioned to consider strategies and outlook of the Corporation and its subsidiaries, as well as the outlook for North American and international economies for the current fiscal year and subsequent periods. 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”, “plans”, “believes”, “estimates”, “seeks”, “intends”, “targets”, “projects”, “forecasts” or negative versions thereof and other similar expressions, or future or conditional verbs such as “may”, “will”, “should”, “would” and “could”. By its nature, this information is subject to inherent risks and uncertainties that may these and other factors, uncertainties and potential events carefully and not to put undue reliance on forward-looking statements. Information contained in forward-looking statements is based upon certain material assumptions that were applied in drawing a conclusion or making a forecast or projection, including management’s perceptions of historical trends, current conditions and expected future developments, as well as other considerations that are believed to be appropriate in the circumstances, including that the foregoing list of factors, collectively, are not expected to have a material impact on the Corporation and its subsidiaries. While the Corporation considers these assumptions to be reasonable based on information currently available to management, they may be general or specific and which give rise to the possibility that expectations, forecasts, prove to be incorrect. predictions, projections or conclusions will not prove to be accurate, that assumptions may not be correct and that objectives, strategic goals and priorities will not be achieved. A variety of factors, many of which are beyond the Corporation’s and its subsidiaries’ control, affect the operations, performance and results of the Corporation and its subsidiaries and their businesses, and could cause actual results to differ materially from current Other than as specifically required by law, the Corporation undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made, or to reflect the occurrence of unanticipated events, whether as a result of new information, future events or results, or otherwise. expectations of estimated or anticipated events or results. These factors include, but Additional information about the risks and uncertainties of the Corporation’s business is are not limited to: the impact or unanticipated impact of general economic, political provided in its disclosure materials, including its MD&A and its Annual Information Form, and market factors in North America and internationally, interest and foreign exchange filed with the securities regulatory authorities in Canada, available at www.sedar.com. POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT 29 REVIEW OF FINANCIAL PERFORMANCE OV E RV I E W Power Financial, a subsidiary of Power Corporation of Canada, is a holding The Pargesa group has holdings in major companies based in Europe. These company with substantial interests in the financial services industry through investments are held by Pargesa directly or through its affiliated Belgian holding its controlling interests in Great-West Lifeco Inc. (Lifeco) and IGM Financial Inc. company, Groupe Bruxelles Lambert (GBL). As at December 31, 2010, Pargesa (IGM). Power Financial also holds, together with the Frère group of Belgium, held a 50.0% equity interest in GBL, representing 52.0% of the voting rights. an interest in Pargesa Holding SA (Pargesa). As at December 31, 2010, Pargesa’s portfolio was composed of interests As at December 31, 2010, Power Financial and IGM held 68.3% and 4.0%, in various sectors, including primarily oil, gas and chemicals through Total respectively, of Lifeco’s common shares, representing approximately 65% S.A. (Total); energy and energy services through GDF Suez; water and waste of the voting rights attached to all outstanding Lifeco voting shares. services through Suez Environnement Company (Suez Environnement); As at December 31, 2010, Power Financial and The Great-West Life Assurance industrial minerals through Imerys S.A. (Imerys); cement and building materials Company (Great-West Life), a subsidiary of Lifeco, held 57.0% and 3.5%, through Lafarge S.A. (Lafarge); and wines and spirits through Pernod Ricard S.A. respectively, of IGM’s common shares. (Pernod Ricard). In addition, Pargesa and GBL have also invested, or committed Power Financial Europe B.V., a wholly owned subsidiary of Power Financial, and the Frère group each hold a 50% interest in Parjointco N.V. (Parjointco), which, as at December 31, 2010, held a 54.1% equity interest in Pargesa, representing 62.9% of the voting rights of that company. These numbers do not reflect the dilution which could result from the potential conversion of outstanding debentures convertible into new bearer shares issued by Pargesa in 2006 and 2007. to invest, in the area of private equity, including in the French private equity funds Sagard 1 and Sagard 2, whose management company is a subsidiary of Power Corporation of Canada. B A S I S OF PR E S E N TAT IO N A N D S U M M A R Y OF AC C OU N T I N G P OL IC I E S The Consolidated Financial Statements of the Corporation have been prepared NON - G A A P FIN A NCIA L ME A SURE S in accordance with generally accepted accounting principles in Canada In analysing the financial results of the Corporation and consistent with the (Canadian GAAP or GAAP herein) and are presented in Canadian dollars. presentation in previous years, net earnings are subdivided in the section CHA NGE S IN ACCOUN T ING P OL ICIE S There were no changes in accounting policies adopted by the Corporation in 2010. See also “Future Accounting Changes” section below. INCLUSION OF PA RGE S A’ S RE SULT S The investment in Pargesa is accounted for by Power Financial under the equity method. As described above, the Pargesa portfolio currently consists primarily of investments in Imerys, Total, GDF Suez, Suez Environnement, Lafarge and Pernod Ricard, which are held by Pargesa directly or through GBL. Imerys’ results are consolidated in the financial statements of Pargesa, while the contribution from Total, GDF Suez, Suez Environnement and Pernod “Results of Power Financial Corporation” below into the following components: > operating earnings; and > other items, which include the after-tax impact of any item that management considers to be of a non-recurring nature or that could make the period-over-period comparison of results from operations less meaningful, and also include the Corporation’s share of any such item presented in a comparable manner by Lifeco or IGM. Please also refer to the comments above related to the inclusion of Pargesa’s results. Management has used these financial measures for many years in its presentation and analysis of the financial performance of Power Financial, and believes that they provide additional meaningful information to readers Ricard to GBL’s operating earnings consists of the dividends received from in their analysis of the results of the Corporation. these companies. GBL accounts for its investment in Lafarge under the equity method, and consequently, the contribution from Lafarge to GBL’s earnings consists of GBL’s share of Lafarge’s net earnings. The contribution from Pargesa to Power Financial’s earnings is based on the economic (flow-through) presentation of results as published by Pargesa. Operating earnings and operating earnings per share are non-GAAP financial measures that do not have a standard meaning and may not be comparable to similar measures used by other entities. For a reconciliation of these non-GAAP measures to results reported in accordance with GAAP, see “Results of Power Financial Corporation – Earnings Summary – Condensed Pursuant to this presentation, operating income and non-operating income Supplementary Statements of Earnings” section below. are presented separately by Pargesa. Power Financial’s share of non-operating income of Pargesa, after adjustments or reclassifications if necessary, is included as part of other items in the Corporation’s financial statements. 30 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT R E S U LT S OF P OW E R F I N A NC I A L C OR P OR AT IO N This section is an overview of the results of Power Financial. In this section, the equity method in order to facilitate the discussion and analysis. This consistent with past practice, the contributions from Lifeco and IGM, which presentation has no impact on Power Financial’s net earnings and is intended represent most of the earnings of Power Financial, are accounted for using to assist readers in their analysis of the results of the Corporation. E A RNING S SUMM A RY – CONDENSED SUPPL EMEN TA RY S TAT EMEN T S OF E A RNING S The following table shows a reconciliation of non-GAAP financial measures used herein for the periods indicated, with the reported results in accordance with GAAP for net earnings and earnings per share. TWELVE MONTHS ENDED DECEMBER 31 Contribution to operating earnings from subsidiaries and investment at equity Lifeco IGM Pargesa Results from corporate activities Operating earnings [ 1 ] [ 2 ] Other items [ 3 ] Net earnings [ 1 ] [ 2 ] TOTAL 1,276 416 120 1,812 (79) 1,733 (149) 1,584 2010 PER SHARE 2.31 (0.21) 2.10 TOTAL 1,120 347 141 1,608 (75) 1,533 (94) 1,439 2009 PER SHARE 2.05 (0.13) 1.92 [ 1 ] Operating earnings and net earnings represent earnings before dividends on perpetual preferred shares issued by the Corporation, which amounted to $99 million and $88 million in the twelve-month periods ended December 31, 2010 and December 31, 2009, respectively. [ 2 ] Operating earnings per share and net earnings per share are calculated after deducting dividends on perpetual preferred shares issued by the Corporation. [ 3 ] See “Other Items” section below for additional information. OPER AT ING E A RNING S > Lifeco continued to experience solid operating results throughout the year Operating earnings for the year ended December 31, 2010 were $1,733 million in all business segments despite the strengthening of the Canadian dollar or $2.31 per share, compared with $1,533 million or $2.05 per share in the against the U.S. dollar, British pound and euro in 2010. corresponding period in 2009. This represents an increase of 12.8% on a per share basis. IGM’s contribution to Power Financial’s operating earnings was $416 million for the twelve-month period ended December 31, 2010, compared with $347 million For the year ended December 31, 2010, the strengthening of the Canadian for the corresponding period in 2009. Details are as follows: dollar against the U.S. dollar, the British pound and the euro had a negative currency impact on Lifeco’s net earnings of $103 million. Power Financial’s share of this currency effect is $73 million or $0.10 per share for the year ended December 31, 2010. > IGM reported operating earnings available to common shareholders for the twelve-month period ended December 31, 2010 of $734 million or $2.79 per share on a diluted basis, compared with $622 million or $2.35 per share in the same period in 2009, an increase of 18.7% on a per share basis. SHA RE OF OPER AT ING E A RNING S FROM SUBSIDIA RIE S A ND IN V E S T MEN T AT EQUI T Y > Other items for the twelve-month period ended December 31, 2010 (recorded in the third quarter) represent a charge of $8 million representing Power Financial’s share of operating earnings from its subsidiaries and IGM’s share of Lifeco’s after-tax charge related to a decision released by the investment at equity increased by 12.7% in the year ended December 31, 2010, Ontario Superior Court of Justice as discussed in the “Contingent Liabilities” compared with the same period in 2009, from $1,608 million to $1,812 million. section below. Lifeco’s contribution to Power Financial’s operating earnings was $1,276 million > Other items for the year ended December 31, 2009 were recorded in the for the twelve-month period ended December 31, 2010, compared with fourth quarter and consisted of: $1,120 million for the corresponding period in 2009. Details are as follows: – A non-cash charge of $77 million ($66 million after tax) on available-for- > Lifeco reported operating earnings attributable to common shareholders sale equity securities related to the market environment. of $1,861 million or $1.964 per share for the twelve-month period ended December 31, 2010, compared with $1,627 million or $1.722 per share in the corresponding period of 2009. This represents a 14.4% increase on a per share basis. > Operating earnings of Lifeco exclude the impact of an incremental litigation provision, as noted in the “Contingent Liabilities” section below, in the amount of $225 million after tax ($204 million attributable to Lifeco’s common shareholders or $0.216 per common share, and $21 million to Lifeco’s non-controlling interests) established in the third quarter. Lifeco now holds $310 million in after-tax provisions for this matter discussed in Note 25 to the Corporation’s 2010 Consolidated Financial Statements. – A non-cash income tax benefit of $18 million resulting from decreases in Ontario corporate income tax rates and their effect on the future income tax liability related to indefinite life intangible assets arising from the acquisition of Mackenzie Financial Corporation in 2001. – A premium of $14 million paid on the redemption of the Series A preferred shares on December 31, 2009. > IGM’s quarterly earnings are primarily dependent on the level of mutual fund assets under management. Improving market conditions, particularly in the fourth quarter of 2010, have resulted in increased levels of average assets under management and increased quarterly earnings as compared to 2009. POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT 31 REVIEW OF FINANCIAL PERFORMANCE The contribution from Pargesa to Power Financial’s operating earnings was > Operating earnings of Pargesa exclude non-recurring earnings of SF280 $120 million in the twelve-month period ended December 31, 2010, compared million for the twelve-month period ended December 31, 2009, consisting with $141 million in the corresponding period of 2009. Details are as follows: principally of the partial reversal of an impairment charge taken by GBL on > Pargesa’s operating earnings for the twelve-month period ended December 31, 2010 were SF465 million, compared with SF512 million in the corresponding period in 2009. its investment in Lafarge for an amount of SF510 million and of impairment charges recorded by GBL. RE SULT S FROM CORP OR AT E AC T I V I T IE S > The results for Pargesa for the twelve-month period ended December 31, 2010 reflect increased earnings from Imerys, which is consolidated by Pargesa. This increase is offset by the fact that GDF Suez had paid, in addition to its Results from corporate activities include income from investments, operating expenses, financing charges (which include dividends on the Corporation’s Preferred Shares Series C and J as these were classified as liabilities), normal dividend, a special one-time dividend in the second quarter of 2009, depreciation and income taxes. which represented an amount of SF73 million for Pargesa, and to a lesser extent a decrease in the contribution from Lafarge. Corporate activities were a net charge of $79 million in the twelve-month period ended December 31, 2010, compared with a net charge of $75 million in > Operating earnings of Pargesa exclude net non-recurring charges the corresponding period of 2009. of SF1 million for the twelve-month period ended December 31, 2010, consisting principally of (i) Pargesa’s share of non-operating earnings of Imerys and Lafarge of SF24 million less (ii) non-operating charges at the holding company level consisting of impairment charges of SF16 million principally on GBL’s investment in Iberdrola S.A. (SF15 million) as a result of a decline in the market value of the investment. Included in the non- operating earnings of Imerys is a gain recorded under International Financial Reporting Standards (IFRS) of SF25 million representing negative goodwill which under Canadian GAAP is not recognized. This gain will be reflected in the Corporation’s 2010 IFRS financial statements. For 2010, the change in corporate activities largely results from an increase in operating expenses in the twelve month period ended December 31, 2010, when compared to the twelve-month period ended December 31, 2009. OT HER I T EMS For the twelve-month period ended December 31, 2010, other items represent a charge of $149 million, compared with a charge of $94 million in the corresponding period of 2009. TWELVE MONTHS ENDED DECEMBER 31 LIFECO Litigation provision IGM Non-cash charge on available-for-sale securities Non-cash income tax benefit Premium paid on redemption of preferred shares PARGESA Impairment charge Other CORPORATE Dilution gain related to issue of common shares by IGM 2010 2009 (144) (4) (1) (149) (38) 10 (8) (53) (17) 12 (94) NE T E A RNING S Net earnings for the twelve-month period ended December 31, 2010 were $1,584 million or $2.10 per share, compared with $1,439 million or $1.92 per share in the corresponding period in 2009. 32 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT F I N A N C I A L P O S I T IO N , L IQ U I DI T Y A N D C A PI TA L R E S OU RC E S CONDENSED SUPPL EMEN TA RY BA L A NCE SHEE T S AS AT DECEMBER 31 ASSETS Cash and cash equivalents [2] Investment at equity Investments Goodwill Intangible assets Other assets Total LIABILITIES Policy liabilities Actuarial liabilities Other Other liabilities Preferred shares of the Corporation Preferred shares of subsidiaries Capital trust securities and debentures Debentures and other borrowings Non-controlling interests SHAREHOLDERS’ EQUITY Perpetual preferred shares Common shareholders’ equity 140,231 13,826 14,147 CONSOLIDATED BASIS 2009 2010 3,656 2,279 100,061 8,726 4,238 24,295 143,255 100,394 4,723 9,015 535 6,348 121,015 9,056 2,005 11,179 13,184 4,855 2,675 94,237 8,655 4,366 25,443 98,059 4,592 8,485 300 203 540 5,967 118,146 8,878 1,725 11,482 13,207 2010 713 13,019 EQUIT Y BASIS [1] 2009 756 13,306 94 85 392 250 642 2,005 11,179 13,184 13,826 390 300 250 940 1,725 11,482 13,207 14,147 Total 143,255 140,231 [ 1 ] Condensed supplementary balance sheets of the Corporation using the equity method to account for Lifeco and IGM. [ 2 ] Under the equity basis presentation, cash equivalents include $470 million ($273 million at December 31, 2009) of fixed income securities with maturities of more than 90 days. In the 2010 Consolidated Financial Statements, this amount of cash equivalents is classified in investments. CONSOL IDAT ED BA SIS Non-controlling interests include the Corporation’s non-controlling interests The consolidated balance sheets include Lifeco’s and IGM’s assets and liabilities. in the common equity of Lifeco and IGM as well as the participating account Total assets of the Corporation increased to $143.3 billion at December 31, 2010, surplus in Lifeco’s insurance subsidiaries and perpetual preferred shares issued compared with $140.2 billion at December 31, 2009. by subsidiaries to third parties. The investment at equity of $2.3 billion represents the Corporation’s carrying value in Parjointco. The decrease in the carrying value is mainly due to foreign currency changes and a decrease in the market value of Pargesa’s investments accounted for as available-for-sale assets. Assets under administration, which are excluded from the Corporation’s balance sheet, include segregated funds of Lifeco, proprietary mutual funds and institutional net assets of Lifeco as well as other assets under administration of Lifeco, and IGM’s assets under management, at market value: Investments at December 31, 2010 were $100.1 billion, a $5.8 billion increase > Assets under administration of Lifeco, excluding those included on the from December 31, 2009. Liabilities increased from $118.1 billion at December 31, 2009 to $121.0 billion at December 31, 2010. Lifeco’s actuarial liabilities increased from $98.1 billion to $100.4 billion over the same period. balance sheet, increased from $330.2 billion at December 31, 2009 to $352.4 billion at December 31, 2010. Segregated funds and proprietary mutual funds and institutional net assets increased by approximately $7.1 billion from December 31, 2009, primarily as a result of improved equity market levels. Other assets under administration by Lifeco increased Debentures and other borrowings increased by $381 million during the twelve- by $15.1 billion as a result of improved equity market levels and lower month period ended December 31, 2010, while subsidiaries repurchased interest rates. preferred shares classified as liabilities for an amount of $203 million and the Corporation repurchased $300 million of similar preferred shares. Details are included in the “Cash Flows – Consolidated” section below. The increase in perpetual preferred shares presented in the “Shareholders’ equity” section below results from the issue of the Series P First Preferred Shares for an amount of $280 million during the second quarter of 2010. > IGM’s assets under management, at market value, were $129.5 billion at December 31, 2010, compared with $120.5 billion at December 31, 2009. The increase is principally due to market and income appreciation. POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT 33 REVIEW OF FINANCIAL PERFORMANCE EQUI T Y BA SIS SHA REHOL DER S’ EQUI T Y Under the equity basis presentation, Lifeco and IGM are accounted for using Common shareholders’ equity was $11,179 million at December 31, 2010, the equity method. This presentation has no impact on Power Financial’s compared with $11,482 million at December 31, 2009. The decrease shareholders’ equity and is intended to assist readers in isolating the of $303 million is mainly due to: contribution of Power Financial, as the parent company, to consolidated assets and liabilities. Cash and cash equivalents held by Power Financial amounted to $713 million at December 31, 2010, compared with $756 million at the end of December 2009. The amount of quarterly dividends declared by the Corporation but not yet paid was $274 million at December 31, 2010. The amount of dividends declared by IGM but not yet received by the Corporation was $76 million at December 31, 2010. In managing its own cash and cash equivalents, Power Financial may hold cash balances or invest in short-term paper or equivalents, as well as deposits, denominated in foreign currencies and thus be exposed to fluctuations > A $476 million increase in retained earnings, reflecting primarily net earnings of $1,584 million, less dividends declared of $1,090 million. > Changes to accumulated other comprehensive income in the negative amount of $813 million. In 2010, 2,287,000 Common Shares were issued by the Corporation pursuant to the Corporation’s Employee Stock Option Plan for an aggregate amount of $31 million. As a result of the above, book value per common share of the Corporation was $15.79 at December 31, 2010, compared with $16.27 at the end of 2009. in exchange rates. In order to protect against such fluctuations, Power Financial On June 29, 2010 the Corporation issued 11,200,000 4.40% Non-Cumulative may, from time to time, enter into currency-hedging transactions with financial 5-Year Rate Reset First Preferred Shares, Series P for gross proceeds institutions with high credit ratings. As at December 31, 2010, essentially all of $280 million. On July 30, 2010, the Corporation redeemed all of its $150 million of the $713 million of cash and cash equivalents was denominated in Canadian First Preferred Shares, Series J at a redemption price of $25.50 for each such dollars or in foreign currencies with currency hedges in place. share, for an aggregate redemption amount of $153 million. On October 31, 2010, The carrying value at equity of Power Financial’s investments in Lifeco, IGM and Parjointco decreased to $13,019 million at December 31, 2010, compared with $13,306 million at December 31, 2009. This decrease is mainly due to: > Power Financial’s share of net earnings from its subsidiaries and investment at equity for the twelve-month period ended December 31, 2010, net of dividends received, amounting to $505 million. > Power Financial’s share of other comprehensive income from its subsidiaries and investment at equity for the twelve-month period ended December 31, 2010 in the negative amount of $813 million. This amount includes a net $832 million negative variation in foreign currency translation the Corporation redeemed all of its $150 million First Preferred Shares Series C at a redemption price of $25.40 for each such share, for an aggregate redemption amount of $152 million. These two series of preferred shares were classified as liabilities in the Consolidated Balance Sheet. The Corporation filed a shor t-form base shelf prospectus dated November 23, 2010, pursuant to which, for a period of 25 months thereafter, the Corporation may issue up to an aggregate of $1.5 billion of First Preferred Shares, Common Shares and debt securities, or any combination thereof. This filing provides the Corporation with the flexibility to access debt and equity markets on a timely basis to make changes to the Corporation’s capital structure in response to changes in economic conditions and changes in its adjustments, related to the Corporation’s indirect investments in Lifeco’s and Pargesa’s foreign operations, a negative variation in the value financial condition. of investments classified as available for sale in the amount of $17 million, and a $36 million positive variation for cash flow hedges. OU T S TA NDING NUMBER OF COMMON SH A RE S As of the date hereof, there were 708,013,680 Common Shares of the Corporation outstanding, compared with 705,726,680 at December 31, 2009. The increase in the number of outstanding Common Shares reflects the exercise of options under the Corporation’s Employee Stock Option Plan. As of the date hereof, options were outstanding to purchase up to an aggregate of 8,480,115 Common Shares of the Corporation under the Corporation’s Employee Stock Option Plan. C A S H F L OW S C A SH FLOW S — CONSOL IDAT ED TWELVE MONTHS ENDED DECEMBER 31 Cash flow from operating activities Cash flow from financing activities Cash flow from investing activities Effect of changes in exchange rates on cash and cash equivalents Increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period 2010 6,572 (1,530) (6,026) (215) (1,199) 4,855 3,656 2009 4,553 (1,245) (2,850) (292) 166 4,689 4,855 On a consolidated basis, cash and cash equivalents decreased by $1,199 million Operating activities produced a net inflow of $6,572 million in the twelve-month in the twelve-month period ended December 31, 2010, compared with period ended December 31, 2010, compared with a net inflow of $4,553 million an increase of $166 million in the corresponding period in 2009. in the corresponding period in 2009. 34 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT Operating activities during the twelve-month period ended December 31, 2010, > Repurchase by the Corporation of preferred shares for an amount compared to the same period in 2009, included: of $305 million, compared with nil in the corresponding period of 2009. > For the twelve-month period ended December 31, 2010, Lifeco’s cash flow > Redemption of preferred shares by subsidiaries of the Corporation from operations was a net inflow of $5,797 million, compared with a net for an amount of $507 million, compared with $948 million in the inflow of $3,958 million in the corresponding period in 2009. Cash provided corresponding period in 2009. by operating activities is used primarily to pay policy benefits, policyholder dividends and claims, as well as operating expenses and commissions. Cash flows generated by operations are mainly invested to support future liability cash requirements. > Operating activities of IGM, after payment of commissions, generated $863 million in the twelve-month period ended December 31, 2010, compared with $700 million in the corresponding period in 2009. Cash flows from financing activities resulted in a net outflow of $1,530 million in the twelve-month period ended December 31, 2010, compared with a net outflow of $1,245 million in the corresponding period in 2009. Financing activities during the twelve-month period ended December 31, 2010 and December 31, 2009, included: > Repurchases for cancellation by subsidiaries of the Corporation of their common shares amounted to $157 million, compared with $70 million in the corresponding period in 2009. > Issuance of debentures by Lifeco for an amount of $500 million, compared with $200 million in the corresponding period of 2009. > Issuance of debentures by IGM for an amount of $200 million, compared with $375 million in the corresponding period of 2009. > Net repayment of other borrowings at Lifeco for an amount of $253 million, compared with net other borrowings of $169 million in the corresponding period of 2009. > Repayment in 2009 by IGM of $287 million of bankers’ acceptances related to the acquisition of Saxon Financial Inc. and of short-term borrowings > Dividends paid by the Corporation and its subsidiaries were $1,718 million, compared with $1,679 million in the corresponding period in 2009. in the amount of $100 million. > Issuance of common shares of the Corporation for an amount of $31 million pursuant to the Corporation’s Employee Stock Option Plan, compared with $10 million in the corresponding period in 2009. > Issuance of preferred shares by the Corporation for an amount of $280 million, compared with $150 million in the corresponding period in 2009. > Issuance of common shares by subsidiaries of the Corporation for an amount of $84 million, compared with $49 million in the corresponding period in 2009. > Issuance of preferred shares by subsidiaries of the Corporation for an amount of $400 million, compared with $320 million in the corresponding Cash flows from investing activities resulted in a net outflow of $6,026 million in the twelve-month period ended December 31, 2010, compared with a net outflow of $2,850 million in the corresponding period in 2009. Investing activities during the twelve-month period ended December 31, 2010, compared to the same period in 2009, included: > Investing activities at Lifeco in the twelve-month period ended December 31, 2010 resulted in a net outflow of $6,099 million, compared with a net outflow of $1,831 million in the corresponding period in 2009. > Investing activities at IGM in the twelve-month period ended December 31, 2010 resulted in a net inflow of $302 million, compared with a net outflow of $750 million in the corresponding period in 2009. period in 2009. C A SH FLOW S — CORP OR AT E TWELVE MONTHS ENDED DECEMBER 31 CASH FLOW FROM OPERATING ACTIVITIES Net earnings Earnings from subsidiaries not received in cash Dilution gain and reversal of provisions Other CASH FLOW FROM FINANCING ACTIVITIES Dividends paid on common and preferred shares Issuance of preferred shares Issuance of common shares Repurchase of preferred shares Other CASH FLOW FROM INVESTING ACTIVITIES Advance to an affiliate Other INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period 2010 1,584 (505) (2) 1,077 (1,086) 280 31 (305) (8) (1,088) (32) (32) (43) 756 713 2009 1,439 (370) (12) 3 1,060 (1,070) 150 10 (5) (915) 4 4 149 607 756 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT 35 REVIEW OF FINANCIAL PERFORMANCE Power Financial is a holding company. As such, corporate cash flows from which require that solvency standards be maintained. In addition, certain operations, before payment of dividends, are principally made up of dividends subsidiaries of IGM must also comply with capital and liquidity requirements received from its subsidiaries and investment at equity and income from established by regulatory authorities. investments, less operating expenses, financing charges, and income taxes. The ability of Lifeco and IGM, which are also holding companies, to meet their obligations generally and pay dividends depends in particular upon receipt of sufficient funds from their subsidiaries. The payment of interest and dividends by Lifeco’s principal subsidiaries is subject to restrictions set out in relevant corporate and insurance laws and regulations, which require that solvency and capital standards be maintained. As well, the capitalization Dividends declared by Lifeco and IGM in the twelve-month period ended December 31, 2010 on their common shares amounted to $1.23 and $2.05 per share, respectively, unchanged from the corresponding period in 2009. Pargesa pays its annual dividends in the second quarter. The dividend paid in 2010 amounted to SF2.72 per bearer share, an increase of 3.8% when compared to the dividend paid in 2009. of Lifeco’s principal subsidiaries takes into account the views expressed by the In the twelve-month period ended December 31, 2010, dividends declared on the various credit rating agencies that provide ratings related to financial strength Corporation’s Common Shares amounted to $1.40 per share, unchanged from and other measures relating to those companies. The payment of dividends the corresponding period in 2009. by IGM’s principal subsidiaries is subject to corporate laws and regulations F U T U R E AC C OU N T I NG C H A NGE S IN T ERN AT IONA L FINA NCIA L REP ORT ING S TA NDA RDS The impact of certain of the foregoing items will be reflected in the financial In February 2008, the Canadian Institute of Chartered Accountants (CICA) statements of the Corporation. Consequently, the Corporation seeks announced that Canadian GAAP for publicly accountable enterprises will harmonization among group companies with respect to such items. be replaced by IFRS for fiscal years beginning on or after January 1, 2011. The Corporation will be required to begin reporting under IFRS for the quarter ending March 31, 2011 and will be required to prepare an opening balance sheet at January 1, 2010 and provide information that conforms to IFRS for the comparative periods presented. The Corporation will include in the March 31, 2011 interim consolidated financial statements disclosures and explanation of transition to IFRS in accordance with IFRS 1, First-Time Adoption of International Financial Reporting Standards. IFRS will require increased financial statement disclosure as compared to Canadian GAAP and the Corporation’s accounting policies will be affected by the change from Canadian GAAP to IFRS, which will impact the presentation of the Corporation’s financial position and results of operations. On adoption of IFRS, the financial position and results of operations reported in accordance Information below regarding the publicly traded subsidiaries’ IFRS changeover plans has been derived from their public disclosure. The Corporation is in the final stages of aggregating and analysing potential adjustments required to its opening balance sheet at January 1, 2010 for changes to accounting policies resulting from identified differences noted between Canadian GAAP and IFRS in the changeover project. The Corporation also continues to analyse differences to net earnings and retained earnings under IFRS. Adoption of IFRS requires that the IFRS standards be applied on a retroactive basis with the exception of those specifically exempted under IFRS 1 for first- time adopters. Absent an exemption, any changes to existing standards must be applied retroactively and reflected in the opening balance sheet of the comparative period. with IFRS may differ as compared to Canadian GAAP and these differences may Key adjustments to the Corporation’s opening balance sheet have been be material. Implementing IFRS will have an impact on accounting, financial identified and analysed, with estimates of the impact to the opening reporting and supporting information technology systems and processes. balance sheet and shareholders’ equity at transition to IFRS presented in the Additionally, the International Accounting Standards Board (IASB) currently Reconciliations of the pro forma Consolidated Balance Sheet and the pro forma has projects underway that are expected to result in new pronouncements Statement of Retained Earnings and Accumulated Other Comprehensive and, accordingly, the development of IFRS continues to evolve. Income below. The Corporation’s IFRS changeover plan includes the modification of financial These estimated adjustments represent management’s best estimates and reporting processes, disclosure controls and procedures, and internal controls may be subject to change, though not materially, prior to the issuance of over financial reporting, as well as the education of key stakeholders, financial statements prepared in accordance with IFRS. These accounting including the Board of Directors, management and employees. The impact differences have been separated in the balance sheet, between items impacting on the Corporation’s information technology, data systems and processes shareholders’ equity at transition and other items that represent a difference will be dependent upon the magnitude of change resulting from these and between IFRS and Canadian GAAP with certain of these items resulting in a other items. At this time, no significant impact on information or data change in financial statement presentation or reclassification. This discussion systems has been identified and the Corporation and its subsidiaries do not has been prepared using the standards and interpretations currently issued expect to make changes which will materially affect internal controls over and expected to be effective at the end of the Corporation’s first annual IFRS financial reporting. The Corporation is monitoring the potential impact of other IFRS-related changes to financial reporting processes, disclosure controls and procedures, and internal controls over financial reporting, though the Corporation does not expect the initial adoption of IFRS will have a material impact on the disclosure controls and procedures for financial reporting. reporting period, December 31, 2011. The amounts have not been audited or subject to review by our external audit. 36 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT CON V ER SION A DJUS T MEN T S INVESTMENT PROPERTIES The following represents key changes identified in accounting policies that Real estate not classified as owner-occupied properties will be accounted for as will impact shareholders’ equity upon the transition to IFRS. The identified investment properties and measured at fair value. The resulting net decrease differences represent management’s best estimate and these estimates and to investment properties at transition is expected to be $85 million. Under decisions may be revised before the Corporation issues financial statements Canadian GAAP, these properties were carried at cost net of write-downs and prepared in accordance with IFRS. allowances for loss, plus a moving average market value adjustment which is INVESTMENT CONTR ACTS The majority of Canadian GAAP policyholder and reinsurance contract liabilities will be classified as insurance contracts under IFRS. Contracts where significant insurance risk does not exist will be classified as investment contracts under expected to total $133 million at transition to IFRS. The change in measurement, including the derecognition of deferred net realized gains on investment properties at January 1, 2010 will increase opening retained earnings by approximately $100 million after tax. IFRS and accounted for either at fair value or at amortized cost. If significant OWNER-OCCUPIED PROPERTIES insurance risk exists, the contract is classified as an insurance contract and will For all owner-occupied properties, the Corporation has elected to measure be measured under the Canadian Asset Liability Method. IFRS allows for the recognition of both deferred acquisition costs and deferred income reserves related to investment contracts. Certain deferred acquisition the fair value as its deemed cost at transition, resulting in a fair value increase of $40 million. After transition, the cost model will be used to value such properties, with depreciation expensed in the consolidated statements of costs that were not incremental to the contract and were deferred and earnings. amortized into consolidated net earnings over the anticipated period of benefit The fair value election at transition is expected to result in an increase in under Canadian GAAP will now be recognized as an expense under IFRS in the opening retained earnings of approximately $15 million after tax. period incurred. Deferred acquisition costs that are incremental in nature will continue to be deferred and amortized. On the balance sheet, the deferred acquisition costs will be presented in other assets. Under Canadian GAAP, actuarial liabilities were presented net of deferred acquisition costs. The adjustment to decrease opening retained earnings for the adjustments related to deferred acquisition costs and deferred income reserves on investment contracts is expected to be approximately $327 million after tax. INVESTMENT AT EQUITY The Corporation will increase the carrying value of its investment at equity and its opening retained earnings by an amount of $154 million to reflect amounts DERECOGNITION OF FINANCIAL A SSETS The IFRS determination of whether a financial asset should be derecognized is based to a greater extent on the transfer of risks and rewards of ownership; whereas under Canadian GAAP, the focus is on the surrendering of control over the transferred assets. IGM has disclosed that its analysis indicates most of its securitization transactions will be accounted for as secured borrowings under IFRS rather than sales, which will result in an increase in total assets and liabilities recorded on its consolidated balance sheets. As these transactions are to be treated as financing transactions rather than sale transactions, a transitional adjustment to opening retained earnings is required to reflect previously recognized under IFRS by Pargesa which were not recognized under this change in accounting treatment. Canadian GAAP. The largest component of this adjustment consists of the IGM has disclosed that it has completed its analysis based on assumptions Corporation’s share of the reversal in 2009 of an impairment charge recorded that: (i) the mortgages are carried at amortized cost, (ii) mortgage origination by GBL for an amount of $139 million. DEFERRED SELLING COMMISSIONS Under IFRS, commissions paid on the sale of certain mutual fund units will be considered as definite life intangible assets and amortized over their useful life under Canadian GAAP. The IFRS standard for intangible assets more specifically addresses the approach to record amortization and disposals of costs are capitalized and amortized, and (iii) the transactions are restated on a retroactive basis. The estimated increase in the mortgage balances is $3.3 billion with a corresponding increase in liabilities. Certain other mortgage- related assets and liabilities, including retained interests, certain derivative instruments and servicing liabilities, will be adjusted. The estimated decrease in the Corporation’s opening retained earnings is approximately $45 million. intangible assets. When a mutual fund client redeems units in certain mutual funds, a redemption fee is paid by the client that is recorded as revenue by IGM. IFRS requires that the remaining deferred selling commission asset EMPLOYEE BENEFITS – CUMUL ATIVE UNAMORTIZED ACTUARIAL GAINS AND LOSSES The Corporation has elected to apply the exemption available to recognize related to those units be recorded as a disposal. The current estimate of all cumulative unamortized actuarial gains and losses of the Corporation’s this difference is expected to be a decrease of $1 million in the Corporation’s defined benefit plans of $308 million in shareholders’ equity upon transition. opening retained earnings. Subsequent to transition, the Corporation intends to apply the “corridor” approach for deferring recognition of actuarial gains and losses that reside RE AL ESTATE PROPERTIES Under IFRS, real estate properties have been classified as either investment within the corridor. properties or owner-occupied properties. This adjustment, referred to as the “fresh start” adjustment, is expected to decrease opening retained earnings by approximately $132 million after tax. POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT 37 REVIEW OF FINANCIAL PERFORMANCE EMPLOYEE BENEFITS – PA ST SERVICE COSTS AND OTHER Differences exist between IFRS and Canadian GAAP in determining employee benefits, including the requirement to recognize unamortized past service CUMUL ATIVE TR ANSL ATION LOSSES OF FOREIGN OPER ATIONS The Corporation will reset the unrealized cumulative translation differences of foreign operations to zero upon adoption of IFRS. The balance of the cumulative loss to be reclassified from other comprehensive income to retained costs and certain service awards. The adjustment for recognition of these earnings at January 1, 2010 is approximately $1,188 million. unamortized vested past service costs and other employee benefits under IFRS are estimated to total $92 million. These differences are expected to increase opening retained earnings by approximately $41 million after tax. UNCERTAIN INCOME TAX PROVISIONS The difference in the recognition and measurement of uncertain tax provisions between Canadian GAAP and IFRS is expected to decrease opening retained earnings by approximately $170 million. OTHER ADJUSTMENTS Several additional items have been identified where the transition from Canadian GAAP to IFRS will result in recognition changes. These adjustments, which include (i) the capitalization of transaction costs on other than held-for- REDESIGNATION OF FINANCIAL A SSETS Lifeco has disclosed it will redesignate certain non-participating available- for-sale financial assets to fair value through profit and loss. Also, certain financial assets classified as held for trading under Canadian GAAP will be redesignated as available for sale under IFRS. The redesignation will have no overall impact on the Corporation’s opening shareholders’ equity at transition but is expected to result in a reclassification within shareholders’ equity of approximately $67 million between retained earnings and accumulated other comprehensive income. NON-CONTROLLING INTERESTS Under Canadian GAAP non-controlling interests were presented between liabilities and equity. IFRS requires presentation of non-controlling interests trading financial liabilities netted against the corresponding financial liability, within the equity section of the balance sheet. (ii) the adoption of the graded vesting method to account for all stock options, and (iii) the measurement of Lifeco preferred shares previously recorded at fair value will be recorded at amortized cost under IFRS, are expected to result in an adjustment to increase opening retained earnings by approximately $3 million after tax. BUSINESS COMBINATIONS The Corporation does not plan to restate business combinations prior to January 1, 2010, and therefore there is no expected impact on opening figures. The Corporation will apply the IFRS 3 standard prospectively for business combinations occurring after January 1, 2010. PRE SEN TAT ION A ND RECL A SSIFIC AT ION A DJUS T MEN T S The following represents changes in key accounting policies that do not impact shareholders’ equity upon the adoption of IFRS. The items below include accounting policy differences under IFRS, certain of which require financial statement presentation and reclassification changes upon transition. The possible impact of the identified differences represents management’s best estimates and these estimates and decisions may be revised before the Corporation issues financial statements prepared in accordance with IFRS. SEGREGATED FUNDS The assets and liabilities of segregated funds, totalling $87.5 billion at January 1, GOODWILL AND INTANGIBLE A SSETS Goodwill and intangible assets under IFRS will be measured using the cost model, based on the recoverable amount, which is the greater of value in use or fair value less cost to sell. The recoverable amount calculated under IFRS approximates the Canadian GAAP carrying value at December 31, 2009 and therefore no adjustment is required at transition. The above accounting policy differences (totalling a decrease of $1,616 million in the opening retained earnings) have been reconciled from Canadian GAAP to IFRS on the following page. It should be noted that the numbers provided in this section are subject to change pending the completion of an audit. Numbers 2010, will be included at fair value on the Consolidated Balance Sheets as a are also subject to change in the event that newly issued international financial single line within assets and liabilities under IFRS. There will be no impact on reporting standards become effective prior to the completion of the audit. the amount disclosed for shareholders’ equity. PRESENTATION OF REINSUR ANCE ACCOUNTS Reinsurance accounts will be presented on a gross basis on the Consolidated Balance Sheets, totalling approximately $2.8 billion of reinsurance assets and corresponding liabilities, with no impact on shareholders’ equity. Gross presentation of the reinsurance revenues and expenses will also be required within the Consolidated Statements of Earnings. 38 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT RECONCIL IAT ION OF T HE PRO F ORM A CONSOL IDAT ED BA L A NCE SHEE T FROM C A N A DIA N G A A P TO IFR S CANADIAN GA AP DECEMBER 31, 2009 CONVERSION ADJUSTMENTS PRESENTATION AND RECLASSIFICATION ADJUSTMENTS ESTIMATED IFRS JANUARY 1, 2010 ASSETS Cash and cash equivalents Investment at equity Other investments Intangible assets Goodwill Other assets Segregated funds for the risk of unitholders LIABILITIES Insurance and investment contract liabilities Other liabilities Preferred shares of the Corporation Preferred shares of subsidiaries Obligations to securitization entities Capital trust securities and debentures Debentures and other borrowings Insurance and investment contracts on account of unitholders Non-controlling interests SHAREHOLDERS’ EQUITY Perpetual preferred shares Common shares Non-controlling interests Contributed surplus Retained earnings Accumulated other comprehensive income 4,855 2,675 94,237 4,366 8,655 25,443 154 3,192 (10) (95) 140,231 3,241 102,651 8,485 300 203 540 5,967 8,878 (69) 534 (4) 3,310 (36) 127,024 3,735 1,725 605 102 11,165 (390) 13,207 140,231 (157) 24 (1,616) 1,255 (494) 3,241 RECONCIL IAT ION OF PRO F ORM A RE TA INED E A RNING S A ND ACCUMUL AT ED OT HER COMPREHENSI V E INCOME FROM C A NA DIA N G A A P TO IFR S AT JANUARY 1, 2010 CANADIAN GAAP EQUITY IFRS ADJUSTMENTS (NET OF TAX) Investment contracts – Deferred acquisition costs Investment contracts – Deferred income reserves Equity accounting for Pargesa Investment properties/owner-occupied properties Derecognition of financial assets Employee benefits – Cumulative unamortized actuarial gains and losses Employee benefits – Past service costs and other Uncertain income tax provisions Other adjustments Reset of cumulative translation losses of foreign operations Redesignation of financial assets IFRS EQUITY 4,855 2,829 97,016 5,206 8,655 28,301 87,495 234,357 105,827 9,164 300 199 3,310 540 5,931 87,495 – 212,766 1,725 605 8,721 126 9,549 865 21,591 234,357 (413) 850 2,953 87,495 90,885 3,245 145 87,495 (8,878) 82,007 8,878 8,878 90,885 RETAINED EARNINGS 11,165 OTHER COMPREHENSIVE INCOME (390) (84) (243) 154 115 (45) (132) 41 (170) 3 (1,188) (67) (1,616) 9,549 1,188 67 1,255 865 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT 39 REVIEW OF FINANCIAL PERFORMANCE The foregoing anticipated changes in accounting policies are not an exhaustive On July 30, 2010, the IASB published for comment an exposure draft proposing list of all possible significant items that will occur upon the transition to IFRS. changes to the accounting standard for insurance contracts. A final standard The Corporation will continue to monitor developments in and interpretations is not expected to be implemented for several years. Lifeco has disclosed that of standards as well as industry practices and may change the accounting it will continue to measure insurance liabilities using the Canadian Asset Liability Method until such time when a new IFRS standard for insurance contract measurement is issued. The exposure draft proposes that an insurer would measure insurance liabilities using a model focusing on the amount, timing, and uncertainty of future cash flows associated with fulfilling its insurance contracts. This is significantly different from the connection between insurance assets and liabilities considered under the Canadian Asset Liability Method and may cause significant volatility in the results of Lifeco. Lifeco has disclosed that on November 30, 2010, it submitted a comment letter urging the IASB to amend the exposure draft, particularly in the area of discounting. On August 17, 2010, the IASB published for comment an exposure draft with changes proposed to the accounting standards for leases. A final standard is expected to be released in June 2011. The exposure draft proposes a new accounting model where both lessees and lessors would record the assets and liabilities on the balance sheet at the present value of the lease payments arising from all lease contracts. policies described above. The Corporation continues to monitor the potential changes proposed by the IASB and consider the impact changes in the standards would have on the Corporation’s operations. In November 2009, the IASB issued IFRS 9 to amend how financial instruments are classified and measured. The standard is effective for annual periods beginning on or after January 1, 2013. The Corporation is analysing the impact the new standard will have on its financial assets and liabilities. In April 2010, the IASB published for comment an exposure draft proposing amendments to the accounting standard for post-employment benefits. The exposure draft was open for comment until September 6, 2010, with a final standard anticipated for release by the IASB at the end of the first quarter of 2011. The exposure draft proposes to eliminate the corridor approach for actuarial gains and losses, which would result in those gains and losses being recognized immediately through other comprehensive income or earnings, while the net pension asset or liability would reflect the full over- or under- funded status of the plan on the Consolidated Balance Sheet. As well, the exposure draft proposes changes to how the defined benefit obligation and the fair value of the plan assets would be presented within the financial statements of an entity. The Corporation is monitoring the proposed amendments to post- employment benefits. R I S K FAC T OR S There are certain risks inherent in an investment in the securities of the have experienced increased volatility and resulted in the tightening of credit Corporation and in the activities of the Corporation, including the following that has reduced available liquidity and overall economic activity. There can and others disclosed in the Corporation’s Management’s Discussion and be no assurance that debt or equity financing will be available, or, together Analysis, which investors should carefully consider before investing in securities with internally generated funds, will be sufficient to meet or satisfy Power of the Corporation. This description of risks does not include all possible risks, Financial’s objectives or requirements or, if the foregoing are available and there may be other risks of which the Corporation is not currently aware. to Power Financial, that they will be on terms acceptable to Power Financial. Power Financial is a holding company that holds substantial interests in the financial services industry through its controlling interest in each of Lifeco and IGM. As a result, investors in Power Financial are subject to the risks attributable to its subsidiaries, including those that Power Financial has as the The inability of Power Financial to access sufficient capital on acceptable terms could have a material adverse effect on Power Financial’s business, prospects, dividend paying capability and financial condition, and further enhancement opportunities or acquisitions. principal shareholder of each of Lifeco and IGM. The market price for Power Financial’s securities may be volatile and subject As a holding company, Power Financial’s ability to pay interest and other operating expenses and dividends, to meet its obligations and to complete current or desirable future enhancement opportunities or acquisitions generally depends upon receipt of sufficient dividends from its principal subsidiaries and other investments and its ability to raise additional capital. The likelihood that shareholders of Power Financial will receive dividends will be dependent upon the operating performance, profitability, financial position and creditworthiness of the principal subsidiaries of Power Financial and on their ability to pay dividends to Power Financial. The payment of interest and dividends by certain of these principal subsidiaries to Power Financial is also subject to restrictions set forth in insurance, securities and corporate laws and regulations which require that solvency and capital standards be maintained by such companies. If required, the ability of Power Financial to arrange additional financing in the future will depend in part upon prevailing market conditions as well as the business performance of Power Financial and its subsidiaries. In recent years, global financial conditions and market events to wide fluctuations in response to numerous factors, many of which are beyond Power Financial’s control. Economic conditions may adversely affect Power Financial, including fluctuations in foreign exchange, inflation and interest rates, as well as monetary policies, business investment and the health of capital markets in Canada, the United States and Europe. In recent years, financial markets have experienced significant price and volume fluctuations that have affected the market prices of equity securities held by the Corporation and its subsidiaries, and that have often been unrelated to the operating performance, underlying asset values or prospects of such companies. Additionally, these factors, as well as other related factors, may cause decreases in asset values that are deemed to be other than temporary, which may result in impairment losses. In periods of increased levels of volatility and related market turmoil, Power Financial’s subsidiaries’ operations could be adversely impacted and the trading price of Power Financial’s securities may be adversely affected. 40 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT S U M M A RY OF C R I T IC A L AC C OU N T I NG E S T I M AT E S The preparation of financial statements in conformity with Canadian GAAP Fair values for public stocks are generally determined by the last bid price requires management to adopt accounting policies and to make estimates for the security from the exchange where it is principally traded. Fair values and assumptions that affect amounts reported in the Corporation’s 2010 for stocks for which there is no active market are determined by discounting Consolidated Financial Statements. The major accounting policies and related expected future cash flows based on expected dividends and where market critical accounting estimates underlying the Corporation’s 2010 Consolidated value cannot be measured reliably, fair value is estimated to be equal to cost. Financial Statements are summarized below. In applying these policies, Market values for real estate are determined using independent appraisal management makes subjective and complex judgments that frequently require services and include management adjustments for material changes in property estimates about matters that are inherently uncertain. Many of these policies cash flows, capital expenditures or general market conditions in the interim are common in the insurance and other financial services industries; others period between appraisals. are specific to the Corporation’s businesses and operations. The significant accounting estimates are as follows: FA IR VA LUE ME A SUREMEN T Financial and other instruments held by the Corporation and its subsidiaries include portfolio investments, various derivative financial instruments, and debentures and other debt instruments. The preparation of financial statements in conformity with Canadian GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting period. The results of the Corporation reflect management’s judgments regarding the impact of prevailing global credit, equity and foreign exchange market conditions. Financial instrument carrying values reflect the liquidity of the markets and the liquidity premiums embedded in the market pricing methods the Corporation IMPA IRMEN T relies upon. In accordance with CICA Handbook Section 3862, Financial Instruments – Disclosures, the Corporation’s assets and liabilities recorded at fair value have been categorized based upon the following fair value hierarchy: > Level 1 inputs utilize observable, quoted prices (unadjusted) in active markets for identical assets or liabilities that the Corporation has the ability to access. Investments are reviewed regularly on an individual basis to determine impairment status. The Corporation considers various factors in the impairment evaluation process, including, but not limited to, the financial condition of the issuer, specific adverse conditions affecting an industry or region, decline in fair value not related to interest rates, bankruptcy or defaults and delinquency in payments of interest or principal. Investments are deemed to be impaired when there is no longer reasonable assurance of timely collection of the full amount of the principal and interest due or the Corporation does not have the > Level 2 inputs utilize other than quoted prices included in Level 1 that are intent to hold the investment until the value has recovered. The market value observable for the asset or liability, either directly or indirectly. of an investment is not by itself a definitive indicator of impairment, as it may > Level 3 inputs are unobservable and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into differ- ent levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Corporation’s assessment of the signifi- cance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. Please refer to Note 22 to the Corporation’s 2010 Consolidated Financial Statements for disclosure of the Corporation’s financial instruments fair value measurement as at December 31, 2010. Fair values for bonds classified as held for trading or available for sale are be significantly influenced by other factors, including the remaining term to maturity and liquidity of the asset. However, market price must be taken into consideration when evaluating impairment. For impaired mortgages and bonds classified as loans and receivables, provisions are established or write-offs are recorded to adjust the carrying value to the estimated realizable amount. Wherever possible, the fair value of collateral underlying the loans or observable market price is used to establish the estimated realizable value. For impaired available-for-sale loans, recorded at fair value, the accumulated loss recorded in accumulated other comprehensive income is reclassified to net investment income. Impairments on available- for-sale debt instruments are reversed if there is objective evidence that a permanent recovery has occurred. All gains and losses on bonds classified or designated as held for trading are recorded in income. As well, when determined to be impaired, interest is no longer accrued and previous interest determined using quoted market prices. Where prices are not quoted accruals are reversed. in a normally active market, fair values are determined by valuation models primarily using observable market data inputs. Market values for bonds and mortgages classified as loans and receivables are determined by discounting Current market conditions have resulted in an increase in the inherent risks of future impairment of invested assets. The Corporation monitors economic conditions closely in its assessment of impairment of individual loans. expected future cash flows using current market rates. POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT 41 REVIEW OF FINANCIAL PERFORMANCE G O ODW IL L A ND IN TA NGIBL E S IMPA IRMEN T T E S T ING P OL IC Y L IA BIL I T IE S Under GAAP, goodwill is not amortized, but is instead assessed for impair- Policy liabilities represent the amounts required, in addition to future premiums ment at the reporting unit level by applying a two-step fair value-based test and investment income, to provide for future benefit payments, policyholder annually, or more frequently, if an event or change in circumstances indicates dividends, commissions and policy administrative expenses for all insurance that the asset might be impaired. In the first test, goodwill is assessed for and annuity policies in force with the Corporation’s subsidiaries. The Appointed impairment by determining whether the fair value of the reporting unit Actuaries of the Corporation’s subsidiary companies are responsible for to which the goodwill is associated is less than its carrying value. When the determining the amount of the policy liabilities to make appropriate provisions fair value of the reporting unit is less than its carrying value, the second test for the Corporation’s subsidiaries’ obligations to policyholders. The Appointed compares the fair value of the goodwill in that reporting unit (determined Actuaries determine the policy liabilities using generally accepted actuarial as a residual value after determining the fair value of the assets and liabilities practices, according to the standards established by the Canadian Institute of the reporting unit) to its carrying value. If the fair value of goodwill is less of Actuaries. The valuation uses the Canadian Asset Liability Method. This than its carrying value, goodwill is considered to be impaired and a charge for method involves the projection of future events in order to determine the impairment is recognized immediately. amount of assets that must be set aside currently to provide for all future For purposes of impairment testing, the fair values of the reporting units are obligations and involves a significant amount of judgment. derived from internally developed valuation models using a market or income In the computation of Lifeco’s policy liabilities, valuation assumptions have approach consistent with models used when the business was acquired. been made by Lifeco and its subsidiaries regarding rates of mortality/morbidity, Acquired intangible assets are separately recognized if the benefits of the intangible assets are obtained through contractual or other legal rights, or if the intangible assets can be sold, transferred, licensed, rented or exchanged. Intangible assets can have a finite life or an indefinite life. Determining the useful lives of intangible assets requires judgment and fact-based analysis. investment returns, levels of operating expenses, rates of policy termination and rates of utilization of elective policy options or provisions. The valuation assumptions use best estimates of future experience together with a margin for adverse deviation. These margins are necessary to provide for possibilities of misestimation and/or future deterioration in the best estimate assumptions and provide reasonable assurance that policy liabilities cover a range of possible Intangible assets with an indefinite life are not amortized and are assessed for outcomes. Margins are reviewed periodically for continued appropriateness. impairment annually or more frequently if an event or change in circumstances indicates that the asset might be impaired. Similar to goodwill impairment testing, the fair value of the indefinite life intangible asset is compared to its Additional detail regarding these estimates can be found in Note 9 to the Corpo- ra tion’s 2010 Consolidated Financial Statements. carrying value to determine impairment, if any. INCOME TA XE S Intangible assets with a finite life are amortized over their estimated useful lives. These assets are tested for impairment whenever events or changes in circum- stances indicate that the carrying value of the asset may not be recoverable. In performing the review for recoverability, the future cash flows expected to result from the use of the asset and its eventual disposition are estimated. If the sum of the expected future undiscounted cash flows is less than the carry- ing value of the asset, an impairment loss is recognized to the extent that fair value is less than the carrying value. Amortization estimates and methods are also reviewed. Indicators of impairment include such things as a significant adverse change in legal factors or in the general business climate, a decline in operating performance indicators, a significant change in competition, or an expectation that significant assets will be sold or otherwise disposed of. The fair value of intangible assets for customer contracts, the shareholder portion of acquired future participating account profits and certain property leases are estimated using an income approach, as described for goodwill above. The fair value of brands and trademarks are estimated using a relief- from-royalty approach using the present value of expected after-tax royalty cash flows through licensing agreements. The key assumptions under this valuation approach are royalty rates, expected future revenues and discount rates. The fair value of intangible assets for distribution channels and technology are estimated using the replacement cost approach. Management estimates the time and cost of personnel required to duplicate the asset acquired. The Corporation is subject to income tax laws in various jurisdictions. The Corporation’s operations are complex and related tax interpretations, regulations and legislation that pertain to its activities are subject to con- tinual change. As multinational life insurance companies, the Corporation’s primary Canadian operating subsidiaries are subject to a regime of specialized rules prescribed under the Income Tax Act (Canada) for purposes of determining the amount of the companies’ income that will be subject to tax in Canada. Accordingly, the provision for income taxes represents the applicable company’s management’s interpretation of the relevant tax laws and its estimate of cur- rent and future income tax implications of the transactions and events during the period. Future tax assets and liabilities are recorded based on expected future tax rates and management’s assumptions regarding the expected timing of the reversal of temporary differences. The Corporation has substantial future income tax assets. The recognition of future tax assets depends on manage- ment’s assumption that future earnings will be sufficient to realize the deferred benefit. The amount of the asset recorded is based on management’s best estimate of the timing of the reversal of the asset. The audit and review activities of the Canada Revenue Agency and other jurisdictions’ tax authorities affect the ultimate determination of the amounts of income taxes payable or receivable, future income tax assets or liabilities and income tax expense. Therefore, there can be no assurance that taxes will be payable as anticipated and/or the amount and timing of receipt or use of the tax-related assets will be as currently expected. Management’s experience indicates the taxation authorities are more aggressively pursuing perceived tax issues and have increased the resources they put to these efforts. 42 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT EMPLOY EE FU T URE BENEFI T S DEFERRED SEL L ING COMMISSIONS The Corporation and its subsidiaries maintain contributory and non- Commissions paid on the sale of certain mutual fund products are deferred contributory defined benefit and defined contribution pension plans for certain and amortized over a maximum period of seven years. IGM regularly reviews employees and advisors. The defined benefit pension plans provide pensions the carrying value of deferred selling commissions with respect to any events based on length of service and final average pay. Certain pension payments or circumstances that indicate impairment. Among the tests performed are indexed either on an ad hoc basis or a guaranteed basis. The defined by IGM to assess recoverability is the comparison of the future economic contribution pension plans provide pension benefits based on accumulated benefits derived from the deferred selling commission asset in relation to its employee and Corporation contributions. The Corporation and its subsidiaries carrying value. At December 31, 2010, there were no indications of impairment also provide post-retirement health, dental and life insurance benefits to deferred selling commissions. to eligible employees, advisors and their dependents. For further information on the Corporation’s pension plans and other post-retirement benefits refer to Note 21 to the Corporation’s 2010 Consolidated Financial Statements. Accounting for pension and other post-retirement benefits requires estimates of future returns on plan assets, expected increases in compensation levels, trends in healthcare costs, the period of time over which benefits will be paid, as well as the appropriate discount rate for accrued benefit obligations. These assumptions are determined by management using actuarial methods and are reviewed and approved annually. Emerging experience, different from the assumptions, will be revealed in future valuations and will affect the future financial position of the plans and net periodic benefit costs. OF F -B A L A N C E S H E E T A R R A NGE M E N T S SECURI T IZ AT IONS GUA R A N T EE S Through IGM’s mortgage banking operations, residential mortgages originated In the normal course of their businesses, the Corporation and its subsidiaries by Investors Group mortgage planning specialists are sold to securitization may enter into certain agreements, the nature of which precludes the trusts sponsored by third parties that in turn issue securities to investors. possibility of making a reasonable estimate of the maximum potential amount IGM retains servicing responsibilities and, in some cases, certain elements the Corporation or subsidiary could be required to pay third parties, as some of recourse with respect to credit losses on transferred loans. During 2010, of these agreements do not specify a maximum amount and the amounts IGM entered into securitization transactions with Canadian bank-sponsored are dependent on the outcome of future contingent events, the nature and securitization trusts and the Canada Mortgage Bond Program through its likelihood of which cannot be determined. mortgage banking operations with proceeds of $1.2 billion compared with $1.3 billion in 2009 as discussed in Note 4 to the 2010 Consolidated Financial L E T T ER S OF CREDI T Statements. Securitized loans serviced at December 31, 2010 totalled $3.5 billion In the normal course of their reinsurance business, Lifeco’s subsidiaries provide compared with $3.3 billion at December 31, 2009. The fair value of IGM’s retained letters of credit to other parties or beneficiaries. A beneficiary will typically hold interest was $107 million at December 31, 2010 compared with $174 million a letter of credit as collateral in order to secure statutory credit for reserves at December 31, 2009. Additional information related to IGM’s securitization ceded to or amounts due from Lifeco’s subsidiaries. A letter of credit may be activities can be found in the “Financial Instruments” section below and drawn upon demand. If an amount is drawn on a letter of credit by a beneficiary, in Notes 1 and 4 of the 2010 Consolidated Financial Statements. the bank issuing the letter of credit will make a payment to the beneficiary for the amount drawn, and Lifeco’s subsidiaries will become obligated to repay this amount to the bank. Lifeco, through certain of its operating subsidiaries, has provided letters of credit to both external and internal parties, which are described in Note 26 to the Corporation’s 2010 Consolidated Financial Statements. POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT 43 REVIEW OF FINANCIAL PERFORMANCE C ON T I NGE N T L I A B I L I T I E S The Corporation’s subsidiaries are from time to time subject to legal actions, $310 million in after-tax provisions for these proceedings. Regardless of the including arbitrations and class actions, arising in the normal course ultimate outcome of this case, all of the participating policy contract terms of business. It is inherently difficult to predict the outcome of any of these and conditions will continue to be honoured. Based on information presently proceedings with certainty, and it is possible that an adverse resolution known, the original decision, if sustained on appeal, is not expected to have could have a material adverse effect on the consolidated financial position a material adverse effect on the consolidated financial position of Lifeco. of the Corporation. However, based on information presently known, it is not expected that any of the existing legal actions, either individually or in the aggregate, will have a material adverse effect on the consolidated financial position of the Corporation. Lifeco has entered into an agreement to settle a class action relating to the provision of notice of the acquisition of Canada Life Financial Corporation to certain shareholders of Canada Life Financial Corporation. The settlement received Court approval on January 27, 2010 and is being implemented. Based Subsidiaries of Lifeco have declared partial windups in respect of certain Ontario on information presently known, Lifeco does not expect this matter to have defined benefit pension plans which will not likely be completed for some time. a material adverse effect on its consolidated financial position. The partial windups could involve the distribution of the amount of actuarial surplus, if any, attributable to the wound-up portion of the plans. However, many issues remain unclear, including the basis of surplus measurement and entitlement, and the method by which any surplus distribution would be implemented. In addition to the regulatory proceedings involving these partial windups, related proposed class action proceedings have been commenced in Ontario related to certain of the partial windups. The provisions for certain Canadian retirement plans in the amounts of $97 million after tax established by Lifeco’s subsidiaries in the third quarter 2007 have been reduced to $68 million. Actual results could differ from these estimates. The Ontario Superior Court of Justice released a decision on October 1, 2010 in regard to the involvement of the participating accounts of Lifeco subsidiaries London Life and Great-West Life in the financing of the acquisition of London Insurance Group Inc. (LIG) in 1997. Lifeco believes there are significant aspects of the lower court judgment that are in error and Notice of Appeal has been filed. Notwithstanding the foregoing, Lifeco has established an incremental provision in the third quarter of 2010 in the amount of $225 million after tax ($204 million and $21 million attributable to Lifeco’s common shareholder and to Lifeco’s non-controlling interests, respectively). Lifeco now holds Subsidiaries of Lifeco have an ownership interest in a U.S.-based private equity partnership wherein a dispute has arisen over the terms of the partnership agreement. Lifeco acquired the ownership interest in 2007 for purchase consideration of US$350 million. Legal proceedings have been commenced and are in their early stages. Legal proceedings have also commenced against the private equity partnership by third parties in unrelated matters. Another subsidiary of Lifeco has established a provision related to the latter proceedings. While it is difficult to predict the final outcome of these proceedings, based on information presently known, Lifeco does not expect these proceedings to have a material adverse effect on its consolidated financial position. In connection with the acquisition of its subsidiary Putnam, Lifeco has an indemnity from a third party against liabilities arising from certain litigation and regulatory actions involving Putnam. Putnam continues to have potential liability for these matters in the event the indemnity is not honoured. Lifeco expects the indemnity will continue to be honoured and that any liability of Putnam would not have a material adverse effect on its consolidated financial position. R E L AT E D PA R T Y T R A N S AC T IO N S In the normal course of business, Great-West Life provides insurance benefits to other companies within the Power Financial Corporation group of companies. In all cases, transactions were at market terms and conditions. C OM M I T M E N T S/C ON T R AC T UA L OB L IG AT IO N S The following table provides a summary of future consolidated contractual obligations. Long-term debt [ 1 ] Operating leases [ 2 ] Purchase obligations [ 3 ] Contractual commitments [ 4 ] Total Letters of credit [ 5 ] PAYMENTS DUE BY PERIOD LESS THAN 1 YEAR 1–5 YEARS MORE THAN 5 YEARS 451 146 55 414 1,066 304 393 84 781 5,289 216 4 5,509 TOTAL 6,044 755 143 414 7,356 [ 1 ] Please refer to Note 10 to the Corporation’s 2010 Consolidated Financial Statements for further information. [ 2 ] Includes office space and certain equipment used in the normal course of business. Lease payments are charged to operations in the period of use. [ 3 ] Purchase obligations are commitments of Lifeco to acquire goods and services, essentially related to information services. [ 4 ] Represents commitments by Lifeco. These contractual commitments are essentially commitments of investment transactions made in the normal course of operations, in accordance with its policies and guidelines, which are to be disbursed upon fulfilment of certain contract conditions. [ 5 ] Please refer to Note 26 to the Corporation’s 2010 Consolidated Financial Statements. 44 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT F I N A N C I A L I N S T RU M E N T S FA IR VA LUE OF FINA NCIA L INS T RUMEN T S and are generally calculated using market conditions at a specific point The following table presents the fair value of the Corporation’s financial in time and may not reflect future fair values. The calculations are subjective instruments. Fair value represents the amount that would be exchanged in nature, involve uncertainties and matters of significant judgment (please in an arm’s-length transaction between willing parties and is best evidenced refer to Note 22 to the Corporation’s 2010 Consolidated Financial Statements). by a quoted market price, if one exists. Fair values are management’s estimates AS AT DECEMBER 31 ASSETS Cash and cash equivalents Investments (excluding real estate) Loans to policyholders Funds held by ceding insurers Receivables and other Derivative financial instruments Total financial assets LIABILITIES Deposits and certificates Debentures and other borrowings Capital trust securities and debentures Preferred shares of the Corporation Preferred shares of subsidiaries Other financial liabilities Derivative financial instruments Total financial liabilities CARRYING VALUE 3,656 96,786 6,827 9,860 2,599 1,067 2010 FAIR VALUE 3,656 98,205 6,827 9,860 2,599 1,067 CARRYING VALUE 4,855 91,136 6,957 10,839 2,601 837 2009 FAIR VALUE 4,855 91,602 6,957 10,839 2,601 837 120,795 122,214 117,225 117,691 835 6,348 535 – – 5,976 258 840 6,821 596 – – 5,976 258 907 5,967 540 300 203 5,321 364 916 6,180 601 318 203 5,321 364 13,952 14,491 13,602 13,903 DERI VAT I V E FINA NCIA L INS T RUMEN T S There were no major changes to the Corporation’s and its subsidiaries’ policies In the course of their activities, the Corporation and its subsidiaries use and procedures with respect to the use of derivative instruments in 2010. There derivative financial instruments. When using such derivatives, they only act has been an increase in the notional amount outstanding ($18,337 million as limited end-users and not as market-makers in such derivatives. at December 31, 2010, compared with $17,393 million at December 31, 2009) and The use of derivatives is monitored and reviewed on a regular basis by senior management of the companies. The Corporation and its subsidiaries have each established operating policies and processes relating to the use of derivative financial instruments, which in particular aim at: > prohibiting the use of derivative instruments for speculative purposes; > documenting transactions and ensuring their consistency with risk management policies; > demonstrating the effectiveness of the hedging relationships; and > monitoring the hedging relationship. in the exposure to credit risk ($1,067 million at December 31, 2010, compared with $837 million at December 31, 2009) that represents the market value of those instruments, which are in a gain position. See Note 24 to the Corporation’s 2010 Consolidated Financial Statements for more information on the type of derivative financial instruments used by the Corporation and its subsidiaries. POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT 45 REVIEW OF FINANCIAL PERFORMANCE DI S C L O S U R E C O N T ROL S A N D PRO C E DU R E S Based on their evaluations as of December 31, 2010, the Chief Executive Officer and the Chief Financial Officer have concluded that the Corporation’s disclosure controls and procedures were effective as at December 31, 2010. I N T E R N A L C ON T ROL OV E R F I N A N C I A L R E P OR T I NG Based on their evaluations as of December 31, 2010, the Chief Executive Officer and the Chief Financial Officer have concluded that the Corporation’s internal controls over financial reporting were effective as at December 31, 2010. During the fourth quarter of 2010, there have been no changes in the Corporation’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting. S E L E C T E D A N N UA L I N F OR M AT ION FOR THE YEARS ENDED DECEMBER 31 Revenues from continuing operations [ 1 ] Operating earnings before other items [ 2 ] per share — basic Net earnings per share — basic per share — diluted Earnings from discontinued operations per share — basic per share — diluted Earnings from continuing operations [ 3 ] per share — basic per share — diluted Consolidated assets Consolidated financial liabilities Debentures and other borrowings Shareholders' equity Book value per share Number of common shares outstanding [millions] Dividends per share [declared] Common shares First preferred shares Series A Series C [ 4 ] Series D Series E Series F Series H Series I Series J [ 5 ] Series K Series L Series M [ 6 ] Series O [ 7 ] Series P [ 8 ] 2010 32,427 1,733 2.31 1,584 2.10 2.10 1,584 2.10 2.10 2009 32,697 1,533 2.05 1,439 1.92 1.91 1,439 1.92 1.91 2008 36,500 1,974 2.69 1,337 1.79 1.78 503 0.71 0.71 834 1.08 1.07 143,255 140,231 141,546 13,952 6,348 13,184 15.79 708.0 13,602 5,967 13,207 16.27 705.7 15,316 5,658 13,419 16.80 705.0 1.4000 1.4000 1.3325 0.45238 0.9750 1.3750 1.3125 1.4750 1.4375 1.5000 0.5875 1.2375 1.2750 1.5000 1.4500 0.6487 0.42744 1.3000 1.3750 1.3125 1.4750 1.4375 1.5000 1.1750 1.2375 1.2750 1.7538 0.45288 0.8431 1.3000 1.3750 1.3125 1.4750 1.4375 1.5000 1.1750 1.2375 1.2750 [ 1 ] Revenues from continuing operations represent consolidated revenues, excluding revenues of Lifeco’s U.S. healthcare business. [ 2 ] Operating earnings and operating earnings per share are non-GAAP financial measures. Operating earnings include Power Financial’s share of Lifeco’s U.S. healthcare business of $31 million in 2008. [ 3 ] Earnings from continuing operations represent net earnings, excluding Power Financial’s share of Lifeco’s U.S. healthcare business. [ 4 ] Redeemed in October 2010. [ 5 ] Redeemed in July 2010. [ 6 ] Issued in November 2008. [ 7 ] Issued in October 2009. [ 8 ] Issued in June 2010. 46 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT CONSOLIDATED FINANCIAL STATEMENTS C ON S OL I DAT E D B A L A NC E S H E E T S AS AT DECEMBER 31 [in millions of Canadian dollars] ASSETS Cash and cash equivalents Investments [ Note 3 ] Shares Bonds Mortgages and other loans Real estate Loans to policyholders Funds held by ceding insurers Investment at equity [ Note 5 ] Intangible assets [ Note 6 ] Goodwill [ Note 6 ] Future income taxes [ Note 7 ] Other assets [ Note 8 ] LIABILITIES Policy liabilities [ Note 9 ] Actuarial liabilities Other Deposits and certificates Funds held under reinsurance contracts Debentures and other borrowings [ Note 10 ] Capital trust securities and debentures [ Note 11 ] Preferred shares of the Corporation [ Note 14 ] Preferred shares of subsidiaries Future income taxes [ Note 7 ] Other liabilities [ Note 12 ] Non-controlling interests [ Note 13 ] SHAREHOLDERS’ EQUITY Stated capital [ Note 14 ] Perpetual preferred shares Common shares Contributed surplus Retained earnings Accumulated other comprehensive income (loss) [ Note 18 ] 2010 2009 3,656 4,855 6,415 73,635 16,736 3,275 100,061 6,827 9,860 2,279 4,238 8,726 1,174 6,434 143,255 100,394 4,723 835 152 6,348 535 – – 1,167 6,861 121,015 6,392 67,388 17,356 3,101 94,237 6,957 10,839 2,675 4,366 8,655 1,268 6,379 140,231 98,059 4,592 907 186 5,967 540 300 203 1,098 6,294 118,146 9,056 8,878 2,005 636 105 11,641 (1,203) 13,184 1,725 605 102 11,165 (390) 13,207 143,255 140,231 Approved by the Board of Directors Signed Raymond Royer Director Signed R. Jeffrey Orr Director POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT 47 CONSOLIDATED FINANCIAL STATEMENTS C ON S OL I DAT E D S TAT E M E N T S OF E A R N I N G S FOR THE YEARS ENDED DECEMBER 31 [in millions of Canadian dollars, except per share amounts] REVENUES Premium income Net investment income Regular net investment income Change in fair value on held-for-trading assets Fee income EXPENSES Policyholder benefits, dividends and experience refunds, and change in actuarial liabilities Commissions Operating expenses Financing charges [ Note 19 ] Share of earnings of investment at equity [ Note 5 ] Other income (charges), net [ Note 20 ] Earnings before income taxes and non-controlling interests Income taxes [ Note 7 ] Non-controlling interests [ Note 13 ] Net earnings Earnings per common share [ Note 23 ] — Basic — Diluted C ON S OL I DAT E D S TAT E M E N T S OF C O M PR E H E N S I V E I NC O M E FOR THE YEARS ENDED DECEMBER 31 [in millions of Canadian dollars] Net earnings Other comprehensive income (loss) Net unrealized gains (losses) on available-for-sale assets Unrealized gains (losses) Income tax (expense) benefit Realized (gains) losses to net earnings Income tax expense (benefit) Net unrealized gains (losses) on cash flow hedges Unrealized gains (losses) Income tax (expense) benefit Realized (gains) losses to net earnings Income tax expense (benefit) 2010 2009 17,748 18,033 5,783 3,646 9,429 5,250 6,203 3,463 9,666 4,998 32,427 32,697 23,063 2,277 3,834 427 29,601 2,826 120 (5) 2,941 497 860 1,584 2.10 2.10 23,809 2,088 3,607 494 29,998 2,699 141 (58) 2,782 565 778 1,439 1.92 1.91 2010 2009 1,584 1,439 129 (55) (88) 18 4 77 (27) 2 (1) 51 246 (47) 11 3 213 223 (78) 1 – 146 Net unrealized foreign exchange gains (losses) on translation of foreign operations (1,014) (1,328) Other comprehensive income (loss) before non-controlling interests Non-controlling interests Other comprehensive income (loss) Comprehensive income (959) 146 (813) 771 (969) 232 (737) 702 48 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT C ON S OL I DAT E D S TAT E M E N T S OF C H A N GE S I N S H A R E HOL DE R S ’ E Q U I T Y FOR THE YEARS ENDED DECEMBER 31 [in millions of Canadian dollars] STATED CAPITAL — PERPETUAL PREFERRED SHARES Perpetual preferred shares, beginning of year Issue of perpetual preferred shares [ Note 14 ] Perpetual preferred shares, end of year STATED CAPITAL — COMMON SHARES Common shares, beginning of year Issue of common shares under the Corporation’s Employee Stock Option Plan [Note 14] Common shares, end of year CONTRIBUTED SURPLUS Contributed surplus, beginning of year Stock options expense [ Note 15 ] Stock options exercised Non-controlling interests Contributed surplus, end of year RETAINED EARNINGS Retained earnings, beginning of year Net earnings Dividends to shareholders Perpetual preferred shares Common shares Other, including share issue cost Retained earnings, end of year ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) [Note 18] Accumulated other comprehensive income (loss), beginning of year Other comprehensive income (loss) Accumulated other comprehensive income (loss), end of year TOTAL SHAREHOLDERS’ EQUITY 2010 2009 1,725 280 2,005 1,575 150 1,725 605 31 636 102 9 (5) (1) 105 11,165 1,584 (99) (991) (18) 595 10 605 91 16 (2) (3) 102 10,811 1,439 (88) (988) (9) 11,641 11,165 (390) (813) (1,203) 347 (737) (390) 13,184 13,207 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT 49 CONSOLIDATED FINANCIAL STATEMENTS C ON S OL I DAT E D S TAT E M E N T S OF C A S H F L OW S FOR THE YEARS ENDED DECEMBER 31 [in millions of Canadian dollars] OPERATING ACTIVITIES Net earnings Non-cash charges (credits) Change in policy liabilities Change in funds held by ceding insurers Change in funds held under reinsurance contracts Amortization and depreciation Future income taxes Change in fair value of financial instruments Non-controlling interests Other Change in non-cash working capital items FINANCING ACTIVITIES Dividends paid By subsidiaries to non-controlling interests Perpetual preferred shares Common shares Issue of common shares by the Corporation Issue of perpetual preferred shares by the Corporation Issue of common shares by subsidiaries Issue of preferred shares by subsidiaries Repurchase of preferred shares by the Corporation Repurchase of common shares by subsidiaries Redemption of preferred shares by subsidiaries Issue of debentures Repayment of debentures and other debt instruments Change in other borrowings Change in obligations related to assets sold under repurchase agreements Change in deposits and certificates Other INVESTMENT ACTIVITIES Bond sales and maturities Mortgage loan repayments Sale of shares Real estate sales Proceeds from securitizations Change in loans to policyholders Change in repurchase agreements Investment in bonds Investment in mortgage loans Investment in shares Investment in real estate Net cash used in business acquisitions and additions to intangible assets Loan to an affiliate Other Effect of changes in exchange rates on cash and cash equivalents Increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year SUPPLEMENTAL CASH FLOW INFORMATION Income taxes paid Interest paid 50 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT 2010 2009 1,584 1,439 6,636 619 (94) 96 41 (3,648) 860 426 52 6,572 (632) (96) (990) (1,718) 31 280 84 400 (305) (157) (507) 700 (207) (46) 5 (72) (18) (1,530) 20,218 2,102 2,653 16 1,203 (135) 559 (26,937) (3,122) (2,116) (376) (44) (32) (15) (6,026) (215) (1,199) 4,855 3,656 196 442 5,612 436 32 97 386 (3,434) 778 813 (1,606) 4,553 (609) (82) (988) (1,679) 10 150 49 320 – (70) (948) 575 (2) (216) 630 (52) (12) (1,245) 20,305 1,901 2,764 11 1,325 (78) 330 (23,378) (3,126) (2,757) (100) (31) – (16) (2,850) (292) 166 4,689 4,855 626 506 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ALL TABULAR AMOUNTS ARE IN millionS OF CANADIAN DOLLARS, UNLESS OTHERWISE NOTED. NO T E 1 S IG N I F IC A N T AC C OU N T I NG P OL IC I E S The Consolidated Financial Statements of Power Financial Corporation (the For IGM, management fees are based on the net asset value of mutual fund Corporation) have been prepared in accordance with Canadian generally assets under management and are recognized on an accrual basis as the service accepted accounting principles and include the accounts of the Corporation is performed. Administration fees are also recognized on an accrual basis as and its subsidiaries. The principal subsidiaries of the Corporation are: the service is performed. Distribution revenues derived from mutual fund and securities transactions are recognized on a trade-date basis. Distribution revenues derived from insurance and other financial services transactions are > Great-West Lifeco Inc. (Lifeco) (direct interest of 68.3% (2009 — 68.6%)), recognized on an accrual basis. whose major operating subsidiary companies are Great-West Life & Annuity Insurance Company (GWL&A), London Life Insurance Company (London Life), The Canada Life Assurance Company (Canada Life), The Great-West Life Assurance Company (Great-West Life) and Putnam Investments, LLC (Putnam). > IGM Financial Inc. (IGM) (direct interest of 57.0% (2009 — 56.3%)), whose major operating subsidiary companies are Investors Group Inc. (Investors Group) and Mackenzie Financial Corporation (Mackenzie). Investment income is recognized on an accrual basis. C A SH A ND C A SH EQUI VA L EN T S Cash and cash equivalents include cash, current operating accounts, overnight bank and term deposits with original maturity of three months or less, fixed income securities with an original term to maturity of three months or less, as well as other highly liquid investments with short-term maturities that are readily convertible to known amounts of cash. Cash and cash equivalents are > IGM holds 4.0% (2009 — 4.0%) of the common shares of Lifeco, and recorded at fair value. Great-West Life holds 3.5% (2009 — 3.5%) of the common shares of IGM. The Corporation also holds a 50% (2009 — 50%) interest in Parjointco N.V. (Parjointco). Parjointco holds a 54.1% (2009 — 54.1%) equity interest in Pargesa Holding SA (Pargesa). The Corporation accounts for its investment in Parjointco using the equity method. USE OF E S T IM AT E S A ND ME A SUREMEN T UNCERTA IN T Y The preparation of financial statements in conformity with Canadian generally accepted accounting principles (Canadian GAAP) requires management to make estimates and assumptions that affect the amounts reported in those financial statements and accompanying notes. In particular, the valuation of goodwill and intangible assets, policy liabilities, income taxes, deferred selling commissions, certain financial assets and liabilities, pension plans and other post-retirement benefits are key components of the financial statements requiring management to make estimates. The reported amounts and note disclosures are determined using management’s best estimates. The results of the Corporation reflect management’s judgments regarding the impact of prevailing global credit, equity and foreign exchange market conditions. The estimation of policy liabilities relies upon investment credit ratings. Lifeco’s practice is to use third-party independent credit ratings where available. Credit rating changes may lag developments in the current environment. Subsequent credit rating adjustments will impact policy liabilities. RE V ENUE RECO GNI T ION IN V E S T MEN T S Investments are classified as held for trading, available for sale, held to maturity, loans and receivables or as non-financial instruments based on management’s intention or the investment’s characteristics. Investments in bonds and shares normally actively traded on a public market are either designated or classified as held for trading or classified as available for sale, based on management’s intention. Fixed income securities are included in bonds on the balance sheet. Held-for-trading investments are recognized at fair value on the balance sheet with realized and unrealized gains and losses reported in the statements of earnings. Available-for-sale investments are recognized at fair value on the balance sheet with unrealized gains and losses recorded in other comprehensive income. Realized gains and losses are reclassified from other comprehensive income and recorded in the statements of earnings when the available-for-sale investment is sold. Interest income earned on both held-for-trading and available-for-sale bonds is recorded as investment income in the statements of earnings. Investments in equity instruments where a market value cannot be measured reliably that are classified as available for sale are carried at cost. Investments in shares for which the Corporation exerts significant influence over but does not control are accounted for using the equity method of accounting (see Note 5). Investments in mortgages and bonds not normally actively traded on a public market and other loans are classified as loans and receivables and are carried at amortized cost net of any allowance for credit losses. Interest income earned and realized gains and losses on the sale of investments classified as For Lifeco, premiums for all types of insurance contracts and contracts with loans and receivables are recorded in net investment income in the statements limited mortality or morbidity risk are generally recognized as revenue when of earnings. due and collection is reasonably assured. When premiums are recognized, policy liabilities are computed with the result that benefits and expenses are matched with such revenue. With respect to Lifeco, investments in real estate are carried at cost net of write- downs and allowances for losses, plus an unrealized moving average market value adjustment of $162 million ($164 million in 2009) in the consolidated Lifeco’s premium revenues, total paid or credited to policyholders and policy balance sheets. The carrying value is adjusted towards market value at a rate of liabilities are all shown net of reinsurance amounts ceded to, or including 3% per quarter. Net realized gains and losses of $115 million ($133 million in 2009) amounts assumed from, other insurers. For Lifeco, fee income is recognized when the service is performed, the amount is collectible and can be reasonably estimated. Fee income primarily includes are included in deferred net realized gains classified in other liabilities on the balance sheets and are deferred and amortized to income at a rate of 3% per quarter on a declining balance basis. fees earned from the management of segregated fund assets, proprietary Investments classified as available for sale and held for trading are recorded mutual fund assets, fees earned on the administration of administrative services on a trade-date basis. only (ASO) Group health contracts and fees earned from management services. POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NO T E 1 S U M M A RY OF S IG N I F IC A N T AC C OU N T I N G P OL IC I E S (C O N T I N U E D) FAIR VALUE ME A SUREMENT Financial instrument carrying values necessarily reflect the prevailing market For impaired mortgages and other loans, and bonds classified as loans and receivables, provisions are established or write-downs made to adjust the liquidity and the liquidity premiums embedded in the market pricing methods carrying value to the net realizable amount. Wherever possible the fair value the Corporation relies upon. The following is a description of the methodologies used to value instruments carried at fair value: of collateral underlying the loans or observable market price is used to establish net realizable value. For impaired available-for-sale loans, recorded at fair value, the accumulated loss recorded in accumulated other comprehensive income is reclassified to net investment income. Impairment on available-for-sale BONDS – HELD FOR TRADING AND AVAILABLE FOR SALE debt instruments is reversed if there is objective evidence that a permanent Fair values for bonds classified as held for trading or available for sale are recovery has occurred. All gains and losses on bonds classified or designated determined with reference to quoted market bid prices primarily provided as held for trading are already recorded in earnings. As well, when determined by third-party independent pricing sources. Where prices are not quoted in to be impaired, interest is no longer accrued and previous interest accruals a normally active market, fair values are determined by valuation models. are reversed. The Corporation maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The Corporation obtains T R A NS AC T ION COS T S quoted prices in active markets, when available, for identical assets at the Transaction costs are expensed as incurred for financial instruments classified or balance sheet date to measure bonds at fair value in its held-for-trading and designated as held for trading. Transaction costs for financial assets classified available-for-sale portfolios. The Corporation estimates the fair value of bonds not traded in active markets by referring to actively traded securities with similar attributes, dealer quotations, matrix pricing methodology, discounted cash flow analyses and/or internal valuation models. This methodology considers such factors as the issuer’s industry, the security’s rating, term, coupon rate and position in the capital structure of the issuer, as well as yield curves, credit curves, prepayment rates and other relevant factors. For bonds that are not traded in active markets, valuations are adjusted to reflect illiquidity, and such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used. SHARES – HELD FOR TRADING AND AVAILABLE FOR SALE as available for sale or loans and receivables are added to the value of the instrument at acquisition and taken into net earnings using the effective interest rate method. Transaction costs for financial liabilities classified as other than held for trading are recognized immediately in net earnings. LOA NS TO P OL IC Y HOL DER S Loans to policyholders are shown at their unpaid balance and are fully secured by the cash surrender values of the policies. The carrying value of loans to policyholders approximates fair value. SECURI T IZ AT IONS IGM periodically sells residential mortgages through Canada Mortgage and Housing Corporation (CMHC), utilizing the National Housing Act Mortgage- Fair values for publicly traded shares are generally determined by the last Backed Securities program (NHA MBS), or through Canadian bank-sponsored bid price for the security from the exchange where it is principally traded. securitization trusts that in turn issue securities to investors. NHA MBS are Fair values for shares for which there is no active market are determined by sold to a trust that issues securities to investors through the Canada Mortgage discounting expected future cash flows. The Corporation maximizes the use Bond Program (CMB Program), which is sponsored by CMHC. IGM retains of observable inputs and minimizes the use of unobservable inputs when servicing responsibilities and certain elements of recourse with respect to credit measuring fair value. The Corporation obtains quoted prices in active markets, losses on transferred loans. IGM also sells NHA-insured mortgages through the when available, for identical assets at the balance sheet date to measure stocks issuance of mortgage-backed securities. at fair value in its held-for-trading and available-for-sale portfolios. MORTGAGES AND OTHER LOANS, BONDS CLASSIFIED AS LOANS AND RECEIVABLES, AND REAL ESTATE Transfers of loans are accounted for as sales provided that control over the transferred loans has been surrendered and consideration other than beneficial interests in the transferred loans has been received in exchange. The loans are Market values for bonds, and mortgages and other loans, classified as loans removed from the balance sheets and a gain or loss is recognized in earnings and receivables are determined by discounting expected future cash flows immediately based on the carrying value of the loans transferred. The carrying using current market rates. Market values for real estate are determined using value is allocated between the assets transferred and the retained interests in independent appraisal services and include management adjustments for proportion to their fair values at the date of transfer. To obtain the fair value of material changes in property cash flows, capital expenditures or general market IGM’s retained interests, quoted market prices are used, if available. However, conditions in the interim period between appraisals. since quotes are generally not available for retained interests, the estimated IMPAIRMENT Investments are reviewed regularly on an individual basis to determine impairment status. The Corporation considers various factors in the impairment evaluation process, including, but not limited to, the financial condition of the issuer, specific adverse conditions affecting an industry or region, decline in fair value not related to interest rates, bankruptcy or defaults, and delinquency in payments of interest or principal. Investments are deemed to have an other than temporary impairment when there is no longer reasonable assurance of timely collection of the full amount of the principal and interest due. The market value of an investment is not a definitive indicator of impairment, as it may be significantly influenced by other factors, including the remaining term to maturity and liquidity of the asset. However, market price must be taken into consideration when evaluating other than temporary impairment. fair value is based on the present value of future expected cash flows using management’s best estimates of key assumptions such as prepayment rates, excess spread, expected credit losses and discount rates commensurate with the risks involved. Retained interests are classified as held for trading and any realized or unrealized gains and losses are recorded in net investment income in the statements of earnings. IGM continues to service the loans transferred. As a result, a servicing liability is recognized and amortized over the expected term of the transferred loans as servicing fees. For all sales of loans, the gains or losses and the servicing fee revenue are reported in net investment income in the statements of earnings. The retained interests in the securitized loans are recorded in other assets and the servicing liability is recorded in other liabilities on the balance sheets. 52 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT NO T E 1 S U M M A R Y OF S IG N I F IC A N T AC C OU N T I N G P OL IC I E S (C O N T I N U E D) FI XED A SSE T S policyholders. The Appointed Actuaries determine the policy liabilities using Fixed assets, which are included in other assets, are recorded at cost less generally accepted actuarial practices, according to standards established by accumulated amortization computed on a straight-line basis over their the Canadian Institute of Actuaries. The valuation uses the Canadian Asset estimated useful lives, which vary from three to 50 years. Amortization of Liability Method. This method involves the projection of future events in order fixed assets included in the Consolidated Statements of Earnings amounted to determine the amount of assets that must be set aside currently to provide to $45 million ($52 million in 2009). Fixed assets are tested for recoverability for all future obligations and involves a significant amount of judgment. whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. FIN A NCIA L L IA BIL I T IE S DEFERRED SEL L ING COMMISSIONS Financial liabilities, other than policy liabilities and certain preferred shares, are classified as other liabilities. Other liabilities are initially recorded on the Commissions paid by IGM on the sale of certain mutual funds are deferred balance sheets at fair value and subsequently carried at amortized cost using and amortized over a maximum period of seven years. Commissions paid on the effective interest rate method with amortization expense recorded in the the sale of deposits are deferred and amortized over a maximum amortization statements of earnings. period of five years. IGM regularly reviews the carrying value of deferred selling commissions with respect to any events or circumstances that indicate impairment. Among the tests performed by IGM to assess recoverability is the comparison of the future economic benefits derived from the deferred selling commission asset in relation to its carrying value. At December 31, 2010, there were no indications of impairment to deferred selling commissions. G O ODW IL L A ND IN TA NGIBL E A SSE T S Goodwill represents the excess of purchase consideration over the fair value of net assets acquired. Intangible assets represent finite life and indefinite life intangible assets acquired and software acquired or internally developed. Lifeco had designated certain preferred shares as held for trading with changes in fair value reported in the statements of earnings. These preferred shares were redeemed in 2009 and 2010. S TO CK- BA SED COMPENS AT ION PL A NS The fair value-based method of accounting is used for the valuation of compensation expense for options granted to employees. Compensation expense is recognized over the period that the stock options vest, with a corresponding increase in contributed surplus. When the stock options are exercised, the proceeds, together with the amount recorded in contributed surplus, are added to the stated capital of the entity issuing the Intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives, for a period not exceeding 30 years. The corresponding shares. Corporation tests goodwill and indefinite life intangible assets for impairment using a two-step fair value-based test annually, and when an event or change in circumstances indicates that the asset might be impaired. Goodwill and intangible assets are written down when impaired to the extent that the REP URCH A SE AGREEMEN T S Lifeco enters into repurchase agreements with third-party broker-dealers in which Lifeco sells securities and agrees to repurchase substantially similar securities at a specified date and price. Such agreements are accounted for as carrying value exceeds the estimated fair value. investment financings. IMPAIRMENT TESTING – GOODWILL In the first test, goodwill is assessed for impairment by determining whether the fair value of the reporting unit to which the goodwill is associated is less than its carrying value. When the fair value of the reporting unit is less than its carrying value, the second test compares the fair value of the goodwill in that reporting unit to its carrying value. If the fair value of goodwill is less than its carrying value, goodwill is considered to be impaired and a charge for impairment is recognized immediately. The fair value of the reporting units is derived from internally developed valuation models consistent with those used when the Corporation is acquiring businesses, using a market or income approach. The discount rates used are based on an industry weighted cost of capital and consider the risk-free rate, market equity risk premium, size premium and operational risk premium for possible variations from projections. IMPAIRMENT TESTING – INDEFINITE LIFE INTANGIBLES The fair value of intangible assets for customer contracts, the shareholder DERI VAT I V E FIN A NCIA L INS T RUMEN T S The Corporation and its subsidiaries use derivative products as risk management instruments to hedge or manage asset, liability and capital positions, including revenues. The Corporation’s policy guidelines prohibit the use of derivative instruments for speculative trading purposes. All derivatives, including those that are embedded in financial and non-financial contracts that are not closely related to the host contracts, are recorded at fair value on the balance sheets in other assets and other liabilities. The method of recognizing unrealized and realized fair value gains and losses depends on whether the derivatives are designated as hedging instruments. For derivatives that are not designated as hedging instruments, unrealized and realized gains and losses are recorded in net investment income on the statements of earnings. Non-qualifying derivatives or derivatives not designated as hedges continue to be utilized on a basis consistent with the risk management policies of the Corporation and are monitored by the Corporation for effectiveness as portion of acquired future participating account profits, certain property economic hedges even if specific hedge accounting requirements are not met. leases, and mutual fund management contracts, is estimated using an For derivatives designated as hedging instruments, unrealized and realized income approach as described for goodwill above. The fair value of brands and gains and losses are recognized according to the nature of the hedged item. trademarks is estimated using a relief-from-royalty approach using the present value of expected after-tax royalty cash flows through licensing agreements. P OL IC Y L IA BIL I T IE S Policy liabilities represent the amounts required, in addition to future premiums and investment income, to provide for future benefit payments, policyholder dividends, commissions, and policy administrative expenses for all insurance and annuity policies in force with Lifeco. The Appointed Actuaries of Lifeco’s subsidiary companies are responsible for determining the amount of the policy liabilities to make appropriate provision for Lifeco’s obligations to Derivatives are valued using market transactions and other market evidence whenever possible, including market-based inputs to models, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. When models are used, the selection of a particular model to value a derivative depends on the contractual terms of, and specific risks inherent in the instrument, as well as the availability of pricing information in the market. The Corporation generally uses similar models to value similar instruments. Valuation models require a variety of inputs, including contractual terms, market prices and rates, yield curves, credit curves, measures of volatility, prepayment rates and correlations of such inputs. POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NO T E 1 S U M M A RY OF S IG N I F IC A N T AC C OU N T I N G P OL IC I E S (C O N T I N U E D) To qualify for hedge accounting, the relationship between the hedged item and PENSION PL A NS A ND OT HER P OS T- RE T IREMEN T BENEFI T S the hedging instrument must meet several strict conditions on documentation, The Corporation and its subsidiaries maintain defined benefit pension plans as probability of occurrence, hedge effectiveness and reliability of measurement. If well as defined contribution pension plans for certain employees and advisors. these conditions are not met, then the relationship does not qualify for hedge accounting treatment and both the hedged item and the hedging instrument are reported independently, as if there was no hedging relationship. The plans provide pension based on length of service and final average earnings. The benefit obligation is actuarially determined and accrued using the projected benefit method pro-rated on service. Pension expense consists of the aggregate Where a hedging relationship exists, the Corporation documents all of the actuarially computed cost of pension benefits provided in respect of relationships between hedging instruments and hedged items, as well as the current year’s service, imputed interest on the accrued benefit obligation its risk management objectives and strategy for undertaking various hedge less expected returns on plan assets which are valued at market value. Past transactions. This process includes linking derivatives that are used in hedging service costs, transitional assets and transitional obligations are amortized transactions to specific assets and liabilities on the balance sheet or to specific over the expected average remaining service life of the employee/advisor group. firm commitments or forecasted transactions. The Corporation also assesses, For the most part, actuarial gains or losses in excess of the greater of 10% of both at the hedge’s inception and on an ongoing basis, whether derivatives the beginning-of-year plan assets or accrued benefit obligation are amortized that are used in hedging transactions are effective in offsetting changes in fair over the expected average remaining service life of the employee/advisor group. values or cash flows of hedged items. Hedge effectiveness is reviewed quarterly The cost of pension benefits is charged to earnings using the projected benefit through a combination of critical terms matching and correlation testing. method pro-rated on services. For fair value hedges, changes in fair value of both the hedging instrument The Corporation and its subsidiaries also have unfunded supplementary pension and the hedged item are recorded in net investment income and con- plans for certain employees. Pension expense related to current services is sequently any ineffective portion of the hedge is recorded immediately in net charged to earnings in the period during which the services are rendered. investment income. In addition, the Corporation and its subsidiaries provide certain post-retirement For cash flow hedges, the effective portion of the changes in fair value of the healthcare, dental, and life insurance benefits to eligible retirees, employees, hedging instrument is recorded in the same manner as the hedged item in advisors and their dependents. The current cost of post-retirement health, either net investment income or other comprehensive income, while the dental and life benefits is charged to earnings using the projected benefit ineffective portion is recognized immediately in net investment income. Gains method pro-rated on services. and losses that accumulate in other comprehensive income are recorded in net investment income in the same period the hedged item affects net earnings. Gains and losses on cash flow hedges are immediately reclassified from other FUNDS HEL D BY CEDING INSURER S/ FUNDS HEL D UNDER REINSUR A NCE CON T R AC T S comprehensive income to net investment income if and when it is probable Under certain forms of reinsurance contracts, it is customary for the ceding that a forecasted transaction is no longer expected to occur. Foreign exchange forward contracts are used to hedge net investment in foreign operations. Changes in the fair value of these hedges are recorded in other comprehensive income. Hedge accounting is discontinued when the hedging no longer qualifies for hedge accounting. insurer to retain possession of the assets supporting the liabilities ceded. Lifeco records an amount receivable from the ceding insurer or payable to the reinsurer representing the premium due. Investment revenue on these funds withheld is credited by the ceding insurer. INCOME TA XE S IGM also enters into total return swaps to manage its exposure to fluctuations The Corporation follows the liability method in accounting for income taxes, in the total return of its common shares related to deferred compensation whereby future income tax assets and liabilities reflect the expected future arrangements. These total return swap agreements require the periodic tax consequences of temporary differences between the carrying amounts of exchange of net contractual payments without the exchange of the notional assets and liabilities and their tax bases. Future income tax assets and liabilities principal amounts on which the payments are based. These instruments are are measured based on the enacted or substantively enacted tax rates which not designated as hedges. Changes in fair value are recorded in operating are anticipated to be in effect when the temporary differences are expected expenses in the statements of earnings. to reverse. F OREIGN CURRENC Y T R A NSL AT ION E A RNING S PER SHA RE The Corporation follows the current rate method of foreign currency translation Basic earnings per share is determined by dividing net earnings available to for its net investments in self-sustaining foreign operations. Under this method, common shareholders by the average number of common shares outstanding assets and liabilities are translated into Canadian dollars at the rate of exchange for the year. Diluted earnings per share is determined using the same method prevailing at the balance sheet date and all income and expenses are translated as basic earnings per share, except that the average number of common shares at an average of daily rates. Unrealized foreign currency translation gains outstanding includes the potential dilutive effect of outstanding stock options and losses on the Corporation’s net investment in its self-sustaining foreign granted by the Corporation, as determined by the treasury stock method. operations are presented separately as a component of other comprehensive income. Unrealized gains and losses are recognized proportionately in earnings COMPA R AT I V E FIGURE S when there has been a net permanent disinvestment in the foreign operations. Certain of the 2009 amounts presented for comparative purposes have been reclassified to conform with the presentation adopted in the current year. All other assets and liabilities denominated in foreign currency are translated into Canadian dollars at exchange rates prevailing at the balance sheet date for monetary items and at exchange rates prevailing at the transaction dates for non-monetary items. Realized and unrealized exchange gains and losses are included in net investment income and are not material to the financial statements of the Corporation. 54 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT NO T E 1 S U M M A R Y OF S IG N I F IC A N T AC C OU N T I N G P OL IC I E S (C O N T I N U E D) FU T URE ACCOUN T ING CHA NGE S INTERNATIONAL FINANCIAL REPORTING STANDARDS The Canadian Accounting Standards Board has announced that Canadian Canadian GAAP and IFRS. The impact of adopting IFRS and the related effects on the Corporation’s consolidated financial statements will be reported in the Corporation’s 2011 interim and annual financial statements. GAAP will be replaced by International Financial Reporting Standards (IFRS), The IFRS standard that deals with the measurement of insurance contracts, as published by the International Accounting Standards Board (IASB). Publicly also referred to as Phase II Insurance Contracts, is currently being developed accountable enterprises will be required to adopt IFRS for the fiscal year and a final accounting standard is not expected to be implemented for several beginning on or after January 1, 2011. The Corporation will issue its initial years. As a result, Lifeco will continue to measure insurance liabilities using the interim Consolidated Financial Statements under IFRS, including comparative Canadian Asset Liability Method until such time when a new IFRS standard for information, for the quarter ended March 31, 2011. insurance contract measurement is issued. Consequently, the evolving nature The Corporation is in the final stages of aggregating and analysing potential adjustments required to the opening balance sheet as at January 1, 2010 for changes to accounting policies resulting from identified differences between of IFRS will likely result in additional accounting changes, some of which may be significant, in the years following the Corporation’s initial transition to IFRS. NO T E 2 AC Q U I S I T IO N S A N D DI S P O S A L S [ a ] During the fourth quarter of 2010, Investment Planning Counsel Inc., a [ c ] On January 19, 2009, PanAgora, a subsidiary of Putnam, sold its equity subsidiary of IGM, acquired Partners in Planning Group Ltd. and related investment in Union PanAgora Asset Management GmbH to Union Asset entities. The purchase price was allocated to indefinite life intangible Management. Gross proceeds received of approximately US$75 million assets and goodwill. [ b ] During the second quarter of 2009, IGM acquired the 27.6% non- controlling interest in Investment Planning Counsel Inc. IGM accounted for the transaction as a step acquisition and the aggregate purchase price, after elimination of non-controlling interest, was allocated to indefinite life intangible assets and goodwill. NO T E 3 I N V E S T M E N T S recorded in net investment income resulted in a gain to Putnam of approximately US$33 million after taxes and non-controlling interests. C A RRY ING VA LUE S A ND E S T IM AT ED M A RK E T VA LUE S OF IN V E S T MEN T S SHARES Designated as held for trading Available for sale BONDS Designated as held for trading Classified as held for trading Available for sale Loans and receivables MORTGAGES AND OTHER LOANS Loans and receivables Designated as held for trading REAL ESTATE CARRYING VALUE 5,364 1,051 6,415 55,266 1,748 7,331 9,290 73,635 16,512 224 16,736 2010 MARKET VALUE 5,364 1,051 6,415 55,266 1,748 7,331 9,942 74,287 17,279 224 17,503 3,275 3,385 100,061 101,590 CARRYING VALUE 4,928 1,464 6,392 51,529 1,759 4,935 9,165 67,388 17,116 240 17,356 3,101 94,237 2009 MARKET VALUE 4,928 1,464 6,392 51,529 1,759 4,935 9,421 67,644 17,326 240 17,566 3,055 94,657 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NO T E 3 I N V E S T M E N T S (C O N T I N U E D) Included in investments are the following: IMPA IRED IN V E S T MEN T S F OR L IFECO Impaired amounts by type [ 1 ] Held for trading Available for sale Loans and receivables Total GROSS AMOUNT IMPAIRMENT 572 58 114 744 (270) (32) (64) (366) 2010 CARRYING AMOUNT 302 26 50 378 GROSS AMOUNT IMPAIRMENT 517 55 151 723 (278) (36) (81) (395) 2009 CARRYING AMOUNT 239 19 70 328 [ 1 ] Excludes amounts in funds held by ceding insurers of $28 million and impairment of ($17) million at December 31, 2010 and $10 million and ($4) million at December 31, 2009. Gross amount represents the amortized cost or the principal balance of the With respect to Lifeco, the impairment charges, net of release of actuarial impaired investments. default provision and other, amounted to $14 million in 2010 ($74 million Impaired investments include $30 million gross amount of capital securities in 2009). that have deferred coupons on a non-cumulative basis. With respect to IGM, shares which have had an unrealized loss for a prolonged period of time are considered to be other than temporarily impaired. No impairment charge related to shares was recorded by IGM for the year 2010 ($77 million in 2009). The allowance for credit losses and changes in the allowance for credit losses related to investments classified as loans and receivables are as follows: Balance, beginning of year Net provision (recovery) for credit losses Write-offs, net of recoveries Other (including foreign exchange rate change) Balance, end of year 2010 2009 88 (5) (8) (7) 68 68 38 (8) (10) 88 Lifeco holds bonds and mortgages with restructured terms or which have been exchanged for securities with amended terms. These investments are performing according to their new terms. As at December 31, 2010, their carrying value is $191 million ($206 million in 2009). NO T E 4 S E C U R I T I Z AT ION S IGM securitizes residential mortgages through CMHC utilizing the NHA MBS program or through Canadian bank-sponsored securitization trusts. NHA MBS are sold to a trust that issues securities to investors through the CMHC-sponsored CMB Program. Pre-tax gains (losses) on the sale of mortgages are reported in net investment income in the statements of earnings. Securitization activities for the years ended December 31, 2010 and 2009 were as follows: Residential mortgages securitized Net cash proceeds Fair value of retained interest Pre-tax gain on sales 2010 1,211 1,203 44 24 2009 1,332 1,325 65 49 IGM’s retained interest in the securitized loans includes cash reserve accounts and rights to future excess spread. This retained interest is subordinated to the interests of the related CMHC or Canadian bank-sponsored securitization trusts (CP conduits) and NHA MBS holders (the purchasers). The purchasers do not have recourse to IGM’s other assets for any failure of the borrowers to pay when due. 56 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT NO T E 4 S E C U R I T I Z AT IO N S (C O N T I N U E D) The present value of future expected cash flows are used to fair value the retained interests. The key economic assumptions at the date of securitization issuances for CMHC or Canadian bank-sponsored securitization trusts transactions completed during 2010 and 2009 were as follows: Weighted-average Remaining service life (in years) Excess spread Prepayment rate Discount rate Servicing fees Expected credit losses 2010 2009 4.5 0.80% 15.00% 1.82% 0.15% – 4.4 1.16% 15.00% 1.66% 0.15% – At December 31, 2010, the fair value of the total retained interests was $107 million ($174 million in 2009). The sensitivity to immediate 10% or 20% adverse changes to key assumptions was not considered material. The total loans reported by IGM, the securitized loans serviced by IGM, as well as cash flows related to securitization arrangements are as follows: Mortages Investment loans Less: securitized loans serviced Total on-balance sheet loans Net cash proceeds Cash flows received on retained interests NO T E 5 I N V E S T M E N T AT E Q U I T Y Carrying value, beginning of year Share of operating earnings Share of Pargesa’s non-operating earnings [ Note 20 ] Share of other comprehensive income (loss) Dividends Carrying value, end of year Share of equity, end of year At December 31, 2010, Parjointco, 50% held by the Corporation, held a 54.1% equity interest in Pargesa (2009 – 54.1%). NO T E 6 G O ODW I L L A N D I N TA NGI B L E A S S E T S G O ODW IL L The carrying value of goodwill and changes in the carrying value of goodwill are as follows: Balance, beginning of year Acquisition[1] Other, including the effect of foreign exchange Balance, end of year [ 1 ] There is no tax-deductible goodwill in 2010 and 2009. 2010 3,819 280 4,099 3,478 621 1,203 88 2010 2,675 120 (5) (454) (57) 2,279 2,278 2010 8,655 37 34 8,726 2009 3,641 302 3,943 3,271 672 1,325 90 2009 2,814 141 (70) (179) (31) 2,675 2,674 2009 8,613 32 10 8,655 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NO T E 6 G O ODW I L L A N D I N TA NGI B L E A S S E T S (C O N T I N U E D) IN TA NGIBL E A SSE T S The carrying value of intangible assets and changes in the carrying value of intangible assets are as follows: COST ACCUMULATED AMORTIZATION CHANGE IN FOREIGN EXCHANGE RATES CARRYING VALUE, END OF YEAR 662 1,400 354 285 741 3,442 595 126 112 13 14 484 1,344 4,786 – – – – – – (169) (28) (29) (6) (7) (274) (513) (513) (39) 63 – – – 24 (31) (22) – (3) (3) – (59) (35) 623 1,463 354 285 741 3,466 395 76 83 4 4 210 772 4,238 COST ACCUMULATED AMORTIZATION CHANGE IN FOREIGN EXCHANGE RATES CARRYING VALUE, END OF YEAR 662 1,400 354 285 737 3,438 595 126 105 13 14 433 1,286 4,724 – – – – – – (142) (24) (22) (6) (7) (245) (446) (446) (13) 129 – – – 649 1,529 354 285 737 116 3,554 (12) (16) – – – – (28) 88 441 86 83 7 7 188 812 4,366 2010 Indefinite life intangible assets Brands and trademarks Customer contract-related Shareholder portion of acquired future participating account profits Trade names Mutual fund management contracts Finite life intangible assets Customer contract-related Distribution channels Distribution contracts Technology Property lease Software Total 2009 Indefinite life intangible assets Brands and trademarks Customer contract-related Shareholder portion of acquired future participating accounts profits Trade names Mutual fund management contracts Finite life intangible assets Customer contract-related Distribution channels Distribution contracts Technology Property lease Software Total 58 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT NO T E 7 I NC OM E TA X E S The Corporation’s effective income tax rate is derived as follows: Combined basic Canadian federal and provincial tax rates Increase (decrease) in the income tax rate resulting from: Non-taxable investment income Lower effective tax rates on income not subject to tax in Canada Resolution of uncertain tax positions Adjustment for overstated prior tax items Earnings of investment at equity Miscellaneous Effective income tax rate Components of income tax expense are: Current income taxes Future income taxes Future income taxes consist of the following taxable temporary differences on: Policy liabilities Loss carry forwards Investments Deferred selling commissions Intangible assets and goodwill Other assets Future income taxes Classified in the Consolidated Balance Sheets as: Future income tax assets Future income tax liabilities 2010 % 30.4 (3.8) (2.8) (2.3) (1.2) (1.2) (2.2) 16.9 456 41 497 2010 (961) 1,102 (378) (211) 468 (13) 7 1,174 (1,167) 7 2009 % 31.9 (2.6) (5.1) (4.3) – (0.8) 1.2 20.3 179 386 565 2009 (724) 1,266 (425) (240) 459 (166) 170 1,268 (1,098) 170 As at December 31, 2010, the Corporation and its subsidiaries have non- The future tax benefit of loss carried forwards has been recognized, to the capital losses of $471 million ($485 million in 2009) available to reduce future extent that they are more likely than not to be realized, in the amount of taxable income for which the benefits have not been recognized. These losses $1,102 million ($1,266 million in 2009). The Corporation and its subsidiaries expire at various dates to 2030. In addition, the Corporation has capital loss will realize this benefit in future years through a reduction in current income carry forwards that can be used indefinitely to offset future capital gains of taxes payable. approximately $61 million ($61 million in 2009). NO T E 8 O T H E R A S S E T S Dividends, interest and other receivables Premiums in course of collection Deferred selling commissions Fixed assets Accrued benefit asset [ Note 21 ] Derivative financial instruments Income taxes receivable Other 2010 2,206 393 784 243 437 1,067 580 724 6,434 2009 2,198 403 850 223 384 837 793 691 6,379 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NO T E 9 P OL IC Y L I A B I L I T I E S COMP OSI T ION OF P OL IC Y L IA BIL I T IE S A ND REL AT ED SUPP ORT ING A SSE T S The composition of policy liabilities of Lifeco is as follows: Canada United States Europe Total 2010 25,055 8,108 1,189 34,352 PARTICIPATING 2009 23,097 8,250 1,428 32,775 NON-PARTICIPATING 2009 22,460 13,790 33,626 69,876 2010 24,155 14,555 32,055 70,765 2010 49,210 22,663 33,244 TOTAL 2009 45,557 22,040 35,054 105,117 102,651 The composition of the assets supporting liabilities and surplus of Lifeco is as follows: 2010 Carrying value Participating Non-participating Canada United States Europe Other Capital and surplus Total carrying value Market value 2009 Carrying value Participating Non-participating Canada United States Europe Other Capital and surplus Total carrying value Market value BONDS MORTGAGE LOANS SHARES 15,595 16,066 12,632 17,162 4,664 6,084 72,203 72,855 6,393 5,069 1,479 2,039 874 261 16,115 16,880 3,882 1,432 – 195 435 756 6,700 6,769 BONDS MORTGAGE LOANS SHARES 14,884 14,299 11,843 16,839 3,880 4,402 66,147 66,403 6,316 5,327 1,456 2,314 970 301 16,684 16,891 3,747 991 – 130 1,041 533 6,442 6,503 REAL ESTATE 370 10 – 1,880 220 793 3,273 3,383 REAL ESTATE 286 14 – 1,770 217 812 3,099 3,053 OTHER TOTAL 8,112 34,352 1,578 444 10,779 6,784 5,526 33,223 33,223 24,155 14,555 32,055 12,977 13,420 131,514 133,110 OTHER TOTAL 7,542 32,775 1,829 491 12,573 6,607 6,955 35,997 35,997 22,460 13,790 33,626 12,715 13,003 128,369 128,847 Cash flows of assets supporting policy liabilities are matched within reasonable Changes in the fair values of assets backing capital and surplus, less related limits. Changes in the fair values of these assets are essentially offset by income taxes, would result in a corresponding change in surplus over time in changes in the fair value of policy liabilities. accordance with investment accounting policies. CHA NGE S IN P OL IC Y L IA BIL I T IE S The change in policy liabilities during the year was the result of the following business activities and changes in actuarial estimates: Balance, beginning of year Impact of new business Normal change in force Management action and changes in assumptions Business movement from/to external parties Impact of foreign exchange rate changes Balance, end of year 2010 102,651 5,095 2,025 (432) (1) (4,221) 2009 102,627 4,198 1,899 (268) (9) (5,796) 105,117 102,651 Under fair value accounting, movement in the market value of the supporting liabilities. The change in the value of the policy liabilities associated with the assets is a major factor in the movement of policy liabilities. Changes in the fair change in the value of the supporting assets is included in the normal change value of assets are largely offset by corresponding changes in the fair value of in force above. 60 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT NO T E 9 P OL IC Y L I A B I L I T I E S (C O N T I N U E D) In 2010, the major contributors to the increase in policy liabilities was the Lifeco’s participating policy liabilities decreased by $74 million in 2009 impact of new business and the normal change in the in-force business due to management actions and assumption changes. This decrease was partially offset by the impact of foreign exchange rates. primarily due to a decrease in the provision for future policyholder dividends Lifeco’s non participating policy liabilities decreased by $427 million in 2010 due to management actions and assumption changes including a $246 million decrease in Canada, a $126 million decrease in Europe and a $55 million decrease in the United States. The decrease in Canada was primarily due to updated expenses and taxes in individual insurance ($86 million decrease), improved individual life mortality ($64 million decrease), improved group insurance morbidity ($62 million decrease), modelling refinements across the Canadian segment ($56 million decrease) and reduced provisions for asset liability matching ($49 million decrease), partially offset by increased provisions for policyholder behaviour in individual insurance ($69 million increase). The decrease in Europe was primarily due to reduced provisions for asset liability matching ($127 million decrease), modelling refinements across the division ($97 million decrease) and updated expenses ($23 million decrease), partially ($1,495 million decrease) and improved life mortality ($168 million decrease), partially offset by lowered investment returns ($1,588 million increase). AC T UA RIA L A SSUMP T IONS In the computation of policy liabilities, valuation assumptions have been made regarding rates of mortality/morbidity, investment returns, levels of operating expenses, rates of policy termination and rates of utilization of elective policy options or provisions. The valuation assumptions use best estimates of future experience together with a margin for adverse deviation. These margins are necessary to provide for possibilities of misestimation and/or future deterioration in the best estimate assumptions and provide reasonable assurance that policy liabilities cover a range of possible outcomes. Margins are reviewed periodically for continued appropriateness. offset by strengthened reinsurance life mortality ($71 million increase), The methods for arriving at these valuation assumptions are outlined below: strengthened longevity ($16 million increase), strengthened group insurance morbidity ($13 million increase), increased provisions for policyholder behaviour ($10 million increase) and asset default ($8 million increase). The decrease in the United States was primarily due to improved life mortality ($52 million decrease), improved longevity ($6 million decrease), modelling refinements ($4 million decrease), partially offset by increased provisions for policyholder behaviour ($8 million increase). Lifeco’s participating policy liabilities decreased by $5 million in 2010 due to management actions and assumption changes. The decrease was primarily due to updated expenses ($261 million decrease), improved investment returns ($20 million decrease), and improved individual life mortality ($13 million decrease), partially offset by modelling refinements ($213 million increase), MORTALITY A life insurance mortality study is carried out annually for each major block of insurance business. The results of each study are used to update Lifeco’s experience valuation mortality tables for that business. When there is insufficient data, use is made of the latest industry experience to derive an appropriate valuation mortality assumption. Although mortality improvements have been observed for many years, for life insurance valuation the mortality provisions (including margin) do not allow for future improvements. In addition, appropriate provisions have been made for future mortality deterioration on term insurance. A 2% increase in the best estimate assumption would increase non-participating policy liabilities by approximately $216 million, causing a decrease in net earnings of Lifeco of approximately $159 million (Power increases in the provision for future policyholder dividends ($66 million increase) Financial’s share – $112 million). and increased provisions for policyholder behaviour ($10 million increase). In 2009, the major contributors to the increase in policy liabilities were the impact of new business and the normal change in the in-force business, almost totally offset by the impact of foreign exchange rates. Annuitant mortality is also studied regularly and the results used to modify established industry experience annuitant mortality tables. Mortality improvement has been projected to occur throughout future years for annuitants. A 2% decrease in the best estimate assumption would increase non- Lifeco’s non-participating policy liabilities decreased by $194 million in 2009 participating policy liabilities by approximately $217 million, causing a decrease due to management actions and assumption changes, including a $135 million in net earnings of Lifeco of approximately $172 million (Power Financial’s decrease in Canada, a $58 million decrease in Europe and a $1 million decrease share – $121 million). in the United States. The decrease in Canada was primarily due to improved individual life mortality ($115 million decrease) updated expenses ($48 million decrease) and modelling refinements in individual life and annuities ($32 million decrease), partially offset by the future tax impact of a change in asset mix targets for long-tail liabilities ($52 million increase). The decrease in Europe was primarily due to reduced provisions for asset liability matching ($199 million decrease), modelling refinements in annuities ($97 million decrease) and improved life mortality ($47 million decrease), partially offset by strengthening of asset default and expense ($158 million increase), modelling refinements in reinsurance ($77 million increase), strengthened administration expenses in Europe ($30 million increase) and strengthened longevity ($20 million increase). The decrease in the United States was primarily due to reduced provisions for asset liability matching ($32 million decrease) and improved life mortality ($18 million decrease), partially offset by strengthening of asset default ($32 million increase) and strengthened longevity ($13 million increase). MORBIDITY Lifeco uses industry-developed experience tables modified to reflect emerging Lifeco experience. Both claim incidence and termination are monitored regularly and emerging experience is factored into the current valuation. For products for which morbidity is a significant assumption, a 5% decrease in best estimate termination assumptions for claim liabilities and a 5% increase in best estimate incidence assumptions for active life liabilities would increase non-participating policy liabilities by approximately $213 million, causing a decrease in net earnings of Lifeco of approximately $151 million (Power Financial’s share – $107 million). PROPERTY AND C A SUALTY REINSUR ANCE Policy liabilities for property and casualty reinsurance written by London Reinsurance Group Inc. (LRG), a subsidiary of London Life, are determined using accepted actuarial practices for property and casualty insurers in Canada. Reflecting the long-term nature of the business, policy liabilities have been established using cash flow valuation techniques, including discounting. POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT 61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NO T E 9 P OL IC Y L I A B I L I T I E S (C O N T I N U E D) The policy liabilities are based on cession statements provided by ceding in the best estimate policy termination assumption would increase non- companies. In certain instances, LRG management adjusts cession statement participating policy liabilities by approximately $452 million, causing a decrease amounts to reflect management’s interpretation of the treaty. Differences in net earnings of Lifeco of approximately $320 million (Power Financial’s share will be resolved via audits and other loss mitigation activities. In addition, – $226 million). policy liabilities also include an amount for incurred but not reported losses which may differ significantly from the ultimate loss development. The estimates and underlying methodology are continually reviewed and updated, and adjustments to estimates are reflected in earnings. LRG analyses the emergence of claims experience against expected assumptions for each reinsurance contract separately and at the portfolio level. If necessary, a more in-depth analysis is undertaken of the cedant experience. INVESTMENT RETURNS The assets which correspond to the different liability categories are segmented. For each segment, projected cash flows from the current assets and liabilities are used in the Canadian Asset Liability Method to determine policy liabilities. Cash flows from assets are reduced to provide for asset default losses. Testing under several interest rate and equity scenarios (including increasing and decreasing rates) is done to provide for reinvestment risk (refer to Note 17). EXPENSES Contractual policy expenses (e.g., sales commissions) and tax expenses are reflected on a best estimate basis. Expense studies for indirect operating expenses are updated regularly to determine an appropriate estimate of future operating expenses for the liability type being valued. Improvements in unit operating expenses are not projected. An inflation assumption is incorporated in the estimate of future operating expenses consistent with the interest rate scenarios projected under the Canadian Asset Liability Method as inflation is assumed to be correlated with new money interest rates. A 5% increase in the best estimate maintenance unit expense assumption would increase the non-participating policy liabilities by approximately $71 million, causing a decrease in net earnings of Lifeco of approximately $51 million (Power Financial’s share – $36 million). POLIC Y TERMINATION Studies to determine rates of policy termination are updated regularly to form the basis of this estimate. Industry data is also available and is useful where Lifeco has no experience with specific types of policies or its exposure is UTILIZATION OF ELECTIVE POLIC Y OPTIONS There are a wide range of elective options embedded in the policies issued by Lifeco. Examples include term renewals, conversion to whole life insurance (term insurance), settlement annuity purchase at guaranteed rates (deposit annuities) and guarantee resets (segregated fund maturity guarantees). The assumed rates of utilization are based on Lifeco or industry experience when it exists and, when not, on judgment considering incentives to utilize the option. Generally speaking, whenever it is clearly in the best interests of an informed policyholder to utilize an option, then it is assumed to be elected. POLIC YHOLDER DIVIDENDS AND ADJUSTABLE POLIC Y FE ATURES Future policy holder dividends and other adjustable policy features are included in the determination of policy liabilities with the assumption that policyholder dividends or adjustable benefits will change in the future in response to the relevant experience. The dividend and policy adjustments are determined consistent with policyholders’ reasonable expectations, such expectations being influenced by the participating policyholder dividend policies and/or policyholder communications, marketing material and past practice. It is Lifeco’s expectation that changes will occur in policyholder dividend scales or adjustable benefits for participating or adjustable business respectively, corresponding to changes in the best estimate assumptions, resulting in an immaterial net change in policy liabilities. Where underlying guarantees may limit the ability to pass all of this experience back to the policyholder, the impact of this non-adjustability impacting shareholder earnings is reflected in the impacts of changes in best estimate assumptions above. CEDED REINSUR ANCE Maximum limits per insured life benefit amount (which vary by line of business) are established for life and health insurance, and reinsurance is purchased for amounts in excess of those limits. Reinsurance costs and recoveries as defined by the reinsurance agreement are reflected in the valuation with these costs and recoveries being appropriately limited. Lifeco has significant exposures in respect of the T-100 and Level Cost calibrated to the direct assumptions. of Insurance Universal Life products in Canada and policy termination rates at the renewal period for renewable term policies in Canada and Reinsurance. Industry experience has guided Lifeco’s persistency assumption for these products as Lifeco’s own experience is very limited. A 10% adverse change Reinsurance contracts do not relieve Lifeco from its obligations to policyholders. Failure of reinsurers to honour their obligations could result in losses to Lifeco. Lifeco evaluates the financial condition of its reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. As a result of reinsurance, policy liabilities have been reduced by the following amounts: Participating Non-participating 2010 23 2,508 2,531 2009 17 2,768 2,785 Certain of the reinsurance contracts are on a funds-withheld basis where Lifeco retains the assets supporting the reinsured policy liabilities, thus minimizing the exposure to significant losses from reinsurer insolvency on those contracts. 62 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT NO T E 10 DE B E N T U R E S A N D O T H E R B OR ROW I NG S 2010 2009 OTHER BORROWINGS GREAT-WEST LIFECO INC. Commercial paper and other short-term debt instruments with interest rates from 0.36% to 0.44% (0.28% to 0.38% in 2009) Revolving credit facility with interest equal to LIBOR rate plus 1% or U.S. prime rate loan (US$215 million in 2010, US$260 million in 2009) Total other borrowings DEBENTURES POWER FINANCIAL CORPORATION 6.90% debentures, due March 11, 2033, unsecured IGM FINANCIAL INC. 6.75% debentures 2001 Series, due May 9, 2011, unsecured 6.58% debentures 2003 Series, due March 7, 2018, unsecured 7.35% debentures 2009 Series, due April 8, 2019, unsecured 6.65% debentures 1997 Series, due December 13, 2027, unsecured 7.45% debentures 2001 Series, due May 9, 2031, unsecured 7.00% debentures 2002 Series, due December 31, 2032, unsecured 7.11% debentures 2003 Series, due March 7, 2033, unsecured 6.00% debentures 2010 Series, due December 10, 2040, unsecured GREAT-WEST LIFECO INC. Term note due October 18, 2012, bearing an interest rate of LIBOR plus 0.30% (US$304 million), unsecured 6.75% debentures due August 10, 2015, unsecured 6.14% debentures due March 21, 2018, unsecured 4.65% debentures due August 13, 2020, unsecured 6.40% subordinated debentures due December 11, 2028, unsecured 6.74% debentures due November 24, 2031, unsecured 6.67% debentures due March 21, 2033, unsecured 6.625% deferrable debentures due November 15, 2034, unsecured (US$175 million) 5.998% debentures due November 16, 2039, unsecured Subordinated debentures due May 16, 2046, bearing an interest rate of 7.153% until May 16, 2016 and, thereafter, a rate of 2.538% plus the 3-month LIBOR rate, unsecured (US$300 million) Subordinated debentures due June 21, 2067, bearing an interest rate of 5.691% until 2017 and, thereafter, a rate equal to the Canadian 90-day bankers’ acceptance rate plus 1.49%, unsecured Subordinated debentures due June 26, 2068, bearing an interest rate of 7.127% until 2018 and, thereafter, a rate equal to the Canadian 90-day bankers’ acceptance rate plus 3.78%, unsecured Notes payable with interest rate of 8.0% due May 6, 2014, unsecured Total debentures 91 213 304 250 450 150 375 125 150 175 150 200 301 – 200 500 100 200 400 172 345 297 1,000 500 4 6,044 6,348 102 273 375 250 450 150 375 125 150 175 150 – 319 200 200 – 100 200 400 183 345 315 1,000 500 5 5,592 5,967 On December 9, 2010, IGM issued $200 million of 6.00% debentures maturing and bear an interest rate of 5.998% until they are due. The debentures may on December 10, 2040. The debentures are redeemable by IGM, in whole or in be redeemed by Lifeco at the greater of the Canadian Yield Price or par plus part, at any time, at the greater of par or a formula price based upon yields at any unpaid and accrued interest on not less than 30 and no more than the time of redemption. 60 days notice. On August 13, 2010, Lifeco issued $500 million principal amount debentures at On June 22, 2009, Putnam executed a new revolving credit facility agreement par that will mature on August 13, 2020. Interest on the debentures at the rate with a syndicate of banks for US$500 million, an increase of US$300 million of 4.65% per annum will be payable semi-annually in arrears on February 13 and from the previous agreement. At December 31, 2009, a subsidiary of Putnam August 13 of each year, commencing February 13, 2011, until the date on which had drawn US$260 million on this credit facility. This agreement expired on the debentures are repaid. The debentures are redeemable at any time in whole June 21, 2010. On June 17, 2010, the revolving credit agreement for US$500 million or in part at the greater of the Canada Yield Price or par, together in each case was amended and is due June 17, 2013. At December 31, 2010, a subsidiary of with accrued and unpaid interest. Putnam had drawn US$215 million on this credit facility. On August 10, 2010, Lifeco redeemed the $200 million principal amount 6.75% On April 7, 2009, IGM issued $375 million of 7.35% debentures maturing April 8, debentures at par that had a maturity date of August 10, 2015. 2019. The debentures are redeemable by IGM, in whole or in part, at any On November 16, 2009, Lifeco issued $200 million principal amount of 5.998% debentures and an additional principal amount of $144 million on December 18, 2009 (refer to Note 11). The debentures are due November 16, 2039 time, at the greater of par or a formula price based upon yields at the time of redemption. POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT 63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NO T E 10 DE B E N T U R E S A N D O T H E R B OR ROW I NG S (C O N T I N U E D) The principal payments on debentures and notes payable in each of the next five years is as follows: 2011 2012 2013 2014 2015 2016 and thereafter NO T E 1 1 C A PI TA L T RU S T S E C U R I T I E S A N D DE B E N T U R E S CAPITAL TRUST DEBENTURES 5.995% senior debentures due December 31, 2052, unsecured (GWLCT) 6.679% senior debentures due June 30, 2052, unsecured (CLCT) 7.529% senior debentures due June 30, 2052, unsecured (CLCT) Acquisition-related fair market value adjustment Trust securities held by Lifeco as temporary investments Trust securities held by Lifeco as long-term investments 451 302 1 1 – 5,289 2010 2009 350 300 150 800 17 (44) (238) 535 350 300 150 800 19 (41) (238) 540 Great-West Life Capital Trust (GWLCT), a trust established by Great-West Life, Pursuant to the Canada Life Financial Corporation acquisition in 2003, the had issued $350 million of capital trust securities, the proceeds of which were Canadian regulated subsidiaries had purchased certain of these capital used by GWLCT to purchase Great-West Life senior debentures in the amount trust debentures. During 2009, Lifeco disposed of $138 million principal of $350 million, and Canada Life Capital Trust (CLCT), a trust established by amount of capital trust securities held by the consolidated group as Canada Life, had issued $450 million of capital trust securities, the proceeds temporary investments. of which were used by CLCT to purchase Canada Life senior debentures in the amount of $450 million. Distributions and interest on the capital trust securities are classified as financing charges on the Consolidated Statements of Earnings (refer to Note 19). On November 11, 2009 Lifeco launched an issuer bid whereby it offered to acquire up to 170,000 of the outstanding Great West Life Trust Securities – Series A (GREATs) of GWLCT and up to 180,000 of the outstanding Canada Life Capital Securities – Series A (CLiCS) of CLCT. On December 18, 2009, pursuant to this offer, Lifeco acquired 116,547 GREATs and 121,788 CLiCS for $261 million, plus accrued and unpaid interest. In connection with this transaction Lifeco issued $144 million aggregate principal amount of 5.998% debentures due November 16, 2039 and paid cash of $122 million. NO T E 1 2 O T H E R L I A B I L I T I E S Accounts payable, accrued liabilities and other Deferred net realized gains Income taxes payable Repurchase agreements Accrued benefit liability [ Note 21 ] Derivative financial instruments Dividends and interest payable 2010 3,596 115 217 1,676 665 258 334 6,861 2009 3,413 133 226 1,162 662 364 334 6,294 64 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT NO T E 1 3 NON - C O N T ROL L I NG I N T E R E S T S Non-controlling interests include Participating policyholders Preferred shareholders of subsidiaries Common shareholders of subsidiaries Earnings attributable to non-controlling interests include Earnings attributable to participating policyholders Dividends to preferred shareholders of subsidiaries Earnings attributable to common shareholders of subsidiaries 2010 2,013 2,159 4,884 9,056 2 110 748 860 NO T E 14 S TAT E D C A PI TA L AU T HORIZED Unlimited number of first preferred shares, issuable in series, of second preferred shares, issuable in series and of common shares. ISSUED A ND OU T S TA NDING PREFERRED SHARES (CLASSIFIED AS LIABILITIES) Series C First Preferred Shares [ i ] Series J First Preferred Shares [ ii ] PREFERRED SHARES (PERPETUAL) Series A First Preferred Shares [ iii ] Series D First Preferred Shares [ iv ] Series E First Preferred Shares [ v ] Series F First Preferred Shares [ vi ] Series H First Preferred Shares [ vii ] Series I First Preferred Shares [ viii ] Series K First Preferred Shares [ ix ] Series L First Preferred Shares [ x ] Series M First Preferred Shares [ xi ] Series O First Preferred Shares [ xii ] Series P First Preferred Shares [ xiii ] NUMBER OF SHARES – – 4,000,000 6,000,000 8,000,000 6,000,000 6,000,000 8,000,000 10,000,000 8,000,000 7,000,000 6,000,000 11,200,000 2010 STATED CAPITAL – – – 100 150 200 150 150 200 250 200 175 150 280 2,005 NUMBER OF SHARES 6,000,000 6,000,000 4,000,000 6,000,000 8,000,000 6,000,000 6,000,000 8,000,000 10,000,000 8,000,000 7,000,000 6,000,000 – Common Shares [ xiv ] 708,013,680 636 705,726,680 2009 2,004 2,014 4,860 8,878 15 87 676 778 2009 STATED CAPITAL 150 150 300 100 150 200 150 150 200 250 200 175 150 – 1,725 605 [ i ] On October 31, 2010, the Corporation redeemed all its outstanding 5.20% [ iv ] The 5.50% Non-Cumulative First Preferred Shares, Series D are entitled Non-Cumulative, Series C First Preferred Shares at a redemption price of to fixed non-cumulative preferential cash dividends at a rate equal to $25.40 per share, for a total consideration of $152 million. $1.375 per share per annum. On and after January 31, 2013, the Corporation [ ii ] On July 30, 2010, the Corporation redeemed all its outstanding 4.70% Non-Cumulative, Series J First Preferred Shares at a redemption price of $25.50 per share, for a total consideration of $153 million. [ iii ] The Series A First Preferred Shares are entitled to an annual cumulative dividend at a floating rate equal to 70% of the prime rate of two major Canadian chartered banks and are redeemable, at the Corporation’s option, at $25.00 per share. may redeem for cash the Series D First Preferred Shares in whole or in part, at the Corporation’s option, at $25.00 per share together with all declared and unpaid dividends to, but excluding, the date of redemption. [ v ] The 5.25% Non-Cumulative First Preferred Shares, Series E are entitled to fixed non-cumulative preferential cash dividends at a rate equal to $1.3125 per share per annum. The Corporation may redeem for cash the Series E First Preferred Shares in whole or in part, at the Corporation’s option, at $25.00 per share together with all declared and unpaid dividends to, but excluding, the date of redemption. POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT 65 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NO T E 14 S TAT E D C A PI TA L (C O N T I N U E D) [ vi ] The 5.90% Non-Cumulative First Preferred Shares, Series F are entitled to [ xi ] The 6.00% Non-Cumulative First Preferred Shares, Series M are entitled fixed non-cumulative preferential cash dividends at a rate equal to $1.475 to fixed non-cumulative preferential cash dividends at a rate equal to per share per annum. The Corporation may redeem for cash the Series F $1.50 per share per annum. On January 31, 2014 and on January 31 every First Preferred Shares in whole or in part, at the Corporation’s option, at five years thereafter, the Corporation may redeem for cash the Series M $25.25 per share if redeemed prior to July 17, 2011 and $25.00 if redeemed First Preferred shares in whole or in part, at the Corporation’s option, at thereafter, in each case together with all declared and unpaid dividends $25.00 per share plus all declared and unpaid dividends to the date fixed to, but excluding, the date of redemption. for redemption, or the Series M First Preferred Shares are convertible to [ vii ] The 5.75% Non-Cumulative First Preferred Shares, Series H are entitled to fixed non-cumulative preferential cash dividends at a rate equal to $1.4375 per share per annum. The Corporation may redeem for cash the Series Non-Cumulative Floating Rate First Preferred Shares, Series N, at the option of the holders on January 31, 2014 or on January 31 every five years thereafter. H First Preferred Shares in whole or in part, at the Corporation’s option, [ xii ] The 5.80% Non-Cumulative First Preferred Shares, Series O are entitled to at $25.25 per share if redeemed prior to December 10, 2011 and $25.00 if fixed non-cumulative preferential cash dividends at a rate equal to $1.45 redeemed thereafter, in each case together with all declared and unpaid per share per annum. On and after October 31, 2014, the Corporation dividends to, but excluding, the date of redemption. may redeem for cash the Series O First Preferred Shares in whole or in [ viii ] The 6.00% Non-Cumulative First Preferred Shares, Series I are entitled to fixed non-cumulative preferential cash dividends at a rate equal to $1.50 per share per annum. The Corporation may redeem for cash the Series I First Preferred Shares in whole or in part, at the Corporation’s option, at $25.50 per share if redeemed prior to April 30, 2011, $25.25 if redeemed thereafter and prior to April 30, 2012 and $25.00 if redeemed thereafter, in each case together with all declared and unpaid dividends part, at the Corporation’s option, at $26.00 per share if redeemed prior to October 31, 2015, $25.75 if redeemed on or after October 31, 2015 and prior to October 31, 2016, $25.50 if redeemed on or after October 31, 2016 and prior to October 31, 2017, $25.25 if redeemed on or after October 31, 2017 and prior to October 31, 2018 and $25.00 if redeemed on or after October 31, 2018, in each case together with all declared and unpaid dividends to, but excluding, the date of redemption. to, but excluding, the date of redemption. [ xiii ] In the second quarter of 2010, the Corporation issued 11,200,000 4.40% [ ix ] The 4.95% Non-Cumulative First Preferred Shares, Series K are entitled to fixed non-cumulative preferential cash dividends at a rate equal to $1.2375 per share per annum. The Corporation may redeem for cash the Series K First Preferred Shares in whole or in part, at the Corporation’s option, at $26.00 per share if redeemed prior to October 31, 2011, $25.75 if redeemed thereafter and prior to October 31, 2012, $25.50 if redeemed thereafter and prior to October 31, 2013, $25.25 if redeemed thereafter and prior to October 31, 2014 and $25.00 if redeemed thereafter, in each case together with all declared and unpaid dividends to, but excluding, the date of redemption. [ x ] The 5.10% Non-Cumulative First Preferred Shares, Series L are entitled to fixed non-cumulative preferential cash dividends at a rate equal to $1.2750 per share per annum. On and after October 31, 2011, the Corporation may redeem for cash the Series L First Preferred Shares in whole or in part, at the Corporation’s option, at $26.00 per share if redeemed prior to October 31, 2012, $25.75 if redeemed thereafter and prior to October 31, 2013, $25.50 if redeemed thereafter and prior to October 31, 2014, $25.25 if redeemed thereafter and prior to October 31, 2015, $25.00 if redeemed thereafter, in each case together with all declared and unpaid dividends to, but excluding, the date of redemption. Non-Cumulative 5-Year Rate Reset First Preferred Shares, Series P for cash proceeds of $280 million. The 4.40% Non-Cumulative First Preferred Shares, Series P are entitled to fixed non-cumulative preferential cash dividends at a rate equal to $1.10 per share per annum. On January 31, 2016 and on January 31 every five years thereafter, the Corporation may redeem for cash the Series P First Preferred Shares in whole or in part, at the Corporation’s option, at $25.00 per share plus all declared and unpaid dividends to the date fixed for redemption, or the Series P First Preferred Shares are convertible to Non-Cumulative Floating Rate First Preferred Shares, Series Q, at the option of the holders on January 31, 2016 or on January 31 every five years thereafter. Transaction costs incurred in connection with the Series P First Preferred Shares of $8 million were charged to retained earnings. [ xiv ] During the year, 2,287,000 common shares (713,000 in 2009) were issued under the Corporation’s Employee Stock Option Plan for a consideration of $31 million ($10 million in 2009). NO T E 1 5 S T O C K-B A S E D C O M PE N S AT IO N [ i ] On October 1, 2000, the Corporation established a deferred share unit plan shall be redeemable, at the time a Director’s membership on the Board for the Directors of the Corporation to promote a greater alignment of is terminated or in the event of the death of a Director, by a lump sum interests between Directors and shareholders of the Corporation. Under cash payment, based on the value of a deferred share unit at that time. this plan, each Director may elect to receive his or her annual retainer and At December 31, 2010, the value of the deferred share units outstanding attendance fees entirely in the form of deferred share units, entirely in was $9.8 million ($8.8 million in 2009). In addition, Directors may also cash, or equally in cash and deferred share units. The number of deferred participate in the Directors Share Purchase Plan. share units granted is determined by dividing the amount of remuneration payable by the five-day-average closing price on the Toronto Stock Exchange of the Common Shares of the Corporation on the last five days of the fiscal quarter (the value of a deferred share unit). A Director who has elected to receive deferred share units will receive additional deferred share units in respect of dividends payable on Common Shares, based on the value of a deferred share unit at that time. A deferred share unit [ ii ] Effective May 1, 2000, an Employee Share Purchase Program was implemented, giving employees the opportunity to subscribe for up to 6% of their gross salary to purchase Subordinate Voting Shares of Power Corporation of Canada on the open market and to have the Corporation invest, on the employee’s behalf, up to an equal amount. The amount paid on behalf of employees was $0.2 million in 2010 ($0.2 million in 2009). 66 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT NO T E 1 5 S T O C K-B A S E D C OM PE N S AT IO N (C O N T I N U E D) [ iii ] Compensation expense is recorded for options granted under the During the year ended December 31, 2010, 717,818 options (136,182 options Corporation’s and its subsidiaries’ stock option plans based on the fair in 2009) were granted under the Corporation’s Employee Stock Option value of the options at the grant date, amortized over the vesting period. Plan. The fair value of these options was estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions: Dividend yield Expected volatility Risk-free interest rate Expected life (years) Fair value per stock option ($/option) Weighted-average exercise price ($/option) 2010 4.5% 20.4% 2.8% 9 $3.61 $28.36 2009 3.7% 16.7% 3.3% 9 $3.46 $26.22 For the year ended December 31, 2010, compensation expense relating of grant and no later than five years from date of grant. Options recently to the stock options granted by the Corporation and its subsidiaries granted have the following vesting conditions: grants of 972,395 options amounted to $9 million ($16 million in 2009). in 2008 which vest equally over a period of five years beginning in 2009; [ iv ] Under the Corporation’s Employee Stock Option Plan, 17,581,600 additional shares are reserved for issuance. The plan requires that the exercise price under the option must not be less than the market value of a share on the date of the grant of the option. Generally, options granted vest on a delayed basis over periods beginning no earlier than one year from date a grant of 136,182 options in 2009 which vest equally over a period of five years beginning in 2010; grants of 38,293 options in 2010 which vest as follows: the first 50% three years from the date of grant and the remaining 50% four years from the date of grant; a grant of 679,525 options in 2010 which vest equally over a period of five years beginning in 2011. A summary of the status of the Corporation’s Employee Stock Option Plan as at December 31, 2010 and 2009, and changes during the years ended on those dates is as follows: Outstanding at beginning of year Granted Exercised Outstanding at end of year Options exercisable at end of year 2010 WEIGHTED- AVER AGE EXERCISE PRICE $ 24.48 28.36 13.50 27.77 27.49 2009 WEIGHTED- AVERAGE EXERCISE PRICE $ 23.72 26.22 13.50 24.48 23.14 OPTIONS 10,626,115 136,182 (713,000) 10,049,297 8,427,393 OPTIONS 10,049,297 717,818 (2,287,000) 8,480,115 7,069,914 The following table summarizes information about stock options outstanding at December 31, 2010: RANGE OF EXERCISE PRICES $ 16.87 21.65 26.22 – 28.13 29.05 – 29.63 31.59 – 32.46 34.46 – 37.13 OPTIONS OUTSTANDING OPTIONS EXERCISABLE WEIGHTED- AVERAGE REMAINING LIFE WEIGHTED- AVERAGE EXERCISE PRICE (yrs) 0.8 2.6 9.1 7.5 5.1 7.2 5.0 $ 16.87 21.65 27.76 29.60 32.11 34.81 27.77 OPTIONS 160,000 3,000,000 77,236 332,392 2,529,484 970,802 7,069,914 WEIGHTED- AVERAGE EXERCISE PRICE $ 16.87 21.65 26.70 29.60 32.10 34.61 27.49 OPTIONS 160,000 3,000,000 865,707 830,980 2,567,777 1,055,651 8,480,115 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT 67 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NO T E 16 C A PI TA L M A N AGE M E N T As an investment holding company, Power Financial’s objectives in managing The Corporation’s major operating subsidiaries are subject to regulatory capital its capital are: requirements along with capital standards set by peers or rating agencies. > To provide sufficient financial flexibility to pursue its growth strategy and Lifeco’s subsidiaries Great-West Life and GWL&A are subject to minimum support its group companies and other investments. regulatory capital requirements. Lifeco’s practice is to maintain the > To maintain an appropriate credit rating to achieve access to the capital markets at the lowest overall cost of capital. > To provide attractive long-term returns to shareholders of the Corporation The Corporation manages its capital taking into consideration the risk characteristics and liquidity of its holdings. In order to maintain or adjust its capital structure, the Corporation may adjust the amount of dividends paid to shareholders, return capital to shareholders or issue new forms of capital. 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 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). As at December 31, 2010, the MCCSR ratio for The capital structure of the Corporation consists of preferred shares, debentures Great-West Life was 203%. and shareholders’ equity composed of stated capital, retained earnings and non-controlling interest in the equity of subsidiaries of the Corporation. The Corporation utilizes perpetual preferred shares as a permanent and cost- effective source of capital. The Corporation considers itself to be a long-term investor and as such holds positions in long-term investments as well as cash and short-term investments for liquidity purposes. As such, the Corporation makes minimal use of leverage at the holding company level. The Corporation is not subject to externally imposed regulatory capital requirements. > At December 31, 2010, the Risk Based Capital ratio (RBC) of GWL&A, Lifeco’s regulated U.S. operating company, is estimated to be 393% of the Company Action Level set by the National Association of Insurance Commissioners. GWL&A reports its RBC ratio annually to U.S. insurance regulators. > As at December 31, 2010 and 2009, Lifeco maintained capital levels above the minimum local requirements in its other foreign operations. IGM subsidiaries subject to regulatory capital requirements include trust companies, securities dealers and mutual fund dealers. These subsidiaries are in compliance with all regulatory capital requirements. NO T E 17 R I S K M A N AGE M E N T Power Financial and its subsidiaries have policies relating to the identification, Power Financial is a holding company. As such, corporate cash flows measurement, monitoring, mitigating and controlling of risks associated from operations, before payment of dividends, are principally made up with financial instruments. The key risks related to financial instruments are of dividends received from its subsidiaries and investment at equity, and liquidity risk, credit risk and market risk (currency, interest rate and equity). income from investments, less operating expenses, financing charges The following sections describe how each segment manages these risks. and income taxes. The ability of Lifeco and IGM, which are also holding L IQUIDI T Y RISK Liquidity risk is the risk that the Corporation and its subsidiaries will not be able to meet all cash outflow obligations as they come due. companies, to meet their obligations and pay dividends depends in particular upon receipt of sufficient funds from their own subsidiaries. Power Financial seeks to maintain a sufficient level of liquidity to meet all its cash flow requirements. In addition, Power Financial and its parent, Power Corporation of Canada, jointly have a $100 million uncommitted line of credit with a Canadian chartered bank. Principal payments on debentures (other than those of Lifeco and IGM discussed below) represent the only significant contractual liquidity requirement of Power Financial. AS AT DECEMBER 31, 2010 Debentures LESS THAN 1 YEAR – 1–5 YEARS – AFTER 5 YEARS 250 TOTAL 250 Power Financial’s liquidity position and its management of liquidity risk have > Management of Lifeco monitors the use of lines of credit on a regular basis, not changed materially since December 31, 2009. and assesses the ongoing availability of these and alternative forms of For Lifeco, the following policies and procedures are in place to manage operating credit. liquidity risk: > Lifeco closely manages operating liquidity through cash flow matching of assets and liabilities and forecasting earned and required yields, to ensure consistency between policyholder requirements and the yield of assets. Approximately 70% of policy liabilities are non-cashable prior to maturity or subject to market value adjustments. > Management of Lifeco 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 or the capital markets. Lifeco maintains a $200 million committed line of credit with a Canadian chartered bank. 68 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT NO T E 17 R I S K M A N AGE M E N T (C O N T I N U E D) In the normal course of business, Lifeco 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 Lifeco’s financial liabilities. AS AT DECEMBER 31, 2010 1 YEAR 2 YEARS 3 YEARS 4 YEARS 5 YEARS Debentures and other debt instruments Capital trust debentures [ 1 ] Purchase obligations Pension contributions 305 – 55 130 490 302 – 26 – 328 1 – 27 – 28 1 – 15 – 16 – – 16 – 16 AFTER 5 YEARS 3,714 800 4 – 4,518 TOTAL 4,323 800 143 130 5,396 PAYMENTS DUE BY PERIOD [ 1 ] Payments due have not been reduced to reflect that Lifeco held capital trust securities of $275 million principal amount ($282 million carrying value). IGM’s liquidity management practices include: controls over liquidity > Institutional investors through private placements. management processes; stress testing of various operating scenarios; and oversight over liquidity management by committees of the board of directors of IGM. Investors Group is an approved issuer of National Housing Act Mortgage- Backed Securities (NHA MBS) and an approved seller into the Canada Mortgage Bond Program (CMB Program). This issuer and seller status provides IGM with For IGM, a key liquidity requirement is the funding of commissions paid on the additional funding sources for residential mortgages. IGM’s continued ability to sale of mutual funds. Commissions on the sale of mutual funds continue to be fund residential mortgages through Canadian bank-sponsored securitization paid from operating cash flows. trusts and NHA MBS is dependent on securitization market conditions that IGM also maintains sufficient liquidity to fund and temporarily hold mortgages. are subject to change. Through its mortgage banking operations, residential mortgages are sold to: Liquidity requirements for trust subsidiaries which engage in financial > Investors Mortgage and Short Term Income Fund; intermediary activities are based on policies approved by committees of their respective boards of directors. As at December 31, 2010, the trust subsidiaries’ > Third parties, including Canada Mortgage and Housing Corporation liquidity was in compliance with these policies. (CMHC) or Canadian bank-sponsored securitization trusts; or IGM’s contractual maturities were as follows: AS AT DECEMBER 31, 2010 Deposits and certificates Other liabilities Long-term debt Operation leases Total contractual obligations DEMAND LESS THAN 1 YEAR 604 – – – 604 91 50 450 45 636 1–5 YEARS 135 43 – 129 307 AFTER 5 YEARS 5 – 1,325 93 1,423 TOTAL 835 93 1,775 267 2,970 In addition to IGM’s current balance of cash and cash equivalents, other Cash and cash equivalents amounting to $242 million and fixed income potential sources of liquidity include IGM’s lines of credit and portfolio of securities amounting to $470 million consist primarily of highly liquid temporary securities. During the third quarter of 2010, IGM decreased its operating lines deposits with Canadian chartered banks as well as bankers’ acceptances of credit with various Schedule I Canadian chartered banks to $325 million and short-term securities guaranteed by the Canadian government. The from $675 million as at December 31, 2009. The operating lines of credit as at Corporation regularly reviews the credit ratings of its counterparties. December 31, 2010 consist of committed lines of credit of $150 million (2009 – The maximum exposure to credit risk on these financial instruments is their $500 million) and uncommitted lines of $175 million (2009 – $175 million). As at carrying value. The Corporation mitigates credit risk on these financial December 31, 2010 and 2009, IGM was not utilizing its committed lines of credit instruments by adhering to its Investment Policy which outlines credit risk or its uncommitted operating lines of credit. parameters and concentration limits. In the fourth quarter of 2010, IGM accessed the domestic debt markets to raise The Corporation regularly reviews the credit ratings of derivative financial capital through the issue of $200 million in 30-year 6.0% debentures. IGM’s ability instrument counterparties. Derivative contracts are over-the-counter traded to access capital markets to raise funds is dependent on market conditions. with counterparties that are highly rated financial institutions. The exposure IGM’s liquidity position and its management of liquidity risk have not changed materially since December 31, 2009. CREDI T RISK Credit risk is the potential for financial loss to the Corporation and its subsidiaries if a counterparty in a transaction fails to meet its obligations. For Power Financial, cash and cash equivalents, fixed income securities, and derivatives are subject to credit risk. The Corporation monitors its credit risk management policies continuously to evaluate their effectiveness. to credit risk is limited to the fair value of those instruments, which were in a gain position, and which was $4 million at December 31, 2010. For Lifeco, the following policies and procedures are in place to manage credit 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. POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT 69 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NO T E 17 R I S K M A N AGE M E N T (C O N T I N U E D) > Investment guidelines also specify collateral requirements. > Lifeco is exposed to credit risk relating to premiums due from policyholders > Portfolios are monitored continuously, and reviewed regularly with the board of directors of Lifeco or the investment committee of the board of directors of Lifeco. > Credit risk associated with derivative instruments is evaluated quarterly based on conditions that existed at the balance sheet date, using practices that are at least as conservative as those recommended by regulators. 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 managed by following policy guidelines set each year by the board of directors of Lifeco. Management of Lifeco continuously monitors and performs an assessment of creditworthiness of reinsurers. MAXIMUM EXPOSURE TO CREDIT RISK FOR LIFECO The following table summarizes Lifeco’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. AS AT DECEMBER 31 Cash and cash equivalents Bonds Held for trading Available for sale Loans and receivables Mortgage loans Loans to policyholders Other financial assets [ 1 ] Derivative assets 2010 1,840 56,296 6,617 9,290 16,115 6,827 13,317 984 2009 3,427 52,362 4,620 9,165 16,684 6,957 14,385 717 Total balance sheet maximum credit exposure 111,286 108,317 [ 1 ] Other financial assets include $9,097 million of funds held by ceding insurers in 2010 ($10,146 million in 2009) where Lifeco retains the credit risk of the assets supporting the liabilities ceded. 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 CONCENTR ATION OF CREDIT RISK FOR LIFECO Concentrations of credit risk arise from exposures to a single debtor, a group of counterparty. Guidelines are implemented regarding the acceptability of types related debtors or groups of debtors that have similar credit risk characteristics of collateral and the valuation parameters. Management of Lifeco monitors the in that they operate in the same geographic region or in similar industries. The value of the collateral, requests additional collateral when needed and performs an characteristics are similar in that changes in economic or political environments impairment valuation when applicable. Lifeco has $24 million of collateral received may impact their ability to meet obligations as they come due. in 2010 ($35 million of collateral received in 2009) relating to derivative assets. The following table provides details of the carrying value of bonds of Lifeco by industry sector and geographic distribution: AS AT DECEMBER 31, 2010 Bonds issued or guaranteed by: Canadian federal government Provincial, state and municipal governments U.S. Treasury and other U.S. agencies Other foreign governments Government-related Sovereign Asset-backed securities Residential mortgage-backed securities Banks Other financial institutions Basic materials Communications Consumer products Industrial products/services Natural resources Real estate Transportation Utilities Miscellaneous Total long-term bonds Short-term bonds Total bonds 70 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT CANADA UNITED STATES EUROPE TOTAL 3,548 5,619 335 121 882 651 2,728 25 2,183 1,057 201 589 1,608 544 997 422 1,557 3,266 1,728 28,061 2,822 30,883 – 1,815 2,851 – – 22 3,450 745 442 1,359 587 246 1,419 726 561 – 563 2,433 628 17,847 816 18,663 31 57 976 6,372 1,502 770 842 111 1,993 1,470 182 477 1,495 181 422 1,400 584 2,821 232 21,918 739 22,657 3,579 7,491 4,162 6,493 2,384 1,443 7,020 881 4,618 3,886 970 1,312 4,522 1,451 1,980 1,822 2,704 8,520 2,588 67,826 4,377 72,203 NO T E 17 R I S K M A N AG E M E N T (C O N T I N U E D) CANADA UNITED STATES EUROPE TOTAL AS AT DECEMBER 31, 2009 Bonds issued or guaranteed by: Canadian federal government Provincial, state and municipal governments U.S. Treasury and other U.S. agencies Other foreign governments Government-related Sovereign Asset-backed securities Residential mortgage-backed securities Banks Other financial institutions Basic materials Communications Consumer products Industrial products/services Natural resources Real estate Transportation Utilities Miscellaneous Total long-term bonds Short-term bonds Total bonds 2,264 4,917 240 104 778 783 2,636 46 2,201 1,021 151 598 1,384 516 1,000 559 1,414 3,008 1,489 25,109 2,406 27,515 1 1,333 2,620 – – 4 3,306 842 453 1,336 571 276 1,351 651 710 – 585 2,172 562 16,773 455 17,228 14 55 758 5,773 1,372 762 851 60 2,299 1,507 198 473 1,664 206 581 1,216 594 2,702 182 21,267 137 21,404 The following table provides details of the carrying value of mortgage loans of Lifeco by geographic location: AS AT DECEMBER 31, 2010 Canada United States Europe Total mortgage loans AS AT DECEMBER 31, 2009 Canada United States Europe Total mortgage loans A SSET QUALITY BOND PORTFOLIO QUALITY AS AT DECEMBER 31 AAA AA A BBB BB and lower Total bonds SINGLE-FAMILY RESIDENTIAL MULTI-FAMILY RESIDENTIAL COMMERCIAL 1,622 – – 1,622 3,528 464 26 4,018 6,691 1,517 2,267 10,475 SINGLE-FAMILY RESIDENTIAL MULTI-FAMILY RESIDENTIAL COMMERCIAL 1,695 – – 1,695 3,965 485 29 4,479 6,371 1,509 2,630 10,510 2010 28,925 11,436 19,968 10,649 1,225 72,203 2,279 6,305 3,618 5,877 2,150 1,549 6,793 948 4,953 3,864 920 1,347 4,399 1,373 2,291 1,775 2,593 7,882 2,233 63,149 2,998 66,147 TOTAL 11,841 1,981 2,293 16,115 TOTAL 12,031 1,994 2,659 16,684 2009 24,653 10,684 19,332 10,113 1,365 66,147 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT 71 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NO T E 17 R I S K M A N AGE M E N T (C O N T I N U E D) DERIVATIVE PORTFOLIO QUALITY AS AT DECEMBER 31 Over-the-counter contracts (counterparty ratings): AAA AA A Total 2010 2009 5 491 488 984 5 338 374 717 LOANS OF LIFECO PA ST DUE , BUT NOT IMPAIRED Loans that are past due but not considered impaired are loans for which scheduled payments have not been received, but management of Lifeco has reasonable assurance of collection of the full amount of principal and interest due. The following table provides carrying values of the loans past due, but not impaired: Less than 30 days 30 — 90 days Greater than 90 days Total PERFORMING SECURITIES SUBJECT TO DEFERRED COUPONS Coupon payment receivable 2010 2009 7 2 2 11 45 6 9 60 PAYMENT RESUMPTION DATE LESS THAN 1 YEAR 1–2 YEARS GREATER THAN 2 YEARS – 2 – For IGM, cash and cash equivalents, securities holdings, mortgage and Held-for-trading securities include Canada Mortgage Bonds with a fair value investment loan portfolios, and derivatives are subject to credit risk. IGM of $638 million, NHA MBS with a fair value of $53 million, as well as fixed monitors its credit risk management practices continuously to evaluate income securities that comprise non-bank-sponsored ABCP with a fair value their effectiveness. of $28 million. These fair values represent the maximum exposure to credit With respect to IGM, at December 31, 2010, cash and cash equivalents risk at December 31, 2010. of $1,574 million consisted of cash balances of $114 million on deposit with IGM regularly reviews the credit quality of the mortgage and investment loan Canadian chartered banks and cash equivalents of $1,460 million. Cash portfolios and the adequacy of the general allowance. As at December 31, 2010, equivalents are composed primarily of Government of Canada treasury bills mortgages and investment loans totalled $342 million and $284 million, respect- totalling $656 million, provincial government and government-guaranteed ively, compared with $373 million and $305 million as at December 31, 2009. commercial paper of $355 million and bankers’ acceptances issued by Canadian The allowance for credit losses was $4 million at December 31, 2010, compared chartered banks of $427 million. IGM regularly reviews the credit ratings of to $7 million in 2009, a decrease of $3 million. The decrease reflects changes its counterparties. The maximum exposure to credit risk on these financial in the size and composition of the mortgage loan portfolio and continued instruments is their carrying value. With respect to IGM, available-for-sale fixed income securities at December 31, 2010 are composed of bankers’ acceptances of $35 million, Canadian chartered bank senior deposit notes and floating rate notes of $82 million and $35 million, respectively, and corporate bonds and other of $92 million. The maximum exposure to credit risk on these financial instru- ments is their carrying value. IGM manages credit risk related to cash and cash equivalents and available-for- low default and loss trends. As at December 31, 2010, the mortgage portfolios were geographically diverse, 100% residential (2009 – 100%) and 60% insured (2009 – 74%). The credit risk on the investment loan portfolio is mitigated through the use of collateral, primarily in the form of mutual fund investments. As at December 31, 2010, impaired mortgages and investment loans were $0.3 million, compared to $0.8 million in 2009. Uninsured non-performing loans over 90 days in the mortgage and investment loan portfolios were $0.2 million at December 31, 2010, unchanged from December 31, 2009. The characteristics of the mortgage and investment loan portfolios have not changed significantly sale fixed income securities by adhering to its Investment Policy, which outlines during 2010. credit risk parameters and concentration limits. IGM’s exposure to and management of credit risk related to cash and cash equivalents, fixed income securities and mortgage and investment loan portfolios have not changed materially since December 31, 2009. 72 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT NO T E 17 R I S K M A N AG E M E N T (C O N T I N U E D) IGM regularly reviews the credit quality of the mortgage loans securitized rate swaps totalled $1 million at December 31, 2010. The outstanding notional through CMHC or Canadian bank-sponsored (Schedule I chartered banks) amount of these derivative contracts was $118 million at December 31, 2010, securitization trusts. The fair value of the retained interests in the securitized compared to $75 million at December 31, 2009. The exposure to credit risk, loans was $107 million at December 31, 2010, compared to $174 million at which is limited to the fair value of those instruments which are in a gain December 31, 2009. Retained interests include: position, was $1 million at December 31, 2010, compared to $3 million at > Cash reserve accounts and rights to future excess spread (securitization December 31, 2009. receivables) which totalled $109 million at December 31, 2010. The aggregate credit risk exposure related to derivatives that are in a gain The portion of this amount pertaining to Canadian bank-sponsored securitization trusts of $23 million is subordinated to the interests of the trust and represents the maximum exposure to credit risk for any failure of the borrowers to pay when due. Credit risk on these mortgages is mitigated by any insurance on these mortgages, as discussed below, and IGM’s credit risk on insured loans is to the insurer. At December 31, 2010, 92.4% of the $1.4 billion in outstanding mortgages securitized under these programs was insured. position of $79 million does not give effect to any netting agreements or collateral arrangements. The exposure to credit risk, considering netting agreements and collateral arrangements, was $40 million at December 31, 2010. Counterparties are all bank-sponsored securitization trusts and Canadian Schedule I chartered banks and, as a result, management has determined that IGM’s overall credit risk related to derivatives was not significant at December 31, 2010. Management of credit risk has not changed materially since December 31, 2009. Rights to the future excess spread under the NHA MBS and CMB Program M A RK E T RISK totalled $87 million. Under the NHA MBS and CMB Program, IGM has an obligation to make timely payments to security holders regardless of whether amounts are received by mortgagors. All mortgages securitized 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 under the NHA MBS and CMB Program are insured by CMHC or another price risk. approved insurer under the program, and IGM’s credit exposure is to the insurer. Outstanding mortgages securitized under these programs are $2.1 billion. Since 2008, IGM has purchased portfolio insurance from CMHC on newly funded qualifying conventional mortgage loans. At December 31, 2010, 94.2% of the total mortgage portfolio serviced by IGM related to its CURRENC Y RISK Currency risk relates to the Corporation, its subsidiaries and its investment at equity 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. mortgage banking operations was insured. Uninsured non-performing Power Financial’s financial assets are essentially cash and cash equivalents loans over 90 days in the securitized portfolio were $0.1 million at and fixed income securities. In managing its own cash and cash equivalents, December 31, 2010, compared to nil at December 31, 2009. IGM’s expected Power Financial may hold cash balances denominated in foreign currencies exposure to credit risk related to cash reserve accounts and rights to future and thus be exposed to fluctuations in exchange rates. In order to protect excess spread was not significant at December 31, 2010. > Fair value of interest rate swaps which IGM enters into as a requirement of the securitization programs that it participates in, had a negative fair value of $2 million at December 31, 2010. The outstanding notional amount of these interest rate swaps was $3.9 billion at December 31, 2010, compared against such fluctuations, Power Financial may from time to time enter into currency-hedging transactions with highly rated financial institutions. As at December 31, 2010, essentially all of Power Financial’s cash and cash equivalents were denominated in Canadian dollars or in foreign currencies with currency hedges in place. to $3.4 billion at December 31, 2009. The exposure to credit risk, which is For Lifeco, if the assets backing policy liabilities are not matched by currency, limited to the fair value of the interest rate swaps which were in a gain changes in foreign exchange rates can expose Lifeco to the risk of foreign position, totalled $40 million at December 31, 2010, compared to $76 million exchange losses not offset by liability decreases. The following policies and at December 31, 2009. procedures are in place to mitigate exposure to currency risk: IGM utilizes interest rate swaps to hedge interest rate risk related to the > Lifeco uses financial measures such as constant currency calculations to securitization activities discussed above. The negative fair value of these monitor the effect of currency translation fluctuations. interest rate swaps totalled $27 million at December 31, 2010. The outstanding notional amount was $2.5 billion at December 31, 2010, compared to $2.8 billion at December 31, 2009. The exposure to credit risk, which is limited to the fair value of the interest rate swaps which are in a gain position, totalled $23 million at December 31, 2010, compared to $5 million at December 31, 2009. IGM also utilizes interest rate swaps to hedge interest rate risk associated with its investments in Canada Mortgage Bonds. The fair value of these interest rate swaps totalled $15 million at December 31, 2010. The outstanding notional amount was $0.5 billion at December 31, 2010 unchanged from December 31, 2009. The exposure to credit risk, which is limited to the fair value of the interest rate swaps which are in a gain position, totalled $15 million at December 31, 2010, compared to $37 million at December 31, 2009. In addition, IGM enters into other derivative contracts which consist primarily of interest rate swaps utilized to hedge interest rate risk related to mortgages held pending sale, or committed to, by IGM. The fair value of these interest > Investments are normally made in the same currency as the liabilities supported by those investments. Segmented Investment Guidelines include maximum tolerances for unhedged currency mismatch exposures. > Foreign currency assets acquired to back liabilities are normally converted back to the currency of the liability using foreign exchange contracts. > A 10% weakening of the Canadian dollar against foreign currencies would be expected to increase non-participating policy liabilities and their supporting assets by approximately the same amount, resulting in an immaterial change to net earnings. A 10% strengthening of the Canadian dollar against foreign currencies would be expected to decrease non-participating policy liabilities and their supporting assets by approximately the same amount, resulting in an immaterial change in net earnings. IGM’s financial instruments are generally denominated in Canadian dollars, and do not have significant exposure to changes in foreign exchange rates. POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT 73 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NO T E 17 R I S K M A N AGE M E N T (C O N T I N U E D) INTEREST R ATE RISK Interest rate risk is the risk that the fair value of future cash flows of a financial Hedging instruments are employed where necessary when there is a lack of suitable permanent investments to minimize loss exposure to interest rate instrument will fluctuate because of changes in the market interest rates. changes. To the extent these cash flows are matched, protection against Power Financial’s financial instruments are essentially cash and cash equivalents, fixed income securities, and long-term debt that do not have interest rate change is achieved and any change in the fair value of the assets will be offset by a similar change in the fair value of the liabilities. significant exposure to interest rate risk. > For products with less predictable timing of benefit payments, investments For Lifeco, the following policies and procedures are in place to mitigate exposure to interest rate risk: > Lifeco 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. > Where these products have benefit or expense payments that are dependent on inflation (inflation-indexed annuities, pensions and disability claims), Lifeco generally invests in real return instruments to hedge its real dollar liability cash flows. Some protection against changes in the inflation index is achieved as any related change in the fair value of the assets will be largely offset by a similar change in the fair value of the liabilities. 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 risks 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 to determine policy liabilities. Valuation assumptions have been made regarding rates of returns on supporting assets, fixed income, equity and inflation. The valuation assumptions use best estimates of future reinvestment rates and inflation assumptions with an assumed correlation together with margins for adverse deviation set in accordance with professional standards. These margins are necessary to provide for possibilities of misestimation and/or future deterioration in the best estimate assumptions and provide reasonable assurance that policy liabilities cover a range of possible outcomes. Margins are reviewed periodically for > For products with fixed and highly predictable benefit payments, continued appropriateness. investments are made in fixed income assets or real estate whose cash flows closely match the liability product cash flows. Where assets are not available to match certain cash flows, such as long-tail cash flows, a portion of these are invested in equities and the rest are duration matched. Projected cash flows from fixed income assets used in actuarial calculations are reduced to provide for potential asset default losses. The net effective yield rate reduction averaged 0.21% (0.23% in 2009). The calculation for future credit losses on assets is based on the credit quality of the underlying asset portfolio. The following outlines the future asset credit losses provided for in policy liabilities. These amounts are in addition to the allowance for asset losses included with assets: Participating Non-participating 2010 802 1,516 2,318 2009 755 1,712 2,467 Testing under several interest rate scenarios (including increasing and In addition to the above, if this change in the yield curve persisted for an decreasing rates) is done to assess reinvestment risk. extended period the range of the tested scenarios might change. The effect One way of measuring the interest rate risk associated with this assumption is to determine the effect on the policy liabilities impacting the shareholder of an immediate 1% parallel decrease or increase in the yield curve persisting for a year would have immaterial additional effects on the reported policy liability. earnings of Lifeco of a 1% immediate parallel shift in the yield curve. These IGM is exposed to interest rate risk on its loan portfolio, fixed income securities, interest rate changes will impact the projected cash flows. Canada Mortgage Bonds and on certain of the derivative financial instruments > The effect of an immediate 1% parallel increase in the yield curve would be used in IGM’s mortgage banking and intermediary operations. to increase these policy liabilities by approximately $29 million, causing The objective of IGM’s asset and liability management is to control interest rate a decrease in net earnings of Lifeco of approximately $25 million. (Power risk related to its intermediary operations by actively managing its interest rate Financial’s share – $18 million). > The effect of an immediate 1% parallel decrease in the yield curve would be to increase these policy liabilities by approximately $410 million, causing a decrease in net earnings of Lifeco of approximately $279 million. (Power Financial’s share – $197 million). exposure. As at December 31, 2010, the total gap between one-year deposit assets and liabilities was within IGM’s trust subsidiaries’ stated guidelines. 74 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT NO T E 17 R I S K M A N AG E M E N T (C O N T I N U E D) IGM utilizes interest rate swaps with Canadian Schedule I chartered bank For Lifeco, the risks associated with segregated fund guarantees have been counterparties in order to reduce the impact of fluctuating interest rates on mitigated through a hedging program for lifetime Guaranteed Minimum its mortgage banking operations, as follows: Withdrawal Benefit guarantees consisting of purchasing equity futures, > As part of the securitization transactions with bank-sponsored secu- ritization trusts, IGM enters into interest rate swaps with the trusts, which transfers the interest rate risk to IGM. IGM enters into offsetting interest currency forwards, and interest rate derivatives. For policies with segregated fund guarantees, Lifeco generally determines policy liabilities at a CTE75 (conditional tail expectation of 75) level. rate swaps with Schedule I chartered banks to hedge this risk. Under Some policy liabilities are supported by real estate, common stocks and these securitization transactions with bank-sponsored securitization private equities, for example, segregated fund products and products with trusts, IGM is exposed to asset-backed commercial paper rates and, after long-tail cash flows. Generally these liabilities will fluctuate in line with equity effecting its interest rate hedging activities, remains exposed to the basis market values. There will be additional impacts on these liabilities as equity risk that asset-backed commercial paper rates are greater than bankers’ market values fluctuate. A 10% increase in equity markets would be expected acceptance rates. > As part of the securitization transactions under the CMB Program, IGM enters into interest rate swaps with Schedule I chartered bank counterparties that transfer the interest rate risk associated with the program, including reinvestment risk, to IGM. To manage these interest rate and reinvestment risks, IGM enters into offsetting interest rate swaps to additionally decrease non-participating policy liabilities by approximately $32 million, causing an increase in net earnings of Lifeco of approximately $25 million (Power Financial’s share – $18 million). A 10% decrease in equity markets would be expected to additionally increase non-participating policy liabilities by approximately $72 million, causing a decrease in net earnings of Lifeco of approximately $54 million (Power Financial’s share – $38 million). with Schedule I chartered bank counterparties to reduce the impact of The best estimate return assumptions for equities are primarily based on long- fluctuating interest rates. > IGM is exposed to the impact that changes in interest rates may have on the value of its investments in Canada Mortgage Bonds. IGM enters into interest rate swaps with Schedule I chartered bank counterparties to hedge interest rate risk on these bonds. > IGM is also exposed to the impact that changes in interest rates may have on the value of mortgages held, or committed to, by IGM. IGM may enter into interest rate swaps to hedge this risk. As at December 31, 2010, the impact to net earnings of IGM of a 100-basis-point change in interest rates would have been approximately $2.5 million (Power Financial’s share – $1.5 million). IGM’s exposure to and management of interest rate risk has not changed materially since December 31, 2009. EQUITY PRICE RISK Equity price risk is the uncertainty associated with the valuation of assets term historical averages. Changes in the current market could result in changes to these assumptions and will impact both asset and liability cash flows. A 1% increase in the best estimate assumption would be expected to decrease non- participating policy liabilities by approximately $333 million, causing an increase in net earnings of Lifeco of approximately $242 million (Power Financial’s share – $171 million). A 1% decrease in the best estimate assumption would be expected to increase non-participating policy liabilities by approximately $386 million, causing a decrease in net earnings of Lifeco of approximately $279 million (Power Financial’s share – $197 million). IGM is exposed to equity price risk on its investments in common shares and proprietary investment funds which are classified as available-for-sale securities. Unrealized gains and losses on these securities are recorded in other comprehensive income until they are realized or until management of IGM determines there is objective evidence of impairment in value that is other than temporary, at which time they are recorded in the statements of earnings. arising from changes in equity markets. To mitigate equity price risk, the As at December 31, 2010, the impact of a 10% decrease in equity prices would Corporation and its subsidiaries have investment policy guidelines in place that have been a $3.3 million unrealized loss recorded in other comprehensive provide for prudent investment in equity markets within clearly defined limits. income (Power Financial’s share – $2 million). IGM’s management of equity Power Financial’s financial instruments are essentially cash and cash equivalents, fixed income securities, and long-term debt that do not have exposure to equity price risk. price risk has not changed materially since December 31, 2009. However, IGM’s exposure to equity price risk has declined materially since December 31, 2009 as a result of the reduction in its common share holdings during 2010. POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT 75 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NO T E 18 AC C U M U L AT E D O T H E R C O M PR E H E N S I V E I NC O M E ( L O S S) FOR THE YEAR ENDED DECEMBER 31, 2010 UNREALIZED GAINS (LOSSES) ON AVAILABLE-FOR- SALE ASSETS CASH FLOW HEDGES FOREIGN CURRENCY TRANSL ATION Balance, beginning of year Other comprehensive income (loss) Income taxes Non-controlling interests Balance, end of year 834 41 (37) 4 (21) (17) 817 (36) 79 (28) 51 (15) 36 – (1,188) (1,014) – (1,014) 182 (832) TOTAL (390) (894) (65) (959) 146 (813) (2,020) (1,203) FOR THE YEAR ENDED DECEMBER 31, 2009 UNREALIZED GAINS (LOSSES) ON AVAILABLE-FOR- SALE ASSETS CASH FLOW HEDGES FOREIGN CURRENCY TRANSL ATION Balance, beginning of year Other comprehensive income (loss) Income taxes Non-controlling interests Balance, end of year 676 257 (44) 213 (55) 158 834 (140) 224 (78) 146 (42) 104 (36) NO T E 19 F I N A N C I NG C H A RGE S Interest on debentures and other borrowings Preferred share dividends Net interest on capital trust debentures and securities Unrealized gain on preferred shares classified as held for trading Other (189) (1,328) – (1,328) 329 (999) (1,188) 2010 363 12 32 (2) 22 427 TOTAL 347 (847) (122) (969) 232 (737) (390) 2009 337 72 42 29 14 494 76 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT NO T E 2 0 O T H E R I N C O M E (C H A RGE S), N E T Share of Pargesa’s non-operating earnings [ Note 5 ] Gain resulting from dilution of the Corporation’s interest in IGM 2010 2009 (5) – (5) (70) 12 (58) NO T E 2 1 PE N S ION PL A N S A N D O T H E R P O S T-R E T I R E M E N T B E N E F I T S The Corporation and its subsidiaries maintain funded defined benefit pension plans for certain employees and advisors as well as unfunded supplementary employee retirement plans (SERP) for certain employees. The Corporation’s subsidiaries also maintain defined contribution pension plans for certain employees and advisors. The Corporation and its subsidiaries also provide post-retirement health, dental and life insurance benefits to eligible retirees, advisors and their dependents. CHA NGE S IN FA IR VA LUE OF PL A N A SSE T S A ND IN T HE ACCRUED BENEFI T OBL IG AT ION 2010 OTHER POST- RETIREMENT BENEFITS PENSION PL ANS 2009 OTHER POST- RETIREMENT B ENEFITS PENSION PL ANS FAIR VALUE OF PLAN ASSETS Balance, beginning of year Employee contributions Employer contributions Benefits paid Actual return on plan assets Other, including foreign exchange Balance, end of year ACCRUED BENEFIT OBLIGATION Balance, beginning of year Benefits paid Current service cost Employee contributions Interest cost Actuarial (gains) losses Settlement and curtailment Past service cost Other, including foreign exchange Balance, end of year FUNDED STATUS Fund surplus (deficit) [ i ] Unamortized past service costs Valuation allowance Unamortized transitional obligation and other Unamortized net actuarial losses (gains) Accrued benefit asset (liability) [ ii ] 3,155 20 95 (159) 304 (52) 3,363 3,106 (159) 59 20 189 376 (2) 27 (68) 3,548 (185) (77) (63) 1 541 217 2,802 19 121 (175) 457 (69) 3,155 2,808 (175) 47 19 184 324 (2) (3) (96) 3,106 49 (115) (75) 1 313 173 382 (18) 3 – 23 51 – 2 (1) 442 (442) (50) – – 47 (445) 359 (19) 3 – 23 34 – (15) (3) 382 (382) (64) – – (5) (451) [ i ] The aggregate accrued benefit obligations and aggregate fair value of plan ($622 million in 2009), respectively. In addition, the Corporation and assets of individual pension plans that had accrued benefit obligations in its subsidiaries maintain unfunded supplementary retirement plans for excess of the fair value of their related plan assets at December 31, 2010 certain employees. The obligation for these plans, which is included amounted to $1,317 million ($811 million in 2009) and $1,097 million above, was $315 million at December 31, 2010 ($286 million in 2009). POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT 77 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NO T E 2 1 PE N S ION PL A N S A N D O T H E R P O S T-R E T I R E M E N T B E N E F I T S (C O N T I N U E D) [ ii ] The net accrued benefit asset (liability) shown above is presented in these financial statements as follows: PENSION PL ANS 437 (220) 217 OTHER POST- RETIREMENT BENEFITS – (445) (445) 2010 TOTAL 437 (665) (228) PENSION PL ANS 384 (211) 173 OTHER POST- RETIREMENT BENEFITS – (451) (451) 2009 TOTAL 384 (662) (278) Accrued benefit asset [ Note 8 ] Accrued benefit liability [ Note 12 ] Accrued benefit asset (liability) COS T S RECO GNIZED Amounts arising from events in the period Current service cost Interest cost Actual return on plan assets Past service cost Actuarial (gains) losses on accrued benefit obligation Adjustments to reflect costs recognized Difference between actual and expected return on assets Difference between actuarial gains and losses arising during the period and actuarial gains and losses amortized Difference between past service costs arising in period and past service costs amortized Amortization of transitional obligation Increase (decrease) in valuation allowance Defined contribution service cost Net cost recognized for the year 2010 OTHER POST- RETIREMENT BENEFITS PENSION PL ANS 2009 OTHER POST- RETIREMENT BENEFITS PENSION PL ANS 59 189 (304) 27 376 347 108 (350) (38) 1 (12) 29 85 3 23 – 2 51 79 – (51) (12) – – – 16 47 184 (457) (3) 324 95 268 (319) (8) 1 1 33 71 3 23 – (15) 34 45 – (36) 4 – – – 13 Subsidiaries of Lifeco have declared partial windups in respect of certain defined benefit pension plans which will not likely be completed for some time. Amounts relating to the partial windups may be recognized by Lifeco as the partial windups are completed. ME A SUREMEN T A ND VA LUAT ION The measurement dates, weighted by accrued benefit obligation, are November 30 for 90% of the plans and December 31 for 10% of the plans. The dates of actuarial valuations for funding purposes for the funded defined benefit pension plans (weighted by accrued benefit obligation) are: MOST RECENT VALUATION % OF PLANS NEXT REQUIRED VALUATION % OF PLANS December 31, 2007 December 31, 2008 December 31, 2009 April 1, 2010 C A SH PAY MEN T S 28 19 49 4 December 31, 2010 December 31, 2011 December 31, 2012 April 1, 2013 44 19 33 4 Benefit payments for unfunded plans Company contributions (defined benefit and contribution plans) ALL PENSION PL ANS 2010 18 107 125 2009 18 115 133 OTHER POST-RETIREMENT BENEFITS 2010 2009 18 – 18 19 – 19 78 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT NO T E 2 1 PE N S ION PL A N S A N D O T H E R P O S T-R E T I R E M E N T B E N E F I T S (C O N T I N U E D) A SSE T A L LO C AT ION BY M A JOR C AT EG ORY W EIGH T ED BY PL A N A SSE T S Equity securities Debt securities All other assets DEFINED BENEFIT PENSION PL ANS 2010 2009 % 51 41 8 100 % 51 41 8 100 No plan assets are directly invested in the Corporation’s or subsidiaries’ securities. Nominal amounts may be invested in the Corporation’s or subsidiaries’ securities through investments in pooled funds. SIGNIFIC A N T A SSUMP T IONS WEIGHTED AVERAGE ASSUMPTIONS USED TO DETERMINE BENEFIT COST Discount rate Expected long-term rate of return on plan assets Rate of compensation increase WEIGHTED AVERAGE ASSUMPTIONS USED TO DETERMINE ACCRUED BENEFIT OBLIGATION Discount rate Rate of compensation increase WEIGHTED AVERAGE HEALTHCARE TREND RATES Initial healthcare trend rate Ultimate healthcare trend rate Year ultimate trend rate is reached DEFINED BENEFIT PENSION PL ANS OTHER POST-RETIREMENT BENEFITS 2010 2009 2010 2009 % 6.2 6.3 3.9 5.5 3.6 % 6.8 6.8 4.2 6.2 3.9 % 6.3 – – 5.5 – 7.0 4.5 2024 % 7.1 – – 6.3 – 7.1 4.5 2024 IMPAC T OF CHA NGE S TO A SSUMED HE A LT HC A RE R AT E S – OT HER P OS T- RE T IREMEN T BENEFI T S 1% increase in assumed healthcare cost trend rate 1% decrease in assumed healthcare cost trend rate IMPAC T ON END-OF-YEAR ACCRUED POST-RETIREMENT BENEFIT OBLIGATION IMPAC T ON POST-RETIREMENT BENEFIT SERVICE AND INTEREST COST 2010 44 (37) 2009 34 (30) 2010 2 (2) 2009 2 (2) POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT 79 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NO T E 2 2 FA I R VA L U E OF F I N A NC I A L I N S T RU M E N T S The following table presents the fair value of the Corporation’s financial evidenced by a quoted market price, if one exists. Fair values are management’s instruments using the valuation methods and assumptions described below. estimates and are generally calculated using market conditions at a specific Fair value represents the amount that would be exchanged in an arm’s-length point in time and may not reflect future fair values. The calculations are transaction between willing parties under no compulsion to act, and best subjective in nature, involve uncertainties and matters of significant judgment. ASSETS Cash and cash equivalents Investments (excluding real estate) Loans to policyholders Funds held by ceding insurers Receivables and other Derivative financial instruments Total financial assets LIABILITIES Deposits and certificates Debentures and other borrowings Capital trust securities and debentures Preferred shares of the Corporation Preferred shares of subsidiaries Other financial liabilities Derivative financial instruments CARRYING VALUE 3,656 96,786 6,827 9,860 2,599 1,067 2010 FAIR VALUE 3,656 98,205 6,827 9,860 2,599 1,067 CARRYING VALUE 4,855 91,136 6,957 10,839 2,601 837 2009 FAIR VALUE 4,855 91,602 6,957 10,839 2,601 837 120,795 122,214 117,225 117,691 835 6,348 535 – – 5,976 258 840 6,821 596 – – 5,976 258 907 5,967 540 300 203 5,321 364 916 6,180 601 318 203 5,321 364 Total financial liabilities 13,952 14,491 13,602 13,903 Fair value is determined using the following methods and assumptions: actively exchange-traded equity securities and mutual and segregated > The fair value of short-term financial instruments approximates carrying value due to their short-term maturities. These include cash and cash equivalents, dividends, interest and other receivables, premiums in course of collection, accounts payable, repurchase agreements, dividends and funds which have available prices in an active market with no redemption restrictions, liquid open-end investment fund units, and investments in Government of Canada Bonds and Canada Mortgage Bonds in instances where there are quoted prices available from active markets. interest payable, and income tax payable. > Level 2 inputs utilize other-than-quoted prices included in Level 1 that are > Shares and bonds are valued at quoted market prices, when available. When a quoted market price is not readily available, alternative valuation methods may be used. Mortgage loans are determined by discounting the expected future cash flows at market interest rates for loans with similar credit risks and maturities (refer to Note 1). > Deposits and certificates are valued by discounting the contractual cash flows using market interest rates currently offered for deposits with similar terms and credit risks and maturities. observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other-than-quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. The fair values for some Level 2 securities were obtained from a pricing service. The pricing service inputs include, but are not limited to, benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, offers and reference data. Level 2 securities include those priced using a matrix which is based on credit > Debentures and other borrowings are determined by reference to current quality and average life, government and agency securities, restricted market prices for debt with similar terms, risks and maturities. stock, some private bonds and equities, most investment-grade and high- > Preferred shares are valued using quoted prices from active markets. > Derivative financial instruments’ fair values are based on quoted market prices, where available, prevailing market rates for instruments with similar characteristics and maturities, or discounted cash flow analysis. In accordance with adopted amendments to Canadian Institute of Chartered Accountants Handbook Section 3862, Financial Instruments – Disclosures, the Corporation’s assets and liabilities recorded at fair value have been categorized based upon the following fair value hierarchy: yield corporate bonds, certain asset-backed securities and some over the counter derivatives. > Level 3 inputs are unobservable and include situations where there is little, if any, market activity for the asset or liability. The prices of the majority of Level 3 securities were obtained from single-broker quotes and internal pricing models. Financial assets and liabilities utilizing Level 3 inputs include certain bonds, some private equities and investments in mutual and segregated funds where there are redemption restrictions and certain over- the-counter derivatives, non-bank-sponsored asset-backed commercial > Level 1 inputs utilize observable, quoted prices (unadjusted) in active paper, securitization receivables and derivative instruments. markets for identical assets or liabilities that the Corporation has the ability to access. Financial assets and liabilities utilizing Level 1 inputs include 80 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT NO T E 2 2 FA I R VA L U E OF F I N A NC I A L I N S T RU M E N T S (C O N T I N U E D) The following table presents information about the Corporation’s financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2010 and 2009 and indicates the fair value hierarchy of the valuation techniques utilized by the Corporation to determine such fair value: DECEMBER 31, 2010 ASSETS Shares Available for sale Held for trading Bonds Available for sale Held for trading Mortgage and other loans Held for trading Derivatives Other assets LIABILITIES Derivatives DECEMBER 31, 2009 ASSETS Shares Available for sale Held for trading Bonds Available for sale Held for trading Mortgage and other loans Held for trading Derivatives Other assets LIABILITIES Derivatives Preferred shares of subsidiaries LEVEL 1 LEVEL 2 LEVEL 3 TOTAL 238 4,947 – 638 – – – 9 – 7,289 55,984 224 1,027 – 1 417 42 392 – 40 109 248 5,364 7,331 57,014 224 1,067 109 5,823 64,533 1,001 71,357 – 216 42 258 LEVEL 1 LEVEL 2 LEVEL 3 TOTAL 564 4,783 – 625 – – 10 1 – 4,868 52,021 240 744 7 1 145 67 642 – 93 105 566 4,928 4,935 53,288 240 837 122 5,982 57,881 1,053 64,916 – 203 203 353 – 353 11 – 11 364 203 567 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT 81 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NO T E 2 2 FA I R VA L U E OF F I N A NC I A L I N S T RU M E N T S (C O N T I N U E D) The following table presents additional information about assets and liabilities measured at fair value on a recurring basis for which the Corporation has utilized Level 3 inputs to determine fair value for the years ended December 31, 2010 and 2009. TOTAL 1,042 (27) 2 398 (106) (184) 5 (171) 959 TOTAL 1,318 4 24 202 (62) (264) 68 (248) 1,042 2009 1,439 (88) 1,351 705.6 6.5 (4.8) DECEMBER 31, 2010 SHARES BONDS AVAIL ABLE FOR SALE HELD FOR TRADING AVAIL ABLE FOR SALE HELD FOR TRADING DERIVATIVES, NET Balance, beginning of year Total gains (losses) In net earnings In other comprehensive income Purchases Sales Settlements Transfers in to Level 3 Transfers out of Level 3 Balance, end of year 1 – – – – – – – 1 145 16 – 288 (30) – – (2) 417 67 (2) 2 – – (5) (20) 42 642 16 – 64 (76) (107) 5 (152) 392 82 (50) – (6) – (31) – 3 (2) OTHER ASSETS 105 (7) – 52 – (41) – – 109 DECEMBER 31, 2009 SHARES BONDS AVAIL ABLE FOR SALE HELD FOR TRADING AVAIL ABLE FOR SALE HELD FOR TRADING DERIVATIVES, NET OTHER ASSETS Balance, beginning of year Total gains (losses) In net earnings In other comprehensive income Purchases Sales Settlements Transfers in to Level 3 Transfers out of Level 3 Balance, end of year 1 – – – – – – – 1 20 (2) – 127 – – – – 145 68 (17) 24 – – (13) 25 (20) 67 1,014 135 25 – 9 (62) (159) 43 (228) 642 (2) – 3 – (54) – – 82 80 – – 63 – (38) – – 105 NO T E 2 3 E A R N I NG S PE R S H A R E The following is a reconciliation of the numerators and the denominators of the basic and diluted earnings per common share computations: FOR THE YEARS ENDED DECEMBER 31 Net earnings Dividends on perpetual preferred shares Net earnings available to common shareholders Weighted number of common shares outstanding (millions) – Basic Exercise of stock options Shares assumed to be repurchased with proceeds from exercise of stock options Weighted number of common shares outstanding (millions) – Diluted 2010 1,584 (99) 1,485 707.0 4.9 (3.9) 708.0 707.3 For 2010, 3,623,428 stock options (3,585,135 in 2009) have been excluded from the computation of diluted earnings per share as the exercise price was higher than the market price. Basic earnings per common share ($) – Basic – Diluted 2.10 2.10 1.92 1.91 82 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT NO T E 24 DE R I VAT I V E F I N A N C I A L I N S T RU M E N T S In the normal course of managing exposure to fluctuations in interest are either exchange traded or over-the-counter traded with counterparties that rates, foreign exchange rates, and to market risks, the Corporation and its are credit-worthy financial intermediaries. subsidiaries are end users of various derivative financial instruments. Contracts The following table summarizes the portfolio of derivative financial instruments of the Corporation and its subsidiaries at December 31: 2010 Interest rate contracts Futures — long Futures — short Swaps Options purchased Foreign exchange contracts Forward contracts Cross-currency swaps Other derivative contracts Equity contracts Futures – long Futures – short 2009 Interest rate contracts Futures — long Futures — short Swaps Options purchased Foreign exchange contracts Forward contracts Cross-currency swaps Other derivative contracts Equity contracts Futures – long Futures – short 1 YEAR OR LESS 1–5 YEARS OVER 5 YEARS TOTAL MA XIMUM CREDIT RISK TOTAL ESTIMATED FAIR VALUE NOTIONAL AMOUNT 57 220 1,655 226 2,158 221 70 291 43 8 38 89 1 – 5,900 846 6,747 – 1,284 1,284 21 – – 21 – – 1,572 221 1,793 – 5,954 5,954 – – – – 58 220 9,127 1,293 10,698 221 7,308 7,529 64 8 38 110 – – 300 31 331 5 731 736 – – – – 2,538 8,052 7,747 18,337 1,067 – – 189 31 220 5 604 609 (20) – – (20) 809 1 YEAR OR LESS 1–5 YEARS OVER 5 YEARS TOTAL MA XIMUM CREDIT RISK TOTAL ESTIMATED FAIR VALUE NOTIONAL AMOUNT 108 181 1,231 60 1,580 236 108 344 49 12 5 66 – – 5,907 957 6,864 – 987 987 26 – – 26 – – 1,349 444 1,793 – 5,733 5,733 – – – – 108 181 8,487 1,461 10,237 236 6,828 7,064 75 12 5 92 – – 309 36 345 1 491 492 – – – – 1,990 7,877 7,526 17,393 837 – – 183 35 218 1 277 278 (23) – – (23) 473 The amount subject to credit risk is limited to the current fair value of the (or pay) to terminate all agreements at year-end. However, this would not instruments which are in a gain position. The credit risk is presented without result in a gain or loss to the Corporation and its subsidiaries as the derivative giving effect to any netting agreements or collateral arrangements and does instruments which correlate to certain assets and liabilities provide offsetting not reflect actual or expected losses. The total estimated fair value represents gains or losses. the total amount that the Corporation and its subsidiaries would receive POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT 83 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NO T E 24 DE R I VAT I V E F I N A NC I A L I N S T RU M E N T S (C O N T I N U E D) SWAPS Interest rate swaps, futures and options are used as part of a portfolio of FOREIGN EXCHANGE CONTR ACTS Cross-currency swaps are used in combination with other investments assets to manage interest rate risk associated with investment activities to manage foreign currency risk associated with investment activities and actuarial liabilities and to reduce the impact of fluctuating interest rates and actuarial liabilities. Under these swaps, principal amounts and fixed on the mortgage banking operations and intermediary operations. Interest and floating interest payments may be exchanged in different currencies. rate swap agreements require the periodic exchange of payments without The Corporation and its subsidiaries also enter into certain foreign exchange the exchange of the notional principal amount on which payments are based. forward contracts to hedge certain product liabilities. Changes in fair value are recorded in net investment income in the Consolidated Statements of Earnings. Call options grant the Corporation and its subsidiaries the right to enter into a swap with predetermined fixed-rate payments over a predetermined time period on the exercise date. Call options are used to manage the variability in future interest payments due to a change in credited interest rates and the related potential change in cash flows due to surrenders. Call options are also used to hedge minimum rate guarantees. OTHER DERIVATIVE CONTR ACTS Equity index swaps, futures and options are used to hedge certain product liabilities. Equity index swaps are also used as substitutes for cash instruments and are used to periodically hedge the market risk associated with certain fee income. Lifeco may use credit derivatives to manage its credit exposure and for risk diversification in its investment portfolio. IGM manages its exposure to market risk on its securities by either entering into forward sale contracts, purchasing a put option or by simultaneously purchasing a put option and writing a call option on the same security. NO T E 2 5 C ON T I NGE N T L I A B I L I T I E S The Corporation’s subsidiaries are from time to time subject to legal actions, provisions for these proceedings. Regardless of the ultimate outcome of this including arbitrations and class actions, arising in the normal course of business. case, all of the participating policy contract terms and conditions will continue It is inherently difficult to predict the outcome of any of these proceedings with to be honoured. Based on information presently known, the original decision, certainty, and it is possible that an adverse resolution could have a material if sustained on appeal, is not expected to have a material adverse effect on the adverse effect on the consolidated financial position of the Corporation. consolidated financial position of Lifeco. However, based on information presently known, it is not expected that any of the existing legal actions, either individually or in the aggregate, will have a material adverse effect on the consolidated financial position of the Corporation. Lifeco has entered into an agreement to settle a class action relating to the provision of notice of the acquisition of Canada Life Financial Corporation to certain shareholders of Canada Life Financial Corporation. The settlement Subsidiaries of Lifeco have declared partial windups in respect of certain received Court approval on January 27, 2010 and is being implemented. Based Ontario defined benefit pension plans which will not likely be completed on information presently known, Lifeco does not expect this matter to have a for some time. The partial windups could involve the distribution of the material adverse effect on its consolidated financial position. amount of actuarial surplus, if any, attributable to the wound-up portion of the plans. However, many issues remain unclear, including the basis of surplus measurement and entitlement, and the method by which any surplus distribution would be implemented. In addition to the regulatory proceedings involving these partial windups, related proposed class action proceedings have been commenced in Ontario related to certain of the partial windups. The provisions for certain Canadian retirement plans in the amounts of $97 million after tax established by Lifeco’s subsidiaries in the third quarter 2007 have been reduced to $68 million. Actual results could differ from these estimates. Subsidiaries of Lifeco have an ownership interest in a U.S.-based private equity partnership wherein a dispute has arisen over the terms of the partnership agreement. Lifeco acquired the ownership interest in 2007 for purchase consideration of US$350 million. Legal proceedings have been commenced and are in their early stages. Legal proceedings have also commenced against the private equity partnership by third parties in unrelated matters. Another subsidiary of Lifeco has established a provision related to the latter proceedings. While it is difficult to predict the final outcome of these proceedings, based on information presently known, Lifeco does not expect these proceedings to have The Ontario Superior Court of Justice released a decision on October 1, 2010 in a material adverse effect on its consolidated financial position. regard to the involvement of the participating accounts of Lifeco subsidiaries London Life and Great-West Life in the financing of the acquisition of London Insurance Group Inc. (LIG) in 1997. Lifeco believes there are significant aspects of the lower court judgment that are in error and Notice of Appeal has been filed. Notwithstanding the foregoing, Lifeco has established an incremental provision in the third quarter of 2010 in the amount of $225 million after tax ($204 million In connection with the acquisition of its subsidiary Putnam, Lifeco has an indemnity from a third party against liabilities arising from certain litigation and regulatory actions involving Putnam. Putnam continues to have potential liability for these matters in the event the indemnity is not honoured. Lifeco expects the indemnity will continue to be honoured and that any liability of Putnam would not have a material adverse effect on its consolidated and $21 million attributable to Lifeco’s common shareholder and to Lifeco’s non- controlling interests, respectively). Lifeco now holds $310 million in after-tax financial position. 84 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT NO T E 26 C OM M I T M E N T S A N D GUA R A N T E E S GUA R A N T EE S LRG has a syndicated letter of credit facility providing US$650 million in In the normal course of operations, the Corporation and its subsidiaries execute letters of credit capacity. The facility was arranged in 2010 for a five-year term agreements that provide for indemnifications to third parties in transactions expiring November 12, 2015. Under the terms and conditions of the facility, such as business dispositions, business acquisitions, loans and securitization collateralization may be required if a default under the letter of credit transactions. The Corporation and its subsidiaries have also agreed to indemnify agreement occurs. LRG has issued US$507 million in letters of credit under the their directors and certain of their officers. The nature of these agreements facility as at December 31, 2010 (US$612 million under a previous letter of credit precludes the possibility of making a reasonable estimate of the maximum facility at December 31, 2009). potential amount the Corporation and its subsidiaries could be required to pay third parties as the agreements often do not specify a maximum amount and the amounts are dependent on the outcome of future contingent events, In addition, LRG has other bilateral letter of credit facilities totalling US$18 million (US$18 million in 2009). LRG issued US$6 million in letters of credit under these facilities as of December 31, 2010 (US$6 million at the nature and likelihood of which cannot be determined. Historically, the Corporation has not made any payments under such indemnification December 31, 2009). agreements. No amounts have been accrued related to these agreements. PL ED GING OF A SSE T S S Y NDIC AT ED L E T T ER S OF CREDI T Clients residing in the United States are required, pursuant to their insurance laws, to obtain letters of credit issued on behalf of London Reinsurance Group (LRG) from approved banks in order to further secure LRG’s obligations under certain reinsurance contracts. With respect to Lifeco, the amounts of assets which have a security interest by way of pledging is $9 million ($11 million in 2009) in respect of derivative transactions and $554 million ($595 million in 2009) in respect of reinsurance agreements. COMMI T MEN T S The Corporation and its subsidiaries enter into operating leases for office space and certain equipment used in the normal course of operations. Lease payments are charged to operations over the period of use. The future minimum lease payments in aggregate and by year are as follows: Future lease payments 2011 146 2012 129 2013 107 2014 86 2015 71 2016 AND THEREAFTER 216 TOTAL 755 NO T E 2 7 R E L AT E D PA R T Y T R A N S AC T IO N S In the normal course of business, Great-West Life provides insurance benefits to other companies within the Power Financial Corporation group of companies. In all cases, transactions are done at market terms and conditions. NO T E 2 8 S E G M E N T E D I N F OR M AT IO N The following strategic business units constitute the Corporation’s reportable > Parjointco holds the Corporation’s interest in Pargesa, a holding company operating segments: > Lifeco offers, in Canada, the United States and in Europe, a wide range of life insurance, retirement and investment products, as well as reinsurance which holds diversified interests in companies based in Europe active in various sectors, including specialty minerals, water, waste services, energy, and wines and spirits. and specialty general insurance products to individuals, businesses and > The segment entitled Other is made up of corporate activities of the other private and public organizations. Corporation and also includes consolidation elimination entries. > IGM offers a comprehensive package of financial planning services and The accounting policies of the operating segments are those described in the investment products to its client base. IGM derives its revenues from Significant Accounting Policies section above. The Corporation evaluates a range of sources, but primarily from management fees, which are the performance based on the operating segment’s contribution to charged to its mutual funds for investment advisory and management consolidated net earnings. Revenues and assets are attributed to geographic services. IGM also earns revenue from fees charged to its mutual funds areas based on the point of origin of revenues and the location of assets. for administrative services. The contribution to consolidated net earnings of each segment is calculated after taking into account the investment Lifeco and IGM have in each other. POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT 85 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NO T E 2 8 S E G M E N T E D I N F OR M AT IO N (C O N T I N U E D) INF ORM AT ION ON PROFI T ME A SURE FOR THE YEAR ENDED DECEMBER 31, 2010 LIFECO IGM PARJOINTCO OTHER TOTAL REVENUES Premium income Net investment income Regular net investment income Change in fair value on held-for-trading assets Fee income EXPENSES Policyholder benefits, dividends and experience refunds, and change in actuarial liabilities Commissions Operating expenses Financing charges Share of earnings of investment at equity Other income (charges), net Earnings before income taxes and non-controlling interests Income taxes Non-controlling interests Contribution to consolidated net earnings 17,748 5,743 3,633 9,376 2,874 29,998 23,063 1,523 3,145 283 28,014 1,984 – – 1,984 227 620 1,137 – 119 13 132 2,491 2,623 – 869 636 111 1,616 1,007 – – 1,007 271 325 411 – – – – – – – – – – – – 120 (5) 115 – – 115 – 17,748 (79) – (79) (115) (194) – (115) 53 33 (29) (165) – – (165) (1) (85) (79) 5,783 3,646 9,429 5,250 32,427 23,063 2,277 3,834 427 29,601 2,826 120 (5) 2,941 497 860 1,584 INF ORM AT ION ON A SSE T ME A SURE DECEMBER 31, 2010 Goodwill Total assets GEO GR A PHIC INF ORM AT ION DECEMBER 31, 2010 Revenues Investment at equity Goodwill and intangible assets Total assets LIFECO 5,840 131,514 IGM PARJOINTCO OTHER 2,886 8,893 – 2,279 – 569 TOTAL 8,726 143,255 CANADA UNITED STATES 16,835 – 9,545 70,035 6,513 – 1,717 29,973 EUROPE 9,079 2,279 1,702 43,247 TOTAL 32,427 2,279 12,964 143,255 86 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT NO T E 2 8 S E G M E N T E D I N F OR M AT IO N (C O N T I N U E D) INF ORM AT ION ON PROFI T ME A SURE FOR THE YEAR ENDED DECEMBER 31, 2009 LIFECO IGM PARJOINTCO OTHER TOTAL REVENUES Premium income Net investment income Regular net investment income Change in fair value on held-for-trading assets Fee income EXPENSES Policyholder benefits, dividends and experience refunds, and change in actuarial liabilities Commissions Operating expenses Financing charges Share of earnings of investment at equity Other income (charges), net Earnings before income taxes and non-controlling interests Income taxes Non-controlling interests Contribution to consolidated net earnings 18,033 6,179 3,490 9,669 2,839 30,541 23,809 1,370 2,946 336 28,461 2,080 – – 2,080 345 617 1,118 – 105 (27) 78 2,250 2,328 – 808 614 126 1,548 780 – – 780 221 247 312 – – – – – – – – – – – – 141 (70) 71 – – 71 – (81) – (81) (91) 18,033 6,203 3,463 9,666 4,998 (172) 32,697 – (90) 47 32 (11) (161) – 12 (149) (1) (86) (62) 23,809 2,088 3,607 494 29,998 2,699 141 (58) 2,782 565 778 1,439 INF ORM AT ION ON A SSE T ME A SURE DECEMBER 31, 2009 Goodwill Total assets GEO GR A PHIC INF ORM AT ION DECEMBER 31, 2009 Revenues Investment at equity Goodwill and intangible assets Total assets LIFECO 5,853 128,369 IGM PARJOINTCO OTHER 2,802 8,646 – 2,675 – 541 TOTAL 8,655 140,231 CANADA UNITED STATES 15,989 – 9,470 65,045 6,715 – 1,830 29,262 EUROPE 9,993 2,675 1,721 45,924 TOTAL 32,697 2,675 13,021 140,231 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT 87 INDEPENDENT AUDITOR’S REPORT TO T HE SHA REHOL DER S OF P OW ER FIN A NCIA L CORP OR AT ION We have audited the accompanying consolidated financial statements of Power Financial Corporation, which comprise the consolidated balance sheets as at December 31, 2010 and 2009, and the consolidated statements of earnings, comprehensive income, changes in shareholders’ equity and cash flows for the years then ended, and a summary of significant accounting policies and other explanatory information. M A NAGEMEN T ’ S RE SP ONSIBIL I T Y F OR T HE CONSOL IDAT ED FIN A NCIA L S TAT EMEN T S Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Canadian generally accepted accounting principles and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. AUDI TOR ’ S RE SP ONSIBIL I T Y Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. OPINION In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Power Financial Corporation as at December 31, 2010 and 2009, and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. Signed Deloitte & Touche LLP 1 March 10, 2011 Montréal, Québec 1 Chartered accountant auditor permit No. 18383 88 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT POWER FINANCIAL CORPORATION F I V E-Y E A R F I N A N C I A L S U M M A RY DECEMBER 31 [in millions of Canadian dollars, except per share amounts] CONSOLIDATED BAL ANCE SHEETS Cash and cash equivalents Consolidated assets Shareholders’ equity Consolidated assets and assets under management CONSOLIDATED STATEMENTS OF E ARNINGS REVENUES Premium income Net investment income Fee income EXPENSES Policyholder benefits, dividends and experience refunds, and change in actuarial liabilities Commissions Operating expenses Financial charges Share of earnings of investment at equity Other income (charges), net Income taxes Non-controlling interests Earnings from continuing operations Earnings from discontinued operations Net earnings PER SHARE Operating earnings before non-recurring items and discontinued operations Net earnings from discontinued operations Net earnings Dividends Book value at year-end MARKET PRICE (COMMON SHARES) High Low Year-end 2010 2009 2008 2007 2006 3,656 143,255 13,184 490,839 4,855 140,231 13,207 471,775 4,689 141,546 13,419 452,158 5,625 130,114 12,865 521,439 5,114 130,486 11,422 341,903 17,748 9,429 5,250 32,427 23,063 2,277 3,834 427 29,601 2,826 120 (5) 497 860 1,584 – 1,584 2.31 – 2.10 1.4000 15.79 34.23 27.00 30.73 18,033 9,666 4,998 32,697 23,809 2,088 3,607 494 29,998 2,699 141 (58) 565 778 1,439 – 1,439 2.05 – 1.92 1.4000 16.27 31.99 14.66 31.08 30,007 953 5,540 36,500 26,774 2,172 3,605 438 32,989 3,511 183 (2,402) 16 442 834 503 1,337 1.98 0.71 1.79 1.3325 16.80 40.94 20.33 23.90 18,753 4,589 5,327 28,669 19,122 2,236 3,199 408 24,965 3,704 145 24 938 1,039 1,896 148 2,044 2.63 0.21 2.79 1.1600 16.26 42.69 35.81 40.77 17,752 5,962 4,223 27,937 19,660 2,024 2,575 338 24,597 3,340 126 345 844 952 2,015 140 2,155 2.26 0.20 2.96 1.0000 14.22 38.72 30.20 37.69 QUA R T E R LY F I N A NC I A L I N FOR M AT IO N [UNAUDITED] [in millions of Canadian dollars, except per share amounts] TOTAL REVENUES NET EARNINGS EARNINGS PER SHARE — BASIC EARNINGS PER SHARE — DILUTED 2010 First quarter Second quarter Third quarter Fourth quarter 2009 First quarter Second quarter Third quarter Fourth quarter 8,874 7,963 9,703 5,887 5,448 9,777 10,973 6,499 389 429 323 443 195 452 452 340 0.52 0.57 0.42 0.59 0.24 0.61 0.61 0.45 0.52 0.57 0.42 0.59 0.24 0.61 0.61 0.45 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT 89 BOARD OF DIRECTORS J. BRIAN AUNE PRESIDENT, ALDERVEST INC. R AYMOND L . MCFEETORS VICE-CHAIRMAN OF THE CORPORATION AND CHAIRMAN, GREAT-WEST LIFECO INC. MARC A . BIBE AU [ 2 ] PRESIDENT AND CHIEF EXECUTIVE OFFICER, BEAUWARD SHOPPING CENTRES LTD. JERRY E.A . NICKERSON [ 2 ] CHAIRMAN OF THE BOARD, H.B. NICKERSON & SONS LIMITED ANDRÉ DESMAR AIS, O.C., O.Q.[ 1, 5 ] CO-CHAIRMAN OF THE CORPORATION AND DEPUT Y CHAIRMAN, PRESIDENT AND R . JEFFREY ORR [ 1 ] PRESIDENT AND CHIEF EXECUTIVE OFFICER CO-CHIEF EXECUTIVE OFFICER, OF THE CORPORATION POWER CORPORATION OF CANADA THE HONOUR ABLE PAUL DESMAR AIS, P.C., C.C., O.Q.[ 1,5 ] CHAIRMAN OF THE EXECUTIVE COMMIT TEE, POWER CORPORATION OF CANADA PAUL DESMAR AIS, JR ., O.C., O.Q.[ 1, 5 ] CO-CHAIRMAN OF THE CORPORATION AND CHAIRMAN AND CO-CHIEF EXECUTIVE OFFICER, POWER CORPORATION OF CANADA GÉR ALD FRÈRE [ 3, 4 ] MANAGING DIRECTOR, FRÈRE-BOURGEOIS S.A. ANTHONY R . GR AHAM, LL.D. [ 5 ] PRESIDENT, WIT TINGTON INVESTMENTS, LIMITED ROBERT GR AT TON DEPUT Y CHAIRMAN, POWER CORPORATION OF CANADA V. PETER HARDER [ 3, 4 ] SENIOR POLICY ADVISER, FRASER MILNER CASGRAIN LLP MICHEL PLESSIS-BÉL AIR , FCA VICE-CHAIRMAN, POWER CORPORATION OF CANADA HENRI-PAUL ROUSSE AU, Ph.D. VICE-CHAIRMAN OF THE CORPORATION AND OF POWER CORPORATION OF CANADA LOUISE ROY, O.Q. INVITED FELLOW, CENTRE INTERUNIVERSITAIRE DE RECHERCHE EN ANALYSE DES ORGANISATIONS AND PRESIDENT, CONSEIL DES ARTS DE MONTRÉAL R AYMOND ROYER , O.C., O.Q., FCA [ 1, 2, 3, 4, 5 ] COMPANY DIRECTOR AMAURY DE SEZE VICE-CHAIRMAN OF THE CORPORATION EMŐKE J.E. SZATHMÁRY, C.M., O.M., Ph.D. [ 2 ] PRESIDENT EMERITUS, UNIVERSIT Y OF MANITOBA THE RIGHT HONOUR ABLE DONALD F. MAZANKOWSKI, P.C., O.C., A.O.E. [ 1 ] COMPANY DIRECTOR DIRECTORS EMERITUS JAMES W. BURNS, O.C., O.M. THE HONOUR ABLE P. MICHAEL PITFIELD, P.C., Q.C. [ 1 ] [ 2 ] [ 3 ] [ 4 ] [ 5 ] MEMBER O F T HE E XEC U T I V E COMMI T T EE MEMBER O F T HE AUDI T CO MMI T T EE MEMBER O F T HE COMP ENS AT ION COMMI T T EE MEMBER O F T HE R EL AT ED PA RT Y A ND CONDU C T R E V IE W CO MMI T T EE MEMBER O F T HE G OV ER N A NCE A ND NOMIN AT ING COMMI T T EE 90 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT OFFICERS PAUL DESMAR AIS, JR ., O.C., O.Q. CO-CHAIRMAN ANDRÉ DESMAR AIS, O.C., O.Q. CO-CHAIRMAN R . JEFFREY ORR PRESIDENT AND CHIEF EXECUTIVE OFFICER R AYMOND L . MCFEETORS VICE-CHAIRMAN HENRI-PAUL ROUSSE AU, Ph.D. VICE-CHAIRMAN AMAURY DE SEZE VICE-CHAIRMAN PHILIP K . RYAN EXECUTIVE VICE-PRESIDENT AND CHIEF FINANCIAL OFFICER EDWARD JOHNSON SENIOR VICE-PRESIDENT, GENERAL COUNSEL AND SECRETARY ARNAUD VIAL SENIOR VICE-PRESIDENT JOCELYN LEFEBVRE , C.A. MANAGING DIRECTOR, POWER FINANCIAL EUROPE B.V. DENIS LE VA SSEUR , C.A. VICE-PRESIDENT AND CONTROLLER STÉPHANE LEMAY VICE-PRESIDENT, ASSISTANT GENERAL COUNSEL AND ASSOCIATE SECRETARY RICHARD PAN VICE-PRESIDENT LUC RENY, CFA VICE-PRESIDENT ISABELLE MORIN, C.A. TREASURER POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT 91 CORPORATE INFORMATION Additional copies of this Annual Report, as well as copies of the annual report of Power Corporation of Canada, are available from the Secretary: POWER FINANCIAL CORPORATION 751 Victoria Square Montréal, Québec Canada H2Y 2J3 STOCK LISTINGS Suite 2600, Richardson Building 1 Lombard Place Winnipeg, Manitoba Canada R3B 0X5 Shares of Power Financial Corporation are listed on the Toronto Stock Exchange, under the following listings: COMMON SHARES: PWF FIRST PREFERRED SHARES: Series A: PWF.PR.A Series D: PWF.PR.E Series E: PWF.PR.F Series F: PWF.PR.G Series H: PWF.PR.H Series I: PWF.PR.I TR ANSFER AGENT AND REGISTR AR Computershare Investor Services Inc. Offices in: Montreal (QC); Toronto (ON) www.computershare.com SHAREHOLDER SERVICES Series K: PWF.PR.K Series L: PWF.PR.L Series M: PWF.PR.M Series O: PWF.PR.O Series P: PWF.PR.P The trademarks contained in this report are owned by Power Financial Corporation, or a member of the Power Corporation group of companies™. Trademarks that are not owned by Power Financial Corporation are used with permission. Shareholders with questions relating to the payment of dividends, change of address and share certificates should contact the Transfer Agent: Computershare Investor Services Inc. Shareholder Services 100 University Avenue, 9th Floor Toronto, Ontario M5J 2Y1 Telephone: 1-800-564-6253 (toll-free in Canada and the U.S.) or 514-982-7555 www.computershare.com WEB SITE www.powerfinancial.com Si vous préférez recevoir ce rapport annuel en français, veuillez vous adresser au secrétaire, CORPORATION FINANCIÈRE POWER 751, square Victoria Montréal (Québec) Canada H2Y 2J3 Bureau 2600, Richardson Building 1 Lombard Place Winnipeg (Manitoba) Canada R3B 0X5 92 POWER FINANCIAL CORPORATION 2010 ANNUAL REPORT A D A N A C N I D E T N I R P