annual r epor t 2011 confidence in the future Confidence in the future In a world of constant change and difficult challenges, it can often seem that having confidence in the future requires a leap of faith. Yet what it really requires is good preparation. The companies in the Power Financial group, through the efforts of thousands of employees and financial advisors, working one-on-one with individual clients or through workplace group programs, provide the services, products and the discipline to help millions of people be well prepared. Confidence in the future — it’s based on being prepared, not on a leap of faith. This Annual Report is intended to provide In addition, selected information concerning The following abbreviations are used interested shareholders and other interested the business, operations, financial condition, throughout this report: Power Financial persons with selected information concerning financial performance, priorities, ongoing Corporation (Power Financial or the Power Financial Corporation. For further objectives, strategies and outlook of Power Corporation); Arkema Inc. (Arkema); information concerning the Corporation, Financial Corporation’s subsidiaries and Great-West Life & Annuity Insurance Company shareholders and other interested persons associates is derived from public information (Great-West Life & Annuity or GWL&A); should consult the Corporation’s disclosure published by such subsidiaries and associates Great-West Lifeco Inc. (Great-West Lifeco documents, such as its Annual Information and is provided here for the convenience of the or Lifeco); Groupe Bruxelles Lambert (GBL); Form and Management’s Discussion and shareholders of Power Financial Corporation. IGM Financial Inc. (IGM Financial or IGM); Analysis. Copies of the Corporation’s continuous For further information concerning such Imerys S.A. (Imerys); Investment Planning disclosure documents can be obtained subsidiaries and associates, shareholders Counsel Inc. (Investment Planning Counsel); at www.sedar.com, on the Corporation’s and other interested persons should consult Investors Group Inc. (Investors Group); website at www.powerfinancial.com, or from the websites of, and other publicly available Lafarge S.A. (Lafarge); London Life Insurance the Office of the Secretary at the addresses information published by, such subsidiaries Company (London Life); Mackenzie Financial shown at the end of this report. and associates. Readers should also review the note further in The selected performance measures shown on this report, in the section entitled Review of pages 2, 3 and 5 are as of December 31, 2011 Financial Performance, concerning the use of unless otherwise noted. Forward-Looking Statements, which applies to the entirety of this Annual Report. 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, IFRS refers to International Financial Reporting Standards. Financial Highlights FOR THE YEARS ENDED D ECEMBER 31 [IN MILLIONS OF CANADIAN DOLLARS , E xCEPT PER SHARE AMO uNTS] Revenues Operating earnings attributable to common shareholders Operating earnings per common share Net earnings attributable to common shareholders Net earnings per common share Dividends declared per common share Total assets Consolidated assets and assets under management Shareholders’ equity Total equity Book value per common share Common shares outstanding (in millions) 2011 32,400 1,729 2.44 1,722 2.43 1.40 252,678 496,781 13,521 22,815 16.26 708.2 2010 32,522 1,625 2.30 1,468 2.08 1.40 244,644 500,181 12,811 21,522 15.26 708.0 The Corporation uses operating earnings as a performance measure in analyzing its financial performance. For a discussion of the Corporation’s use of non-IFRS financial measures, please refer to the Review of Financial Performance section in this Annual Report. TABLE OF CONTENTS Financial Highlights Group Organization Chart Business Summary Directors’ Report to Shareholders Responsible Management Great-West Lifeco Great-West Life, London Life, Canada Life Canada Life – Europe Great-West Life & Annuity Putnam Investments 1 2 4 6 16 18 19 21 22 23 IGM Financial Investors Group Mackenzie Financial Pargesa group Review of Financial Performance Consolidated Financial Statements and Notes Five-Year Financial Summary Board of Directors Officers Corporate Information 24 26 27 28 31 45 111 112 113 114 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 1 Group Organization Chart PO W E R F I N A N C I A L C O R P O R A T I O N 4.0% 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. 2011 OPERATING EARNINGS ATTRIBuTABLE TO COMMON SHAREHOLDERS $1,729 MILLION 2011 RETuRN ON SHAREHOLDERS’ EquITY 15.5% CONSOLIDATED ASSETS AND ASSETS uNDER MANAGEMENT TOTAL ASSETS uNDER ADMINISTRATION $496.8 BILLION $620.7 BILLION 2 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 68.2%100%GREAT-WEST LIFE100%LONDON LIFE 2011 Operating earnings attributable to common shareholders$1,898 million 2011 Return on shareholders’ equity16.6%Total assets under administration$502 Billion100%CANADA LIFE100%great-west life & annuity 100%PUTNAMINVESTMENTSGreat-West Lifeco 3.6% Percentages denote participating equity interest as at December 31, 2011. [1] On March 15, 2012, GBL reduced its equity interest in Pernod Ricard to 7.5%. Operating earnings is a non-IFRS financial measure. Return on shareholders’ equity is calculated using operating earnings. POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 3 57.6%50.0%56.5%IGMFinancialParjointcoPargesa100% INVESTORSGROUP50.0%Groupe Bruxelles lamBertImerys 57.0%Lafarge 21.0%GDF SUEZ 5.2% Suez environnement7.2% total 4.0%pernod ricard 9.8% [1] 100% MACKENZIE FINANCIAL 93.9% INVESTMENT PLANNINGCouNSEL2011 Operating earnings available to common shareholders$833 million2011 Return on shareholders’ equity19.7%Total assets under management$118.7 Billion2011 Operating earningsSF 343 millionNet asset valueSF6.7 Billion > Gold Key financial security advisors associated with Great-West Life > Serves the financial security needs of more than 12 million Canadians > 26% market share of individual life insurance measured by premium [1] > Freedom 55 Financial and Wealth & Estate Planning Group financial > 25% market share of individual living benefits measured by premium [1] security advisors associated with London Life > 27% market share of individual segregated funds [1] > Independent advisors associated with managing general agencies > 22% market share of group insurance [3] > National accounts, including Investors Group > 18% market share of group capital accumulation plans, > Great-West Life group insurance and retirement sales and service serving 1.2 million member accounts [4] staff in offices across Canada that support independent advisors, > Leading market share for creditor insurance revenue premium brokers and benefit consultants distributing its group products > Brokers, consultants, advisors and third-party administrators > GWL&A and its subsidiaries provide services to nearly 25,000 defined > Financial institutions contribution plans > Sales and service staff and specialized consultants > Putnam has nearly 5 million shareholders and retirement plan > Services global institutional, domestic retail, defined contribution, participants and nearly 150 institutional client accounts around and registered investment advisor markets the world > More than 170,000 advisors distribute Putnam products > Independent financial advisors and employee benefit u.K. AND > 30% share of group life market[3] 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 > > > ISLE OF MAN > 20% share of group income protection market[3] > Among the top offshore life companies in the u.K. market with 22% share[1] > Among the top insurers in payout annuities, with 6% market share[1] IRELAND > Among the top seven insurers by new business market share[4] GERMANY > One of the top two insurers in the independent intermediary unit-linked market[1] > Among the top six in the overall unit-linked market[2] REINSuRANCE > Among top ten life reinsurers in the u.S. by assumed business Business Summary Products & Services Distribution Channels Market Position Great-West Lifeco Great-West Life London Life Freedom 55 Financial™ Canada Life Great-West Life & Annuity Putnam Investments 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 retirement accounts, life insurance, annuities, business-owned life insurance and executive benefits products > Global asset management offering mutual funds, institutional portfolios, > college savings plans, 401(k)s, IRAs and other retirement plans Investment capabilities include fixed income, equities (both u.S. and global), absolute return and global asset allocation Europe > Protection and wealth management products and related services in the united Kingdom, Isle of Man, Ireland and Germany > Reinsurance and retrocession business, primarily in the united States and European markets [1] As at September 30, 2011 [2] As at December 31, 2011 [3] As at December 31, 2010 [4] As at June 30, 2011; Benefits Canada 2011 CAP report data IGM Financial Investors Group Mackenzie Financial Investment Planning Counsel Pargesa 4 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT Products & Services Distribution Channels Market Position > 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 > Investors Group network of 4,608 consultants > $118.7 billion in assets under management > Mackenzie sales and service for financial advisors across all wealth > Significant market position in mutual fund management, management channels (over 30,000 financial advisors) > Investment Planning Counsel has over 850 independent financial planners > Institutional asset management sales force > Relationship with Canadian Medical Association with 13.3% of industry long-term mutual fund assets under management > Among Canada’s leading providers of financial planning services > $22.5 billion in institutional, sub-advised and other mandates with Mackenzie Products & Services Group Holdings Performance Record > 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 LAFARGE > One of the world leaders in cement, > Strong and consistent dividend payout; $2.7 billion over 15 years aggregates and concrete > Consistent outperformance of relevant equity market indices over the IMERYS TOTAL > > A world leader in industrial minerals An international integrated oil and long term > Fifteen-year total return to shareholders of 7.7% (SF), compared with 5.2% (SF) for the Swiss SPI index and 4.9% (€) GDF SuEz > A leading energy provider in electricity for the French CAC 40 index gas company and natural gas SuEz ENVIRONNEMENT > An international water and waste management company PERNOD RICARD > The world co-leader in wines and spirits Great-West Lifeco Great-West Life London Life Freedom 55 Financial™ Canada Life Great-West Life & Annuity Putnam Investments 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 retirement accounts, life insurance, annuities, business-owned life insurance and executive benefits products > Global asset management offering mutual funds, institutional portfolios, college savings plans, 401(k)s, IRAs and other retirement plans > Investment capabilities include fixed income, equities (both u.S. and global), absolute return and global asset allocation Europe > Protection and wealth management products and related services in the united Kingdom, Isle of Man, Ireland and Germany > Reinsurance and retrocession business, primarily in the united States and European markets Products & Services 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 managing general agencies > > 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 > Serves the financial security needs of more than 12 million Canadians > 26% market share of individual life insurance measured by premium [1] > 25% market share of individual living benefits measured by premium [1] > 27% market share of individual segregated funds [1] > 22% market share of group insurance [3] > 18% market share of group capital accumulation plans, serving 1.2 million member accounts [4] > Leading market share for creditor insurance revenue premium > Brokers, consultants, advisors and third-party administrators > Financial institutions > Sales and service staff and specialized consultants > Services global institutional, domestic retail, defined contribution, and registered investment advisor markets > GWL&A and its subsidiaries provide services to nearly 25,000 defined contribution plans > Putnam has nearly 5 million shareholders and retirement plan participants and nearly 150 institutional client accounts around the world > More than 170,000 advisors distribute Putnam products > 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 > > > IRELAND GERMANY > REINSuRANCE > > 30% share of group life market[3] > 20% share of group income protection market[3] > Among the top offshore life companies in the u.K. market with 22% share[1] Among the top insurers in payout annuities, with 6% market share[1] Among the top seven insurers by new business market share[4] One of the top two insurers in the independent intermediary unit-linked market[1] Among the top six in the overall unit-linked market[2] Among top ten life reinsurers in the u.S. by assumed business IGM Financial Investors Group Mackenzie Financial Investment Planning Counsel Pargesa > 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 > 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 Products & Services Distribution Channels Market Position Investors Group network of 4,608 consultants > > Mackenzie sales and service for financial advisors across all wealth > management channels (over 30,000 financial advisors) Investment Planning Counsel has over 850 independent financial planners > Institutional asset management sales force > Relationship with Canadian Medical Association > $118.7 billion in assets under management > Significant market position in mutual fund management, with 13.3% of industry long-term mutual fund assets under management > Among Canada’s leading providers of financial planning services > $22.5 billion in institutional, sub-advised and other mandates with Mackenzie Products & Services Group Holdings Performance Record LAFARGE IMERYS TOTAL GDF SuEz > > > > SuEz ENVIRONNEMENT > PERNOD RICARD > One of the world leaders in cement, aggregates and concrete 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 > Strong and consistent dividend payout; $2.7 billion over 15 years > Consistent outperformance of relevant equity market indices over the long term > Fifteen-year total return to shareholders of 7.7% (SF), compared with 5.2% (SF) for the Swiss SPI index and 4.9% (€) for the French CAC 40 index POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 5 Directors’ Report to Shareholders Power Financial Corporation and its subsidiaries continued to produce strong financial results in the face of challenging economic and financial market conditions in 2011. It was a year of two halves, with investor sentiment and market levels improving substantially in the first half and then deteriorating sharply in the second. Turmoil in Europe weakened markets across the globe and presented a particular challenge to growth in our united Kingdom and European businesses. It also contributed to a lowering of interest rates globally, which puts pressure on the profitability of a number of life insurance products. The strength of our approach to balance sheet management, our strong risk-management culture and credit investing skills, and the resilience of our distribution channels helped us grow our earnings in 2011, in spite of these challenges. Throughout the year, the companies in our group maintained their focus on strengthening their products, as well as their distribution and client service capabilities, in order to provide enhanced value to their clients and take advantage of the growth opportunities in their respective markets. Our businesses are focused on helping individuals achieve and maintain financial security throughout their lifetimes. We do so by serving individuals both one-on-one and through employer-based group programs. Our research indicates that the need for products and services that help people prepare for and live comfortably in retirement will continue to grow. Our research also indicates that savings rates are by far the most important determinant of retirement preparedness. It shows clearly that individuals with a financial advisor save more and are better prepared for retirement, at all income and age levels. We therefore continue to invest in businesses centered on delivering financial services and products through financial advisors. In 2011, our companies picked up the pace of investing in technology, for both improved efficiency and enhanced client interfaces. In many of their lines of business, our companies invested in sales tools, financial planning tools and enhancements to the customer experience. 6 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT We believe our corporate governance structures and practices have been essential in creating and maintaining strong business franchises capable of performing in good times and in bad. Our governance is rooted in a long-term perspective towards shareholder returns, and focuses upon key factors such as strategy, people, capital and risk. We oversee our principal investments through boards of directors made up of a mix of experienced individuals both from within our group and from the outside. Our group companies also have a long and proud history of contributing to the well-being of the communities in which they operate. We are building upon these well-ingrained practices by adopting a more structured approach to our corporate social responsibilities. The principles underlying our approach in this area are outlined later in this report under “Responsible Management”. FIN A N CIA L RE S u LT S Power Financial’s operating earnings attributable to common shareholders for the year ended December 31, 2011 were $1,729 million or $2.44 per share, compared with $1,625 million or $2.30 per share in the corresponding period in 2010. This represents an increase of 6.2 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. The need for products and services that help people prepare for and live comfortably in retirement will continue to grow. POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 7 Directors’ Report to Shareholders CONTINuED For the twelve-month period ended December 31, 2011, other items represented a charge of $7 million, compared with a charge of $157 million in the corresponding period in 2010. Other items in 2011 include a contribution of $88 million representing the Corporation’s share of non-operating earnings of Great-West Lifeco. In the fourth quarter of 2011, Great-West Lifeco re-evaluated and reduced the litigation provision established in the third quarter of 2010, which positively impacted Great-West Lifeco’s common shareholders’ net earnings for 2011 by $223 million. Additionally, Great-West Lifeco established a provision of $99 million in respect of the settlement of litigation relating to its ownership in a u.S.-based private equity firm. Other items in 2011 also include a charge of $133 million representing the Corporation’s share of GBL’s €650 million write-down of its investment in Lafarge. Net earnings attributable to common shareholders, including other items, were $1,722 million or $2.43 per share for the year ended December 31, 2011, compared with $1,468 million or $2.08 per share in 2010. Dividends paid by Power Financial Corporation totalled $1.40 per common share in 2011, unchanged from 2010. GRO u P COM PA NIE S’ RE S u LT S Great-West Lifeco Great-West Lifeco’s financial condition remains very solid as a result of its continued strong performance in 2011. The company delivered superior results compared to peer companies in its industry due to strong organic growth of premiums and deposits, and solid investment performance, despite challenging market conditions. Great-West Lifeco reported operating earnings attributable to common shareholders of $1,898 million for 2011, compared with $1,819 million for 2010. Great-West Lifeco’s return on equity (ROE) of 16.6 per cent on operating earnings and 17.6 per cent on net earnings for the twelve months ended December 31, 2011 continued to rank among the strongest in the financial services sector. Other measures of Great-West Lifeco’s performance in 2011 include: > Premiums and deposits of $62.3 billion, compared with $59.1 billion in 2010. > An increase in general fund and segregated fund assets from $229.4 billion to $238.8 billion in 2011. > Total assets under administration at December 31, 2011 of $502 billion, compared to approximately $487 billion a year ago. 8 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT The dividend on Great-West Lifeco’s common shares remained unchanged in 2011. Great-West Lifeco’s capital position remains very strong. The Minimum Continuing Capital and Surplus Requirements (MCCSR) ratio for Great-West Life was 204 per cent on a consolidated basis at December 31, 2011. This measure of capital strength remains at the upper end of the target operating range. At December 31, 2011, Great-West Lifeco held cash and cash equivalents of approximately $600 million, the net result of capital transactions since the third quarter of 2008. As this cash is held at Great-West Lifeco, it is not reflected in the regulatory capital ratios of its operating subsidiaries. It augments Great-West Lifeco’s capital and liquidity position, thereby enhancing the company’s capability to take advantage of market opportunities. In Canada, Great-West Lifeco’s companies maintained leading market positions in their individual and group businesses. Individual insurance sales in Canada increased 6 per cent and sales of proprietary retail investment funds increased 3 per cent year over year. The Canadian operations have experienced strong organic growth by focusing on diversified distribution, prudent product and service enhancements, and expense management. Group retirement services recorded strong growth and group insurance continued to experience strong persistency, while individual segregated funds and mutual funds maintained positive net cash flows. Together, Great-West Lifeco’s operating companies remain Canada’s number one provider of individual insurance solutions. In the united States, Great-West Lifeco’s Financial Services businesses continued to post solid results in 2011. While overall sales were down from 2010’s record-setting year, a focus on expanded distribution and diverse product offerings contributed to a 23 per cent increase in corporate 401(k) plan sales and a strong jump in regional and national business-owned life insurance cases in 2011. In 2011, Putnam continued to rebuild its brand and position in the marketplace by focusing on investment performance and innovation, and introduced new ways for investors to cope with volatile markets. For example, the firm launched Putnam Dynamic Risk Allocation Fund, which Putnam believes may achieve higher returns than a traditional balanced fund with approximately the same volatility and risk. Putnam also established itself as one of the leaders in using social media as a means to interact with its clients and strengthen its brand. In Europe, Great-West Lifeco has operations through Canada Life in the united Kingdom, Isle of Man, Ireland and Germany. POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 9 Directors’ Report to Shareholders CONTINuED In 2011, the company continued to face challenging credit markets as well as a general loss of consumer confidence in investments due to volatility in equity markets. These pressures continued to affect sales volumes. Earnings were again impacted by the required strengthening of reserves for future asset default risk and asset impairments. The earnings impact was somewhat mitigated by both the company’s credit risk reduction activities and the opportunity for yield enhancement of gilt holdings (u.K. government-issued securities) due to wider credit spreads. iGM financiaL IGM Financial and its operating companies experienced an increase in net earnings in 2011. Average total assets under management increased year over year. Investors Group and Mackenzie Financial, the company’s principal businesses, continued to generate business growth through product innovation, investment management, resource management and distribution expansion throughout the year. Operating earnings available to common shareholders for the year ended December 31, 2011 were $833 million or $3.22 per share compared to operating earnings available to common shareholders of $759 million or $2.89 per share in 2010. Net earnings available to common shareholders, including other items, for the year ended December 31, 2011 were $901 million or $3.48 per share compared to net earnings available to common shareholders, including other items, of $731 million or $2.78 per share in 2010. Total assets under management at December 31, 2011 totalled $118.7 billion. This compared with total assets under management of $129.5 billion at December 31, 2010, a decrease of 8.3 per cent. The decrease was driven primarily by declining stock market levels in the last half of the year. Dividends were $2.10 per share for the year, up from $2.05 in the prior year. The Investors Group Consultant network continued to expand by opening five new region offices during 2011. The company now has 106 region offices across Canada. There were 4,608 Consultants at December 31, 2011. Investors Group mutual fund assets under management were $57.7 billion at the end of 2011, compared with $61.8 billion in 2010. Mutual fund sales were $6.0 billion, compared with mutual fund sales in 2010 of $5.7 billion. The redemption rate on long-term mutual funds for 2011 was 8.8 per cent compared to 8.3 per cent at December 31, 2010. Net sales of mutual funds in 2011 were $39 million. 10 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 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. Throughout the year, consultants worked with clients to help them understand the impact of financial market volatility on their long-term financial planning. Mackenzie’s total assets under management were $61.7 billion at the end of 2011, compared with $68.3 billion at December 31, 2010. Total sales were $10.3 billion, down from the prior year’s level of $12.2 billion. Total net redemptions for the year were $2.5 billion, compared with $1.5 billion in 2010. Mackenzie 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 2011, Mackenzie broadened its investment choices for Canadians by adding several new funds and more options, including tax-deferred solutions. Individuals with a financial advisor save more and are better prepared for retirement, at all income and age levels. POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 11 Directors’ Report to Shareholders CONTINuED ParGesa Directly and through the Belgian holding company Groupe Bruxelles Lambert (GBL), the Pargesa group holds significant positions 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. Pargesa’s operating earnings stood at SF343 million in 2011 versus SF466 million in 2010. The decline in income was mainly due to a weakening of the euro against the Swiss franc, Pargesa’s reporting currency. The average 2011 rate declined 13.0 per cent and Pargesa recorded a SF55 million exchange loss on the sale of euros resulting from the sale of its interest in Imerys to GBL. Moreover, although Imerys’ income rose, its contribution at the Pargesa level declined due to the latter’s decreased economic interest in this holding. After the assumption of a SF416 million write-down on GBL’s interest in Lafarge, net income showed a SF65 million loss. The write-down had no impact on the group’s cash or adjusted net assets. At the end of December 2011, Pargesa’s adjusted net asset value was SF6.7 billion. This represents a value of SF80.0 per Pargesa share, compared with SF99.8 at the end of 2010, a decrease of 19.8 per cent expressed in Swiss francs. The 2011 financial crisis put a stop to the cyclical upturn in industrial production and international trade that began in 2010. After rebounding sharply in 2010, economic growth slowed again in the second half of last year. The European debt crisis spread to the real economy as the weakening of European banking systems led to a slowdown in lending, and drastic emergency public spending cuts in some countries had a negative impact on growth. By the end of fiscal 2011, the euro zone had entered a recession. At the next annual meeting of shareholders on May 16, 2012, Pargesa’s board of directors will propose paying a dividend of SF2.57 per holder’s share, for a total distribution of SF217.5 million. The dividend per share of SF2.57 represents a 5.5 per cent decrease, in Swiss francs, but a 2.4 per cent increase when expressed in euros, the currency in which the portfolio of the group is denominated. 12 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT GROu P D E V ELO PM EN T S One of the most notable group developments this year was the sale of Pargesa’s stake in Imerys to GBL. In April 2011, Pargesa sold its 25.6 per cent interest in Imerys for €1,087 million to GBL, thereby concentrating the ownership and oversight of Imerys within GBL. The position stood at 57.0 per cent as at December 31, 2011. The purpose of this transaction from Pargesa’s perspective was to ensure that it had adequate cash resources to meet debt maturities coming due over the next two years. Pargesa’s only holding now consists of its 50 per cent investment in GBL. GBL also took action to extend upcoming maturing debt during the year. The companies in the Power Financial group were active in the capital markets in February 2012 with the issuance of perpetual preferred shares to improve the quality of capital: Great-West Lifeco issued $250 million of First Preferred Shares, Series P, and Power Financial issued $250 million of First Preferred Shares, Series R. C A N A DA’ S RE T IRE M EN T RE A D IN E S S The evolving savings and retirement readiness of Canadians are matters of vital importance in an environment of volatile economic and market conditions, and the demographic pressures of an aging work force, longer life expectancies and shorter working careers. Studies show that 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, mainly because they do not save enough or do not benefit from participation in a retirement plan. Enhancements to the system can and should be made in order to facilitate and incent Canadians to save more. The retirement readiness of Canadians is best enhanced through targeted, incremental changes to an already well-balanced retirement system which blends public and private responsibility. 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. Moreover, the relationship with a financial advisor generally starts early in life and, contrary to popular belief, begins when the individual has a relatively low level of financial assets. The value of advice is based upon the impact of a long-term relationship between an individual or household and a financial advisor where saving habits and market discipline are built over time. POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 13 Directors’ Report to Shareholders CONTINuED BOA RD O F D IREC TO R S Several Directors will not stand for re-election at the May 2012 Annual Meeting of Shareholders. Mr. Brian Aune joined the Board of Power Financial Corporation in 2006. He had been Chairman and Chief Executive Officer of Nesbitt Thomson for over ten years, and brought to the Board the benefit of his involvement in the financial services industry and in many other Canadian business sectors. The Right Honourable Donald F. Mazankowski was first elected to the Board in 1996, following a distinguished career of public service during which he held the posts of Deputy Prime Minister of Canada, Minister of Finance, President of the Treasury Board, Minister of Transport, Minister of Agriculture and President of the queen’s Privy Council for Canada. He served on the Executive Committee of the Board. He has also served for many years on the Boards and Board Committees of Power Corporation, Great-West Lifeco and subsidiaries, and IGM Financial and subsidiaries, where he chaired the Audit Committee. Mr. Jerry E. A. Nickerson, Chairman of the Board of H.B. Nickerson and Sons Limited, has been a Director of Power Financial Corporation since 1999, bringing with him many years of business experience. In recent years, he sat on the Audit Committee of the Board. Mr. Nickerson has also served as a Director of Power Corporation and Great-West Lifeco and subsidiaries, and as a member of several committees of these companies’ boards. He chaired the Audit Committees of Great-West Lifeco and the Great-West Life Assurance Company from 1994 to 2009 and of other subsidiaries at various times during that period. In addition, and in keeping with the Corporation’s practice of maintaining a majority of Directors who are independent of management, several Directors who are also, and will remain, senior officers of the Corporation or its affiliates will not stand for re-election. They are Messrs. Raymond L. McFeetors, Michel Plessis-Bélair (who will be named a Vice-Chairman of the Corporation), Dr. Henri-Paul Rousseau, and Mr. Amaury de Seze. On behalf of the Board and the shareholders, we wish to thank all of these Directors for their valuable service to Power Financial Corporation and its affiliates over many years. During their tenure and with the benefit of their judgment and wise counsel, the Power Financial group made several important acquisitions and dispositions, successfully confronted the economic challenges of recent years, and achieved long-term performance of which they should be justifiably proud. 14 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT Fu T u RE O u T LO O K The last several years have been extremely challenging for the developed economies of the world and for the financial services industry in particular. Despite great progress on many fronts, many structural imbalances remain to be resolved, including the large fiscal or trade deficits in many countries. In the financial services industry, there is the added risk that the regulatory reform pendulum may swing back so hard that it exacerbates the resolution of these problems. Despite the obstacles, the need for products and services that help individuals prepare for and live comfortably in retirement will continue to grow in the future. Against this backdrop, Power Financial continues to pursue its strategy based on a long-term view of the opportunities that lie ahead for our group companies. We do so with confidence in the future. 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 2011 in an improving but challenging operating environment. On behalf of the Board of Directors, signed signed signed R. Jeffrey Orr President and Chief Executive Officer March 14, 2012 Paul Desmarais, Jr., o.c., o.q. Co-Chairman of the Board André Desmarais, o.c., o.q. Co-Chairman of the Board POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 15 Responsible Management Responsible management has long been an intrinsic corporate value at our company and is a constant priority that we believe is essential to long-term profitability and value creation. Responsible management defines our approach at Power Financial, in all facets of our business. It informs our efforts when dealing with corporate social responsibility (CSR) issues and initiatives relating to our portfolio companies. The same is true with the manner in which we manage our relationships with the communities where we are established and the ethical way in which we treat our customers, employees and business partners. Oversight: We reMain coMMitted to furtherinG PeOPle: We suPPort our PeoPLe by ProvidinG an enrichinG, sOciety: We contribute to society by offerinG sound our resPonsibLe ManaGeMent resPectfuL, baLanced and Products and services, and by PhiLosoPhy, Predicated on a stronG foundation of inteGrity and ethicaL conduct. Our CSR Statement, which can be found on our website, reflects our philosophy of responsible management. It helps shape the corporate culture we foster throughout the Power Financial group of companies. A Power Financial officer has been tasked with overseeing the implementation of our CSR Statement and will be providing annual progress reports on our CSR initiatives to the Governance and Nominating Committee of the Board of Directors. We encourage and support the efforts of our portfolio companies to develop initiatives consistent with our CSR Statement. We also work with our operating subsidiaries on group-wide CSR strategic issues. reWardinG Work environMent. We rely on all the people in our group of companies for the success of our business. A motivated work force respected by management is one of the most effective means we have to create long-term value for our shareholders. We actively support a culture of development and performance. We seek to create flexible and balanced workplaces that recognize the value of diversity and personal well-being. Our people are the ambassadors of our core values. Our management philosophy is based on teamwork and trust, especially critical in our business environment where they are charged with earning the trust of our customers. We will continue to ensure they benefit from positive working relationships and opportunities for personal growth. suPPortinG the coMMunities Where We are estabLished. The mainstay of our business is financial services. Our companies help customers achieve their financial and retirement goals by providing financial advice and planning products and services. We believe that the companies in which we invest have sound and well-structured products that meet customer needs and provide value. Our primary areas of focus are life and health protection, retirement savings and investment advisory services. Our companies operate in a financially prudent manner and have sustainable business models within their relative markets. In the context of our responsible management and active ownership approach, we recognize the importance of integrating environmental, social and governance considerations when interacting with our portfolio companies. 16 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT As part of our CSR values, we strive to be responsible corporate citizens and make a positive contribution to the communities where the Corporation is established. Through our parent company, Power Corporation, we have generously contributed to more than 800 organizations through the years and supported many employee volunteering initiatives. We will continue to support our communities with a focus on health, education, arts and culture, community development, and the environment. envirOnment: We Work to reduce the environMentaL iMPact of our businesses throuGh continuous iMProveMent. Sound environmental practices and behaviours are well-rooted in how the Corporation approaches its business activities, and we remain committed to conducting our activities in an environmentally-responsible manner. As a holding company, our limited direct environmental impact is primarily related to the activities of our head office, which has no production, manufacturing or service operations. Over the years, we have focused our efforts on resource conservation, energy efficiency and waste management. We remain committed to continuously reducing our limited impact while working with our group companies to support their environmental management initiatives. cOllabOratiOn and transParency: We are coMMitted to resPonsibLe discLosure. We believe in enhancing our disclosure to better communicate our responsible management activities. We realize this is an area that continues to grow in importance for our stakeholders. Over the coming years, we will be improving the quality of our CSR reporting to provide meaningful information to our stakeholders. Our group companies have a long and proud history of contributing to the well-being of the communities in which they operate. POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 17 Great-West Lifeco Great-West Lifeco is an international financial services holding company with interests in life insurance, health insurance, retirement and investment services, asset management and reinsurance businesses. Great-West 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. Great-West Lifeco and its companies have over $502 billion in total assets under administration. Great-West Lifeco’s financial condition remains very solid as a result of its continued strong performance in 2011. The company delivered superior results compared to peer companies in its industry due to strong organic growth of premiums and deposits, as well as solid investment performance, despite challenging market conditions. Great-West Lifeco’s companies continue to benefit from 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 Great-West Lifeco and its companies over the long term. Great-West Lifeco’s approach to asset and liability management has minimized exposure to interest rate movements. In Canada, Great-West Lifeco continued to offer segregated fund guarantees in a judicious and disciplined manner, thereby limiting risk exposure. As a result of these practices, Great-West 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 204 per cent on a consolidated basis at December 31, 2011. This measure of capital strength remains at the upper end of the company’s target operating range. At December 31, 2011, Great-West Lifeco held cash and cash equivalents of approximately $600 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 Great-West Lifeco’s operating subsidiaries. It augments Great-West Lifeco’s capital and liquidity position, thereby enhancing its capability to take advantage of market opportunities. 18 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT Great-West Life London Life Canada Life CANADA Great-West Life—founded in Winnipeg, Manitoba in 1891, is a leading Canadian insurer, with interests in life insurance, 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. London Life—founded in London, Ontario in 1874, has been helping Canadians meet their financial security needs for more than 135 years. canada Life—founded in 1847, was Canada’s first domestic life insurance company. Great-West Life 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 distribution 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, health care, dental care, critical illness, disability, wellness and international benefits, plus convenient online services. The company 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 our companies, as well as independent advisors, brokers and consultants. In 2011 Great-West Life and its subsidiaries continued to see strong sustained performance in their Canadian businesses. Their individual insurance business grew slightly faster than the market; the group retirement services business recorded solid growth; the group insurance business continued to experience strong persistency; and the individual segregated fund and mutual fund businesses maintained positive net cash flows. POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 19 Our businesses are focused on helping individuals achieve and maintain financial security throughout their lifetimes. London Life London Life offers financial security advice and planning through its more than 3,150-member Freedom 55 Financial division. Freedom 55 Financial offers London Life’s own brand of investment, savings and retirement income, annuities, 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. A London Life subsidiary, quadrus Investment Services Ltd., offers 43 exclusive mutual funds under the Quadrus Group of Funds™ brand. The relationship the company has with advisors supports the very strong persistency of its business, provides a strategic advantage and contributes to strong market share across multiple lines of business. canada Life In Canada, the company offers a broad range of insurance and wealth management products and services for individuals, families and business owners from coast to coast. These products include investments, savings and retirement income, annuities, life, disability and critical illness insurance. Canada Life, together with Great-West Life, is a leading provider of individual disability and critical illness insurance in Canada. 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. 20 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT Canada Life EuROPE 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; savings and individual insurance in the Isle of Man; individual insurance, savings and pension products in Ireland; and fund-based pensions, critical illness and disability insurance in Germany. Through its Reinsurance Division, Canada Life is a leading provider of traditional mortality, structured and annuity reinsurance solutions for life insurers in the united States and in international markets. As a result of its continued emphasis on credit and expense controls, Canada Life was in a strong position coming into 2011, and this focus was maintained throughout the year. Additionally, there was renewed attention on risk and risk management, as Canada Life prepares for the advent of Solvency II in Europe. 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 the group insurance business. Sales of payout annuities were very strong in the early part of 2011. 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. Despite challenging market conditions for unit-linked providers, retirement savings product sales, and in particular sales of the market-leading Guaranteed Minimum Withdrawal Benefit (GMWB) product, showed strong growth in 2011. Canada Life’s serious illness and GMWB products retained their status as the leaders in their categories in a recent poll of insurance intermediaries. In Ireland, Canada Life became the first company to launch a guaranteed variable annuity product, and also launched a new Income Opportunities Fund, managed by Setanta Asset Management, the group’s asset manager in Ireland. In 2011, reinsurance demand remained strong, particularly for structured reinsurance solutions with u.S. life insurers. Canada Life continued to leverage its financial strength, disciplined risk management practices and excellent client relationships to achieve strong business results in the face of significant catastrophe impacts early in the year. The company continues to follow capital developments globally for potential business opportunities. POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 21 Great-West Life & Annuity uNITED STATES Great-West Life & Annuity is a leading provider of employer-sponsored retirement savings plans. GWL&A and its subsidiaries offer fund management, investment and advisory services, as well as record-keeping and administrative services for other plan providers. GWL&A also offers business-owned life insurance, executive benefits products, individual retirement accounts, life insurance and annuities. The company markets its products and services nationwide through its sales force and distribution partners. In 2011, GWL&A made significant progress on its strategic plan. Key initiatives to increase sales and assets under management, enhance service and launch new products laid the groundwork for accelerated growth. Expanded distribution and diverse product offerings contributed to a 23 per cent increase in corporate 401(k) plan sales and a jump in regional and national business-owned life insurance cases to nine in 2011 from three the previous year. An agreement with a nationwide financial distributor created a high-potential channel for corporate 401(k) sales, while GWL&A also added distribution partners to drive additional sales of individual life insurance products. A new online sales tool aggregated information about 401(k) prospects, advisors, plans and sales metrics to increase opportunities and sales force productivity. A new customer relationship management system consolidated legacy databases to improve service to plan sponsors and partners and enhance client retention. The Maxim Lifetime Asset Allocation Series mutual funds, which provide retirement target date options, and the Maxim SecureFoundation Portfolios, which offer guaranteed lifetime income within retirement plans, together ranked 10th in net flows among u.S. target date offerings in 2011. An individual retirement account rollover initiative helped increase asset retention. A new hybrid product accounted for 26 per cent of business-owned life insurance sales in 2011. A collective trust product introduced in 2011 provides target date asset allocation investment solutions to large corporate and government plan markets. 22 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT Putnam Investments uNITED STATES EuROPE ASIA This year, Putnam celebrates 75 years of managing money for individual and institutional investors. Inspired by balance, the firm has practised an active, risk-conscious approach to pursuing client mandates since the launch of the George Putnam Balanced Fund in 1937. Putnam today provides investment services across a range of equity, fixed income, absolute return and alternative strategies. The global asset manager and retirement plan provider distributes those services largely through intermediaries via its offices and strategic alliances in North America, Europe and Asia. Putnam made significant progress in 2011 as the firm continued to focus on further bolstering its investment and distribution capabilities, retirement offerings, brand strength in the marketplace, state-of-the-art technology and innovative product offerings, while maintaining award-winning customer service. The firm expanded its product line during the year with funds that seek to help advisors and their clients manage the challenges of the current investment era, through the introduction of Putnam Dynamic Risk Allocation Fund, Putnam Short Duration Income Fund, and the Putnam Retirement Income Lifestyle Funds. Putnam continued to bring value-added thought leadership and differentiated practice management services to the marketplace last year. Putnam launched the acclaimed FundVisualizer™ tool and Wealth Management Center for financial advisors, as well as the Putnam Institute, which aims to critically examine key investment theories and issues of importance to individual and institutional investors, consultants, plan sponsors and financial advisors. In 2011, Putnam was recognized by a number of industry observers for strong investment results, service and business leadership. The firm received six Lipper Fund Awards based on performance excellence across multiple asset classes for periods of three years or more. Additionally, Putnam won the DALBAR Service Award for the 22nd consecutive year for providing the highest levels of investor service to mutual fund shareholders, and was named Retirement Leader of the Year by a major industry publication. POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 23 IGM Financial IGM Financial is one of Canada’s premier personal financial services companies, and one of the country’s largest managers and distributors of mutual funds and other managed asset products, with over $118 billion in total assets under management at December 31, 2011. The company serves the financial needs of Canadians through multiple distinct businesses, including Investors Group, Mackenzie Financial and Investment Planning Counsel. Fundamental to its activities is the belief in the value of advice in contributing to the advancement of the financial literacy and financial security of Canadians. IGM Financial and its operating companies experienced an increase in net earnings in 2011. Average total assets under management increased year over year. Investors Group Inc. and Mackenzie Financial Corporation, the company’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 component of the company’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 industry in the last few years as a result of emerging research and continued public interest in enhanced financial literacy. The scope of the company’s business and its association with other members of the Power Financial Corporation group of companies have placed IGM Financial 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. IGM Financial is committed to the principles of corporate social responsibility. The company has a long-standing practice of corporate giving through a range of philanthropic activities at IGM Financial and within each of its operating companies. Their people contribute to communities across Canada through active participation in volunteer organizations, industry 24 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT committees and professional associations. The company conducts its business in a manner that respects the long-term financial, economic, environmental and social interests of the communities in which it operates. IGM Financial is committed to the principles of good governance practices which consider the long-term returns to the company’s shareholders and its responsibilities to its clients. In keeping with this commitment, IGM Financial has adopted an extensive written code of conduct that governs its directors, officers and employees. The Investors Group consultant network continued to expand by opening five new region offices during 2011. The company now has 106 region offices across Canada. There were 4,608 consultants at December 31, 2011. 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. Mackenzie 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. This focus is evidenced by the strength of Mackenzie’s relationships with financial advisors, the work undertaken with investor and advisor education programs, and the company’s commitment to focusing on active investment management strategies. During 2011, Mackenzie added 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, as well as innovative investment and service solutions for investors. The value of advice is based upon a long-term relationship between a household and a financial advisor where saving habits are built over time. POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 25 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 4,600 consultants to nearly one million Canadians. Investors Group offers investment management, securities, insurance, mortgage and other financial services to its clients through integrated financial planning. The company’s commitment to training and support is integral to consultants’ ability to deliver effective financial advice. Investors Group’s culture provides consultants with an entrepreneurial environment and unique support structure to deliver personalized service and knowledgeable advice to clients. In 2011, 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. Clients enhance their financial literacy and gain financial confidence as 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 2011, the company implemented a number of enhancements to its fixed income offering in order to address the current low interest rate environment and provide appropriate diversification opportunities for clients. Investors Fixed Income Flex Portfolio was introduced in February and Investors Canadian Corporate Bond Fund in May. In November, three new equity mandates were added — Investors Core Canadian Equity, Investors Core u.S. Equity, and IG Putnam u.S. Growth. The company also announced the proposed merger of eight funds with similar investment mandates. These proposed mergers are intended to provide more effective management and, in some cases, broader, more diversified investment mandates, which in turn will provide the potential for more stable long-term performance. In 2011, the consultant network growth, the active engagement of over 1,700 employees, the increased communication in response to the global financial situation, the continual refinement of financial planning, and the expanding product and service offerings demonstrated the company’s commitment to meet the evolving financial needs of Canadians. 26 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT Mackenzie Financial Mackenzie is a multidimensional financial services company with more than 150 mutual funds and is recognized as one of Canada’s premier investment managers, providing investment advisory and related services in North America. The company provides investment management services through multiple product offerings utilizing proprietary investment research and experienced investment professionals. The company distributes its investment services through multiple distribution channels to both retail and institutional investors. Mackenzie is dedicated to providing clients with high-quality, innovative investment solutions, and strives to maintain strong long-term investment performance across its multiple product offerings. In 2011, Mackenzie continued to focus on business growth, innovation and responsiveness, and professional growth. On September 2, Mackenzie entered into an agreement with B2B Trust, a subsidiary of Laurentian Bank, under which B2B Trust would acquire 100 per cent of M.R.S. Trust Company and M.R.S. Inc. in a share purchase transaction. The transaction closed on November 16. This sale allows the company to focus all of its energy and resources moving forward on its core business of investment management. Mackenzie’s product lineup continued to evolve with a number of product launches during the year, including Mackenzie Saxon Dividend Income Class, a tax-efficient version of Mackenzie Saxon Dividend Income Fund, and the Canadian Shield Fund was converted from a closed-end investment fund to Mackenzie universal Canadian Shield Fund, an open-end mutual fund. In November, Mackenzie became one of the few mutual fund distributors to offer the Registered Disability Savings Plan (RDSP). The strength of Mackenzie’s retail distribution network is built on long-standing and expanding relationships. These relationships allow the company’s products to be efficiently distributed through retail brokers, financial advisors, insurance agents, banks, pension consulting firms and financial institutions, giving Mackenzie one of the broadest retail distribution platforms of any investment company in Canada. With the realignment of its sales teams to focus on strategic alliances and the retail and institutional channels, Mackenzie is positioned to serve the needs of different types of investors across the insurance channel, group retirement platforms, sub-advisory needs, pension plans, corporations and individuals working with a financial advisor. POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 27 Pargesa group The Pargesa group holds significant positions in six large companies based in Europe: Imerys (industrial minerals), Lafarge (cement, aggregates and concrete), 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 56.5 per cent equity interest (76.0 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 April 2011, Pargesa sold its 25.6 per cent stake in Imerys to GBL for €1,087 million so as to concentrate within the latter the oversight of its controlling stake, which was 57.0 per cent as at December 31, 2011. There were no other major changes in the group’s investment portfolio in 2011. In 2011, the group’s holdings all posted increases in revenues. Their operating performance also improved, except for Lafarge, which was impacted by high cost inflation and by negative foreign exchange. At the level of Pargesa, according to the economic presentation of results, net operating earnings declined 26.5 per cent to SF342 million, mainly due to a decrease in the euro against the Swiss franc, the reporting currency used in Pargesa’s financial statements. After a write-down of SF416 million of GBL’s interest in Lafarge, Pargesa recorded a loss of SF65 million. iMerys 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 and Packaging, and Ceramics, Refractaries, Abrasives and Foundry. In 2011, Imerys’ end markets held up well overall compared to 2010, a year of strong rebound and inventory rebuilding. Sales grew by 9.8 per cent to €3.7 billion, current operating income rose 15.5 per cent to €487 million and net income, after non-recurring items, was up 25.3 per cent to €303 million. 28 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT LafarGe With operations in more than 64 countries, Lafarge, a world leader in building materials, holds leading positions in each of its markets: cement, aggregates and concrete. In 2011, the group’s sales were up 3 per cent to €15.3 billion, sustained by growing volumes in emerging markets and favourable weather conditions in the last quarter. High cost inflation and negative foreign exchange impacts weighed on current operating income, which fell 8.9 per cent to €2.2 billion. Net income, after non-recurring items, stood at €593 million, compared to €827 million in 2010. totaL 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. Despite a backdrop of economic slowdown, ongoing pressure on global oil supplies drove the average price of crude oil above uS$111/barrel, a 40 per cent increase over the previous year. This environment was favourable for upstream operations, but difficult for downstream operations in Europe. The European refining margin indicator (ERMI) fell to uS$17.4/tonne from uS$27.4/tonne in 2010, while the average gas selling price rose 27 per cent. In this context, net income stood at €12.3 billion versus €10.6 billion in 2010. Contrary to popular belief, the relationship with a financial advisor generally starts when an individual has a relatively low level of financial assets. POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 29 Pargesa group CONTINuED Gdf suez 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. In 2011, the company recorded sales of €90.7 billion, up 7.3 per cent, despite exceptionally mild weather in Europe and a gas rate freeze in France. EBITDA was up 9.5 per cent to €16.5 billion, reflecting the contribution of International Power, which was integrated into the group in February 2011. Net income, after non-recurring items, stood at €4.0 billion versus €4.6 billion the previous year. suez environneMent 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 2011, the group’s sales stood at €14.8 billion, up 6.9 per cent from the previous year. Current operating income, which rose 1.4 per cent to €1.0 billion, was impacted by additional construction costs for the Melbourne desalination plant. Net income, after non-recurring items, stood at €323 million versus €565 million in 2010. Pernod ricard 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 global co-leader in wines and spirits. In 2010–2011, Pernod Ricard’s sales grew 8 per cent to €7.6 billion. The gross margin after logistics costs was up 9.3 per cent to €4.6 billion. Net income stood at €1,045 million compared to €951 million the previous year. 30 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT Review of Financial Performance All tabular amounts are in millions of Canadian dollars, unless otherwise noted. M arch 14, 2012 This Annual Report is intended 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 (MD&A). Copies of the Corporation’s continuous disclosure documents can be obtained at www.sedar.com, on the Corpo ration’s website 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 report, other than management of market liquidity and funding risks, changes in accounting policies statements of historical fact, are forward-looking statements based on certain and methods used to report financial condition (including uncertainties associated assumptions and reflect the Corporation’s current expectations, or with respect to with critical accounting assumptions and estimates), the effect of applying future disclosure regarding the Corporation’s public subsidiaries, reflect such subsidiaries’ accounting changes, business competition, operational and reputational risks, disclosed current expectations. Forward-looking statements are provided for technological change, changes in government regulation and legislation, changes the purposes of assisting the reader in understanding the Corporation’s financial in tax laws, unexpected judicial or regulatory proceedings, catastrophic events, the performance, financial position and cash flows as at and for the periods ended on Corporation’s and its subsidiaries’ ability to complete strategic transactions, integrate certain dates and to present information about management’s current expectations acquisitions and implement other growth strategies, and the Corporation’s and its and plans relating to the future and the reader is cautioned that such statements subsidiaries’ success in anticipating and managing the foregoing factors. may not be appropriate for other purposes. These statements may include, without limitation, statements regarding the operations, business, financial condition, expected financial results, performance, prospects, opportunities, priorities, targets, goals, ongoing objectives, 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 be general or specific and which give rise to the possibility that expectations, forecasts, 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 The reader is cautioned to consider these and other factors, uncertainties and potential events carefully and not to put undue reliance on for ward-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 prove to be incorrect. Other than as specifically required by applicable Canadian 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. Corporation and its subsidiaries and their businesses, and could cause actual results Additional information about the risks and uncertainties of the Corporation’s to differ materially from current expectations of estimated or anticipated events or business and material factors or assumptions on which information contained in results. These factors include, but are not limited to: the impact or unanticipated forward-looking statements is based is provided in its disclosure materials, including impact of general economic, political and market factors in North America and its most recent MD&A and its Annual Information Form, filed with the securities internationally, interest and foreign exchange rates, global equity and capital markets, regulatory authorities in Canada and available at www.sedar.com. Readers are reminded that a list of the abbreviations used throughout can be found at the beginning of this Annual Report. In addition, the following abbreviations are used in the Review of Financial Performance and in the Financial Statements and Notes thereto: Audited Consolidated Financial Statements of Power Financial and Notes thereto for the year ended December 31, 2011 (the 2011 Consolidated Financial Statements or the Financial Statements); International Financial Reporting Standards (IFRS); previous Canadian generally accepted accounting principles (previous Canadian GAAP or previous CGAAP). POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 31 Review of Financial Performance Overview Power Financial, a subsidiary of Power Corporation, is a holding company company, Groupe Bruxelles Lambert. As at December 31, 2011, Pargesa held with substantial interests in the financial services industry through its a 50.0% equity interest in GBL, representing 52.0% of the voting rights. controlling interests in Lifeco and IGM. Power Financial also holds, together with the Frère group of Belgium, an interest in Pargesa. As at December 31, 2011, Pargesa’s portfolio was composed of interests in various sectors, including primarily oil and gas through Total; energy and As at December 31, 2011, Power Financial and IGM held 68.2% and 4.0%, energy services through GDF Suez; water and waste management services respectively, of Lifeco’s common shares, representing approximately 65% through Suez Environnement; industrial minerals through Imerys; cement of the voting rights attached to all outstanding Lifeco voting shares. As at and building materials through Lafarge; and wines and spirits through December 31, 2011, Power Financial and Great-West Life, a subsidiary of Lifeco, Pernod Ricard. Also as at December 31, 2011, GBL had a 10% interest in held 57.6% and 3.6%, respectively, of IGM’s common shares. Arkema, a global chemical producer based in France. On March 14, 2012, GBL Power Financial Europe B.V., a wholly owned subsidiary of Power Financial, and the Frère group each hold a 50% interest in Parjointco, which, as at December 31, 2011, held a 56.5% equity interest in Pargesa, representing 76.0% of the voting rights of that company. These figures do not reflect the dilution announced the sale of its interest in Arkema for proceeds of €432 million and a gain of €220 million. Also, on March 14, 2012, GBL announced it had launched the sale of a maximum of 6.2 million shares of Pernod Ricard, representing approximately 2.3% of the share capital of Pernod Ricard. which could result from the potential conversion of outstanding debentures In addition, Pargesa and GBL have also invested, or committed to invest, convertible into new bearer shares issued by Pargesa in 2006 and 2007. in the area of private equity, including in the French private equity funds The Pargesa group has holdings in major companies based in Europe. These investments are held by Pargesa through its affiliated Belgian holding Sagard 1 and Sagard 2, whose management company is a subsidiary of Power Corporation. Basis of Presentation and Summary of Accounting Policies internatio naL finan cia L re Po rtin G s tandards Pernod Ricard and Arkema, which are held through GBL, which is In Februar y 2008, the Canadian Institute of Chartered Accountants consolidated in Pargesa. Imerys’ results are consolidated in the financial announced that Canadian GAAP for publicly accountable enterprises would statements of GBL, while the contribution from Total, GDF Suez, Suez be replaced by International Financial Reporting Standards (IFRS), as issued Environnement, Pernod Ricard and Arkema to GBL’s operating earnings by the International Accounting Standards Board (IASB), for fiscal years consists of the dividends received from these companies. GBL accounts beginning on or after January 1, 2011. The Corporation developed and implemented an IFRS changeover plan which addressed key areas, including accounting policies, financial reporting, 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. disclosure controls and procedures, information systems, education and The contribution from Pargesa to Power Financial’s earnings is based on the training, and other business activities. The Corporation commenced economic (flow-through) presentation of results as published by Pargesa. reporting under IFRS for the quarter ending March 31, 2011, including Pursuant to this presentation, operating earnings and non operating presenting a transitional balance sheet at January 1, 2010 and reporting under earnings are presented separately by Pargesa. Power Financial’s share of IFRS for comparative periods, with the required reconciliations presented. non-operating earnings of Pargesa, after adjustments or reclassifications The Corporation’s presentation currency is the Canadian dollar. if necessar y, is included as part of other items in the Corporation’s The information for prior periods presented herein, including information relating to comparative periods in 2010, has been restated or reclassified to conform to IFRS and to financial statement presentations adopted for the current period being reported, unless otherwise noted as being presented under previous Canadian GAAP and not IFRS. Included in the Corporation’s 2011 Consolidated Financial Statements is the IFRS 1 transitional financial statements. n o n -ifr s finan cia L M e a sure s In analyzing the financial results of the Corporation and consistent with the presentation in previous years, net earnings are subdivided in the section “Results of Power Financial Corporation” below into the following components: note including reconciliations of the balance sheet and equity at transition > operating earnings; and to IFRS, and reconciliations of net earnings and comprehensive income at > other items or non-operating earnings, which include the after-tax impact December 31, 2010 for the figures previously presented under Canadian GAAP. of any item that management considers to be of a non-recurring nature The impact to shareholders’ equity at transition (January 1, 2010) from previous Canadian GAAP to IFRS was a net decrease of $385 million. The impact to 2010 earnings was a decrease of $17 million, consisting of a decrease in operating earnings of $22 million and an increase in other items of $5 million. For a complete listing of relevant IFRS accounting policies and details of the impact of the initial adoption of IFRS on the presentation of the financial statements, refer to Notes 2 and 3 of the Corporation’s 2011 Consolidated Financial Statements. Further information is also available 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 its subsidiaries. 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 on the Corporation’s website at www.powerfinancial.com. in their analysis of the results of the Corporation. in cLusio n o f P arG e sa’ s re su Lt s The investment in Pargesa, an associate of the Corporation as defined under IFRS, 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, Operating earnings and operating earnings per share are non-IFRS 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-IFRS measures to results reported in accordance with IFRS, see “Results of Power Financial Corporation — Earnings Summary — Condensed Supplementary Statements of Earnings” section below. 32 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT Results of Power Financial Corporation 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 arnin Gs su M M ary — co nd en s ed su PPLeM entary s tate M ent s o f e arnin Gs The following table shows a reconciliation of non-IFRS financial measures used herein for the periods indicated, with the reported results in accordance with IFRS for net earnings attributable to common shareholders and earnings per share. T WELVE MONT hS ENDED D ECEMBER 31 Contribution to operating earnings from subsidiaries and investment in associates Lifeco IGM Pargesa Results from corporate activities Dividends on perpetual preferred shares Operating earnings attributable to common shareholders Other items Net earnings attributable to common shareholders Earnings per share attributable to common shareholders — operating earnings — non-operating earnings — net earnings 2011 1,298 480 110 1,888 (55) (104) 1,729 (7) 1,722 2.44 (0.01) 2.43 2010 1,249 432 121 1,802 (78) (99) 1,625 (157) 1,468 2.30 (0.22) 2.08 o Per atin G e arnin Gs at trib utab Le to coM Mo n s hareh o Ld er s IGM’s contribution to Power Financial’s operating earnings was $480 million for the twelve-month period ended December 31, 2011, compared with Operating earnings attributable to common shareholders for the year $432 million for the corresponding period in 2010. Details are as follows: ended December 31, 2011 were $1,729 million or $2.44 per share, compared with $1,625 million or $2.30 per share in the corresponding period in 2010 (an increase of 6.2% on a per share basis). co ntrib utio n to o Per atin G e arnin Gs fro M sub sidiarie s and inve s tM ent in a sso ciate s Power Financial’s share of operating earnings from its subsidiaries and investment in associates increased by 4.8% for the year ended December 31, > IGM reported operating earnings available to common shareholders of $833 million or $3.22 per share for the twelve-month period ended December 31, 2011, compared with $759 million or $2.89 per share in the same period in 2010, an increase of 11.4% on a per share basis. > IGM’s earnings are primarily dependent on the level of assets under management. Average daily mutual fund assets were $105.7 billion in 2011, compared with $101.4 billion in 2010. 2011, compared with the same period in 2010, from $1,802 million to > On September 2, 2011, Mackenzie Financial Corporation, a subsidiary of $1,888 million. Lifeco’s contribution to Power Financial’s operating earnings was $1,298 million for the year ended December 31, 2011, compared with $1,249 million for the corresponding period in 2010. Details are as follows: > Lifeco reported operating earnings attributable to common shareholders of $1,898 million or $2.000 per share for the twelve-month period ended December 31, 2011, compared with $1,819 million or $1.920 per share in the corresponding period in 2010. This represents an increase of 4.2% on a per share basis. > Operating earnings of Lifeco exclude the net impact of two unrelated litigation provisions which increased earnings of Lifeco by $124 million after tax. The provisions are described fully in the “Other Items” section below. Operating earnings for the twelve months ended December 31, 2010 exclude the impact of an incremental litigation provision in the amount of $225 million after tax ($204 million attributable to common shareholders). > Despite challenging market conditions, Lifeco delivered strong consistent operating earnings in all regions. IGM, announced that it had entered into an agreement to sell M.R.S. Trust Company and M.R.S. Inc. (collectively, MRS). The operating earnings of Power Financial include the earnings of MRS which have been classified as discontinued operations in the Corporation’s Consolidated Statement of Earnings but exclude the after-tax gain on the sale of the investment for an amount of $30 million, recorded in the fourth quarter of 2011, as well as a $29 million one-time positive tax adjustment recorded in the third quarter of 2011. The contribution from Pargesa to Power Financial’s operating earnings was $110 million in the twelve-month period ended December 31, 2011, compared with $121 million in the corresponding period in 2010. Details are as follows: > Pargesa’s operating earnings for the twelve-month period ended December 31, 2011 were SF343 million, compared with SF466 million in the corresponding period in 2010. Pargesa’s operating results, which are reported in Swiss francs, were negatively impacted by the weakening of the euro against the Swiss franc. POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 33 Review of Financial Performance > Although the results of Imerys for the twelve-month period ended other ite M s December 31, 2011 were 25% higher than in the corresponding period in For the twelve-month period ended December 31, 2011, other items 2010, the contribution from Imerys to Pargesa’s earnings decreased by represented a charge of $7 million, compared with a charge of $157 million in 13% in 2011, due to a smaller percentage of ownership as Pargesa’s direct the corresponding period in 2010. interest in Imerys was sold to GBL in April 2011 and due to the weakening of the euro against the Swiss franc. Other items in 2011 include a contribution of $88 million representing the Corporation’s share of non-operating earnings of Lifeco. In the fourth quarter > The contribution of Lafarge to Pargesa’s operating earnings decreased for of 2011, Lifeco re-evaluated and reduced a litigation provision established the twelve-month period ended December 31, 2011, due to lower operating in the third quarter of 2010 which positively impacted Lifeco’s common earnings at Lafarge and the effect of currency, as explained above. shareholders’ net earnings by $223 million. Additionally, in the fourth quarter > The results of Pargesa also include a foreign currency loss of SF55 million of 2011, Lifeco established a provision of $99 million after tax in respect of on the sale of the euros resulting from the proceeds of the disposal of the the settlement of litigation relating to its ownership in a U.S.-based private Imerys shareholding. This loss was partly offset by gains in GBL’s private equity firm. The net impact to Lifeco of these two unrelated matters was equity portfolio for an amount of SF19 million. $124 million. re su Lt s fro M co r Po r ate ac tivitie s Results from corporate activities include income from investments, operating expenses, financing charges, depreciation and income taxes. Other items in 2011 also include a charge of $133 million representing the Corporation’s share of GBL’s €650 million write-down of its investment in Lafarge recorded in the third quarter. The persistence of Lafarge’s share price at a level significantly below its consolidated carrying value rendered Corporate activities were a net charge of $55 million in the twelve-month an impairment test necessary. period ended December 31, 2011, compared with a net charge of $78 million in the corresponding period in 2010. Other items in 2010 were primarily composed of the Corporation’s share of the litigation provision referred to above recorded by Lifeco in the third The improvements in corporate activities result mainly from a decrease in quarter of 2010 representing an amount of $144 million. financing charges of $15 million due to the redemption of the Corporation’s Series J preferred shares in July 2010 and the Series C preferred shares in October 2010, and from the recognition, in the fourth quarter of 2011, of an amount representing the tax advantage of losses carry forward transferred to IGM under a loss consolidation transaction. The following table provides additional information on other items for the periods indicated: T WELVE MONT hS ENDED D ECEMBER 31 Share of Lifeco’s Litigation provisions Share of IGM’s Gain on disposal of MRS Changes in the status of certain income tax filings Employee benefits and restructuring costs Share of Pargesa’s Impairment charge Other 2011 88 18 17 (133) 3 (7) 2010 (144) (13) (4) 4 (157) n e t e arnin Gs at trib utab Le to co M Mo n s hareh o Ld er s Net earnings attributable to common shareholders for the twelve-month period ended December 31, 2011 were $1,722 million or $2.43 per share, compared with $1,468 million or $2.08 per share in the corresponding period in 2010. 34 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT Condensed Consolidated Balance Sheets CONDENSED SUPPLEMENTARy BAL ANCE ShEETS AS AT D ECEMBER 31 ASSETS Cash and cash equivalents [2] Investment in associates Investments Funds held by ceding insurers Reinsurance assets Intangible assets Goodwill Other assets Segregated funds for the risk of unit holders Total assets LIABILITIES Insurance and investment contract liabilities Obligations to securitization entities Debentures and other borrowings Capital trust securities Other liabilities Insurance and investment contracts on account of unit holders Total liabilities EqUITy Perpetual preferred shares Common shareholders’ equity Non-controlling interests Total equity Total liabilities and equity CONSOLIDATED BASIS EqUIT y BASIS [1] 2011 2010 2011 2010 3,385 2,222 3,656 2,448 707 713 13,369 12,660 117,042 109,990 9,923 2,061 5,023 8,786 7,654 9,856 2,533 5,024 8,717 7,593 96,582 94,827 104 94 252,678 244,644 14,180 13,467 115,512 108,196 3,827 5,888 533 7,521 3,505 6,313 535 9,716 96,582 94,827 229,863 223,092 250 409 659 250 406 656 2,005 11,516 9,294 22,815 2,005 10,806 8,741 21,552 252,678 244,644 2,005 11,516 2,005 10,806 13,521 14,180 12,811 13,467 [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 $430 million ($470 million at December 31, 2010) of fixed income securities with maturities of more than 90 days. In the Consolidated Financial Statements, this amount of cash equivalents is classified in investments. co n so Lidated ba sis Liabilities increased from $223.1 billion at December 31, 2010 to $229.9 billion The consolidated balance sheets include Lifeco’s and IGM’s assets and liabilities. at December 31, 2011, mainly due to an increase in Lifeco’s insurance and Total assets of the Corporation increased to $252.7 billion at December 31, 2011, investment contract liabilities. compared with $244.6 billion at December 31, 2010. Debentures and other borrowings decreased by $425 million during the The investment in associates of $2.2 billion represents the Corporation’s carrying value in Parjointco. The components of the decrease from 2010 are shown in the “Equity Basis” section below. Investments at December 31, 2011 were $117.0 billion, a $7.1 billion increase from December 31, 2010 primarily related to Lifeco. See also the discussion in the "Cash Flows" section below. twelve-month period ended December 31, 2011, as further explained in the “Cash Flows — Consolidated” section below. Non-controlling interests include the Corporation’s non-controlling interests in the common equity of Lifeco and IGM as well as the participating account surplus in Lifeco’s insurance subsidiaries and perpetual preferred shares issued by subsidiaries to third parties. POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 35 Review of Financial Performance Assets under administration of Lifeco and IGM are as follows: AS AT D ECEMBER 31 [ IN BILLIONS OF C ANADIAN DOLL ARS ] Assets under management of Lifeco Invested assets Other corporate assets Segregated funds net assets Proprietary mutual funds and institutional net assets Assets under management of IGM Total assets under management Other assets under administration of Lifeco Total assets under administration 2011 114.6 27.6 96.6 125.4 364.2 118.7 482.9 137.8 620.7 2010 106.6 27.9 94.8 126.1 355.4 129.5 484.9 131.5 616.4 Total assets under administration at December 31, 2011 increased by Cash and cash equivalents held by Power Financial amounted to $707 million $4.3 billion (an increase at Lifeco of $15.1 billion and a decrease at IGM of at December 31, 2011, compared with $713 million at the end of December 2010. $10.8 billion) from December 31, 2010: The amount of quarterly dividends declared by the Corporation but not > Total assets under administration by Lifeco at December 31, 2011 increased by $15.1 billion from December 31, 2010, primarily due to an increase in fair value of invested assets as a result of lower government bond rates and yet paid was $274 million at December 31, 2011. The amount of dividends declared by IGM but not yet received by the Corporation was $80 million at December 31, 2011. an increase in other assets under administration due to new plan sales In managing its own cash and cash equivalents, Power Financial may and positive currency movement. hold cash balances or invest in short-term paper or equivalents, as well > IGM’s assets under management, at market value, were $118.7 billion at December 31, 2011, compared with $129.5 billion at December 31, 2010. eQuit y ba sis as deposits, denominated in foreign currencies and thus be exposed to fluctuations in exchange rates. In order to protect against such fluctuations, Power Financial may, from time to time, enter into currency-hedging transactions with financial institutions with high credit ratings. As at Under the equity basis presentation, Lifeco and IGM are accounted for by December 31, 2011, essentially all of the $707 million of cash and cash the Corporation using the equity method. This presentation has no impact equivalents was denominated in Canadian dollars or in foreign currencies on Power Financial’s shareholders’ equity and is intended to assist readers with currency hedges in place. in isolating the contribution of Power Financial, as the parent company, to consolidated assets and liabilities. The carrying value at equity of Power Financial’s investments in Lifeco, IGM and Parjointco increased to $13,369 million at December 31, 2011, compared with $12,660 million at December 31, 2010. This increase is explained as follows: Carrying value, at the beginning Repayment of advance Share of operating earnings Share of other items Share of change in other comprehensive income Dividends Other Carrying value, at the end eQuit y LIFECO 7,726 – 1,298 86 156 (797) 7 IGM PARJOINTCO TOTAL 2,454 2,480 12,660 – 480 37 4 (311) 7 (32) 110 (130) (222) – 16 (32) 1,888 (7) (62) (1,108) 30 8,476 2,671 2,222 13,369 The Corporation filed a short-form base shelf prospectus dated November 23, Common shareholders’ equity was $11,516 million at December 31, 2011, 2010, pursuant to which, for a period of 25 months thereafter, the Corporation compared with $10,806 million at December 31, 2010. The increase of may issue up to an aggregate of $1.5 billion of First Preferred Shares, Common $710 million is mainly due to: > A $761 million increase in retained earnings, reflecting primarily net earnings of $1,826 million, less dividends declared of $1,095 million and other items of positive $30 million. 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 financial condition. > Changes to accumulated other comprehensive income in the negative o ut s tandin G n u M b er o f co M Mo n s hare s amount of $57 million, which represents the Corporation’s share of other comprehensive income of its subsidiaries and associates. As of the date hereof, there were 708,173,680 Common Shares of the Corporation outstanding, compared with 708,013,680 at December 31, In 2011, 160,000 common shares were issued by the Corporation pursuant 2010. As of the date hereof, options were outstanding to purchase up to to the Corporation’s Employee Stock Option Plan for an aggregate amount an aggregate of 9,097,618 Common Shares of the Corporation under the of $3 million. Corporation’s Employee Stock Option Plan. As a result of the above, book value per common share of the Corporation was $16.26 at December 31, 2011, compared with $15.26 at the end of 2010. 36 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT Cash Flows co n d en s ed c a s h f LoWs — co n so Lidated FOR T hE yEARS ENDED D ECEMBER 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 — continuing operations Cash and cash equivalents, at the beginning Less: cash and cash equivalents — discontinued operations, beginning of year Cash and cash equivalents — continuing operations, end of year 2011 5,505 (2,406) (3,106) 24 17 3,656 (288) 3,385 2010 6,533 (1,268) (6,268) (215) (1,218) 4,855 (269) 3,368 On a consolidated basis, cash and cash equivalents from continuing > No redemption of preferred shares by the Corporation, compared to operations increased by $17 million in the twelve-month period ended redemption in the amount of $305 million in the corresponding period December 31, 2011, compared with a decrease of $1,218 million in the in 2010. corresponding period in 2010. > No redemption of preferred shares by subsidiaries of the Corporation, Operating activities produced a net inflow of $5,505 million in the compared to redemption in the amount of $507 million in the twelve-month period ended December 31, 2011, compared with a net inflow corresponding period in 2010. of $6,533 million in the corresponding period in 2010. > Repurchase for cancellation by subsidiaries of the Corporation of their Operating activities during the twelve-month period ended December 31, common shares amounted to $186 million, compared with $157 million in 2011, compared to the same period in 2010, included: the corresponding period in 2010. > Lifeco’s cash flow from operations was a net inflow of $4,844 million, > No issuance of debentures and other debt instruments at Lifeco, compared compared with a net inflow of $5,797 million in the corresponding period to an issuance for an amount of $500 million in the corresponding period in 2010. Cash provided by operating activities is used by Lifeco primarily to in 2010. pay policy benefits, policyholder dividends and claims, as well as operating expenses and commissions. Cash flows generated by operations are mainly invested by Lifeco to support future liability cash requirements. > Net repayment of other borrowings at Lifeco for an amount of $6 million, compared with net repayment of debentures and other borrowings of $254 million in the corresponding period in 2010. > Operating activities of IGM, after payment of commissions, generated $777 million, compared with $824 million in the corresponding period > Repayment of debentures by IGM for an amount of $450 million, compared with issuance of debentures of $200 million in the corresponding period in 2010. in 2010. Cash flows from financing activities, which include dividends paid on the common and preferred shares of the Corporation, as well as dividends paid by subsidiaries to non-controlling interests, resulted in a net outflow of $2,406 million in the twelve-month period ended December 31, 2011, compared with a net outflow of $1,268 million in the corresponding period in 2010. Financing activities during the twelve-month period ended December 31, 2011, compared to the same period in 2010, included: > Dividends paid by the Corporation and its subsidiaries to non-controlling interests were $1,735 million, compared with $1,7 18 million in the corresponding period in 2010. > Issuance of common shares of the Corporation in the amount of $3 million, compared to issuance in the amount of $31 million in the corresponding period in 2010, pursuant to the Corporation’s Employee Stock Option Plan. > Issuance of common shares by subsidiaries of the Corporation for an amount of $61 million, compared with $84 million in the corresponding period in 2010. > No issuance of preferred shares by the Corporation, compared to an issuance for an amount of $280 million in the corresponding period in 2010. > No issuance of preferred shares by subsidiaries of the Corporation, compared to issuance for an amount of $400 million in the corresponding > Increase in obligations to securitization entities at IGM for an amount of $319 million, compared with an increase of $193 million in the corresponding period in 2010. > A net payment of $408 million by IGM in 2011 arising from obligations related to assets sold under repurchase agreements, compared to net receipts of $5 million in 2010. The net payment in 2011 included the settlement of $428 million in obligations related to the sale of $426 million in Canada Mortgage Bonds, which are reported in investing activities. Cash flows from investing activities resulted in a net outflow of $3,106 million in the twelve-month period ended December 31, 2011, compared with a net outflow of $6,268 million in the corresponding period in 2010. Investing activities during the twelve-month period ended December 31, 2011, compared to the same period in 2010, included: > Investing activities at Lifeco resulted in a net outflow of $3,407 million, compared with a net outflow of $6,099 million in the corresponding period in 2010. > Investing activities at IGM resulted in a net inflow of $229 million, compared with a net inflow of $60 million in the corresponding period in 2010. > In addition, the Corporation reduced its level of fixed income securities with maturities of more than 90 days, resulting in a net inflow of $40 million, compared with a net outflow of $197 million in the corresponding period period in 2010. in 2010. POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 37 Review of Financial Performance c a s h fLoWs — co rPo r ate FOR T hE yEARS ENDED D ECEMBER 31 CASh FLOW FROM OPERATING ACTIVITIES Net earnings Earnings from subsidiaries and Pargesa not received in cash Other CASh FLOW FROM FINANCING ACTIVITIES Dividends paid on common and preferred shares Issuance of perpetual preferred shares Issuance of common shares Redemption of preferred shares Other CASh FLOW FROM INVESTING ACTIVITIES Repayment from (advance to) Parjointco INCREASE (DECREASE) IN CASh AND CASh EqUIVALENTS Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year 2011 1,826 (776) 4 1,054 (1,095) 3 (1,092) 32 32 (6) 713 707 2010 1,567 (488) (2) 1,077 (1,086) 280 31 (305) (8) (1,088) (32) (32) (43) 756 713 Power Financial is a holding company. As such, corporate cash flows from Dividends declared by Lifeco and IGM during the twelve-month period ended operations, before payment of dividends, are principally made up of dividends December 31, 2011 on their common shares amounted to $1.23 and $2.10 per received from its subsidiaries and associates and income from investments, share, respectively, compared with $1.23 and $2.05 per share, respectively, less operating expenses, financing charges, and income taxes. The ability of in the corresponding period in 2010. IGM increased its quarterly dividend in Lifeco and IGM, which are also holding companies, to meet their obligations the third quarter of 2011 from $0.5125 to $0.5375. 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 of Lifeco’s principal subsidiaries takes into account the views expressed by the various credit rating agencies that provide ratings related to financial strength and other measures relating to those companies. The payment of dividends by IGM’s principal subsidiaries is subject to corporate laws and regulations which require that solvency standards be maintained. In addition, certain subsidiaries of IGM must also comply with capital and liquidity requirements established by regulatory authorities. Pargesa pays its annual dividends in the second quarter. The dividend paid to Parjointco in 2011 amounted to SF2.72 per bearer share, unchanged from the 2010 dividend. None of the Pargesa dividend received by Parjointco in 2011 was paid as dividend to the Corporation; Parjointco used part of these funds to repay its advance from the Corporation in the amount of $32 million. In the twelve-month period ended December 31, 2011, dividends declared on the Corporation’s Common Shares amounted to $1.40 per share, the same as in the corresponding period in 2010. Summary of Critical Accounting Estimates The preparation of financial statements in conformity with IFRS requires In accordance with IFRS 7, Financial Instruments — Disclosure, the Corporation’s management to adopt accounting policies and to make estimates and assets and liabilities recorded at fair value have been categorized based upon assumptions that affect amounts reported in the Corporation’s 2011 the following fair value hierarchy: Consolidated Financial Statements. The major accounting policies and related critical accounting estimates underlying the Corporation’s 2011 Consolidated Financial Statements are summarized below. In applying these policies, management makes subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. Many of these policies are common in the insurance and other financial services industries; others are specific to the Corporation’s businesses and > Level 1 inputs utilize observable, quoted prices (unadjusted) in active markets for identical assets or liabilities that the Corporation has the ability to access. > Level 2 inputs utilize other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. > Level 3 inputs are unobservable and include situations where there is little, operations. The significant accounting estimates are as follows: if any, market activity for the asset or liability. fair va Lue M e a sureM ent Financial and other instrument s held by the Corporation and it s subsidiaries include portfolio investments, various derivative financial instruments, and debentures and other debt instruments. In certain cases, the inputs used to measure fair value may fall into different 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 Financial instrument carrying values reflect the liquidity of the markets significance of a particular input to the fair value measurement in its entirety and the liquidity premiums embedded in the market pricing methods the requires judgment and considers factors specific to the asset or liability. Corporation relies upon. 38 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT Refer to Note 29 to the Corporation’s 2011 Consolidated Financial Statements in sur an ce and inve s tM ent co ntr ac t L iab iLitie s for disclosure of the Corporation’s financial instruments fair value Insurance and investment contract liabilities represent the amounts required, measurement as at December 31, 2011. in addition to future premiums and investment income, to provide for Fair values for bonds classified as fair value through profit or loss are future benefit payments, policyholder dividends, commission and policy determined using quoted market prices. Where prices are not quoted in administrative expenses for all insurance and annuity policies in force a normally active market, fair values are determined by valuation models with Lifeco. The Appointed Actuaries of Lifeco’s subsidiary companies are primarily using observable market data inputs. Market values for bonds and responsible for determining the amount of the liabilities to make appropriate mortgages classified as loans and receivables are determined by discounting provisions for Lifeco’s obligations to policyholders. The Appointed Actuaries expected future cash flows using current market rates. Fair values for public stocks are generally determined by the last bid price for the security from the exchange where it is principally traded. Fair values for stocks for which there is no active market are determined by discounting expected future cash flows based on expected dividends and where market value cannot be measured reliably, fair value is estimated to be equal to cost. Market values for real estate are determined using independent appraisal determine the insurance and investment contract liabilities using generally accepted actuarial practices, according to the standards established by the Canadian Institute of Actuaries. The valuation uses the Canadian Asset Liability Method (CALM). This method involves the projection of future events in order to determine the amount of assets that must be set aside currently to provide for all future obligations and involves a significant amount of judgment. services and include management adjustments for material changes in In the computation of insurance contract liabilities, valuation assumptions property cash flows, capital expenditures or general market conditions in the have been made regarding rates of mortality/morbidity, investment interim period between appraisals. iM Pair M ent 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 Investments are reviewed regularly on an individual basis to determine margin for adverse deviation. These margins are necessary to provide impairment status. The Corporation considers various factors in the for possibilities of misestimation and/or future deterioration in the best impairment evaluation process, including, but not limited to, the financial estimate assumptions and provide reasonable assurance that insurance condition of the issuer, specific adverse conditions affecting an industry contract liabilities cover a range of possible outcomes. Margins are reviewed or region, decline in fair value not related to interest rates, bankruptcy or periodically for continued appropriateness. 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. Additional detail regarding these estimates can be found in Note 2 to the Corporation’s 2011 Consolidated Financial Statements. The market value of an investment is not by itself a definitive indicator of in coM e ta Xe s impairment, as it may be significantly influenced by other factors, including The Corporation is subject to income tax laws in various jurisdictions. the remaining term to maturity and liquidity of the asset. however, market The Corporation’s and its subsidiaries’ operations are complex and related tax price must be taken into consideration when evaluating impairment. interpretations, regulations and legislation that pertain to its activities are For impaired mortgages and bonds classified as loans and receivables, subject to continual change. Lifeco’s primary Canadian operating subsidiaries provisions are established or write-offs are recorded to adjust the carrying are subject to a regime of specialized rules prescribed under the Income Tax Act value to the estimated realizable amount. Wherever possible, the fair value (Canada) for purposes of determining the amount of the companies’ income of collateral underlying the loans or observable market price is used to that will be subject to tax in Canada. Accordingly, the provision for income establish the estimated realizable value. For impaired available-for-sale loans taxes represents the applicable company’s management’s interpretation recorded at fair value, the accumulated loss recorded in accumulated other of the relevant tax laws and its estimate of current and future income comprehensive income is reclassified to net investment income. Impairments tax implications of the transactions and events during the period. Deferred on available-for-sale debt instruments are reversed if there is objective tax assets and liabilities are recorded based on expected future tax rates and evidence that a permanent recovery has occurred. All gains and losses on management’s assumptions regarding the expected timing of the reversal bonds classified or designated as fair value through profit or loss are already of temporary differences. The Corporation has substantial deferred income recorded in income, therefore a reduction due to impairment of assets will tax assets. The recognition of deferred tax assets depends on management’s be recorded in income. As well, when determined to be impaired, interest is assumption that future earnings will be sufficient to realize the deferred no longer accrued and previous interest accruals are reversed. benefit. The amount of the asset recorded is based on management’s best Go o dWiLL and intan Gib Le s i M Pair M ent te s tin G Goodwill and intangible assets are tested for impairment annually or more frequently if events indicate that impairment may have occurred. Intangible assets that were previously impaired are reviewed at each reporting date for evidence of reversal. In the event that certain conditions have been met, the Corporation would be required to reverse the impairment charge or a portion thereof. 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 Goodwill has been allocated to cash generating units (CGU), representing aggressively pursuing perceived tax issues and have increased the resources the lowest level in which goodwill is monitored for internal reporting they put to these efforts. purposes. Goodwill is tested for impairment by comparing carrying value of the CGU groups to the recoverable amount to which the goodwill has been allocated. Intangible assets are tested for impairment by comparing the asset’s carrying amount to its recoverable amount. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of the asset’s fair value less cost to sell and value in use, which is generally calculated using the present value of estimated future cash flows expected to be generated. POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 39 Review of Financial Performance eM PLoyee future b enefit s over which benefits will be paid, as well as the appropriate discount rate The Corporation and its subsidiaries maintain contributor y and for accrued benefit obligations. These assumptions are determined by non-contributory defined benefit and defined contribution pension plans management using actuarial methods and are reviewed and approved for certain employees and advisors. The defined benefit pension plans annually. Emerging experience, which may differ from the assumptions, will provide pensions based on length of service and final average pay. Certain be revealed in future valuations and will affect the future financial position pension payments are indexed either on an ad hoc basis or a guaranteed basis. of the plans and net periodic benefit costs. The defined contribution pension plans provide pension benefits based on accumulated employee and Corporation contributions. The Corporation and its subsidiaries also provide post employment health, dental and life insurance benefits to eligible employees and advisors. For further information on the Corporation’s pension plans and other post-employment benefits refer to Note 27 to the Corporation’s 2011 Consolidated Financial Statements. Accounting for pension and other post-employment benefits requires estimates of future returns on plan assets, expected increases in compensation levels, trends in healthcare costs, and the period of time d eferred s eLL in G coM Missio n s Commissions paid on the sale of certain mutual fund products are deferred and amortized over a maximum period of seven 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, 2011, there were no indications of impairment to deferred selling commissions. Future Accounting Changes The Corporation continues to monitor the potential changes proposed by The new standard also requires: the IASB and to consider the impact changes in the standards may have on • embedded derivatives to be assessed for classification together with the Corporation’s operations. their financial asset host; In addition, the Corporation may be impacted in the future by the following IFRS and is currently evaluating the impact these future standards will have on its consolidated financial statements when they become effective: • a single expected loss impairment method be used for financial assets; and • amendments to the criteria for hedge accounting and measuring > IFRS 4 – Insurance Contracts The IASB issued an exposure draft effectiveness. proposing changes to the accounting standard for insurance contracts in July 2010. The proposal would require an insurer to 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 vastly different from the connection between insurance assets and liabilities considered under CALM and may cause significant volatility in the results of Lifeco. The exposure draft also proposes changes to the presentation and disclosure within the financial statements. Lifeco will continue to measure insurance contract liabilities using CALM until such time when a new IFRS for insurance contract measurement is issued. A final standard is not expected to be implemented for several years; Lifeco continues to actively monitor developments in this area. > IFRS 7 – Financial Instruments: Disclosure Effective for the Corporation on January 1, 2013, the IASB issued amendments to IFRS 7 regarding disclosure of offsetting financial assets and financial liabilities. The amendments will allow users of financial statements to improve their understanding of transfer transactions of financial assets (for example, securitizations), including understanding the possible effects of any risks that may remain with the entity that transferred the assets. The amendments also require additional disclosures if a disproportionate amount of transfer transactions are undertaken near the end of a reporting period. > IFRS 9 – Financial Instruments The IASB approved the adoption of the proposed new Financial Instruments standard to be effective January 1, 2015. The new standard requires all financial assets to be classified on initial recognition at amortized cost or fair value while eliminating the existing categories of available for sale, held to maturity, and loans and receivables. The full impact of IFRS 9 on the Corporation will be evaluated after the remaining stages of the IASB’s project to replace IAS 39, Financial Instruments: Recognition and Measurement — impairment methodology, hedge accounting, and asset and liability offsetting — are finalized. The Corporation continues to actively monitor developments in this area. > IFRS 10 – Consolidated Financial Statements Effective for the Corporation on January 1, 2013, IFRS 10, Consolidated Financial Statements uses consolidated principles based on a revised definition of control. The definition of control is dependent on the power of the investor to direct the activities of the investee, the ability of the investor to derive variable benefits from its holdings in the investee, and a direct link between the power to direct activities and receive benefits. > IFRS 11 – Joint Arrangements Effective for the Corporation on January 1, 2013, IFRS 11, Joint Arrangements separates jointly controlled entities between joint operations and joint ventures. The standard has eliminated the option of using proportionate consolidation in accounting for interests in joint ventures, now requiring an entity to use the equity method of accounting for interests in joint ventures. > IFRS 12 – Disclosure of Interest in Other Entities Effective for the Corporation on January 1, 2013, IFRS 12, Disclosure of Interest in Other Entities proposes new disclosure requirements for the interest an entity has in subsidiaries, joint arrangements, associates, and structured entities. The standard requires enhanced disclosure, including how control was determined and any restrictions that might exist on consolidated assets and liabilities presented within the financial statements. As a consequence of the issuance of IFRS 10, 11 and 12, the IASB also issued amended and re-titled IAS 27, Separate Financial Statements and IAS 28, Investments in Associates and Joint Ventures. The new requirements are effective for the Corporation on January 1, 2013. > IFRS 13 – Fair Value Measurement Effective for the Corporation on January 1, 2013, IFRS 13, Fair Value Measurement provides guidance for the measurement and disclosure of assets and liabilities held at fair value. The standard refines the measurement and disclosure requirements and aims to achieve consistency with other standard setters to improve visibility to financial statement users. 40 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT > IAS 1 – Presentation of Financial Statements Effective for the net pension asset or liability would reflect the full funded status of the plan Corporation on January 1, 2013, IAS 1, Presentation of Financial Statements on the balance sheets. Further, the standard includes changes to how the includes requirements that other comprehensive income be classified defined benefit obligation and the fair value of the plan assets would be by nature and grouped between those items that will be classified presented within the financial statements of an entity. subsequently to profit or loss (when specific conditions are met) and those that will not be reclassified. Other amendments include changes to discontinued operations and overall financial statement presentation. > IAS 19 – Employee Benefits The IASB published an amended version of this standard in June 2011 that eliminates the corridor approach for actuarial gains and losses resulting in those gains and losses being recognized immediately through other comprehensive income while the The Corporation will continue to use the corridor method until January 1, 2013, when the revised IAS for employee benefits becomes effective. > IAS 32 – Financial Instruments: Presentation In December 2011, the IASB issued amendments to IAS 32 which clarify the existing requirements for offsetting financial assets and financial liabilities. The amendments will be effective for the Corporation on January 1, 2014. Risk Factors There are certain risks inherent in an investment in the securities of the performance of Power Financial and its subsidiaries. In recent years, global Corporation and in the activities of the Corporation, including the following financial conditions and market events have experienced increased volatility and others disclosed in the Corporation’s MD&A, which investors should and resulted in the tightening of credit that has reduced available liquidity carefully consider before investing in securities of the Corporation. This and overall economic activity. There can be no assurance that debt or equity description of risks does not include all possible risks, and there may be other financing will be available, or, together with internally generated funds, will risks of which the Corporation is not currently aware. be sufficient to meet or satisfy Power Financial’s objectives or requirements 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 principal shareholder of each of Lifeco and IGM. 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 or, if the foregoing are available to Power Financial, that they will be on terms acceptable to Power Financial. 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. The market price for Power Financial’s securities may be volatile and subject 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 significant or prolonged, 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. Off-Balance Sheet Arrangements Guar antee s Le t ter s o f credit In the normal course of their businesses, the Corporation and its subsidiaries In the normal course of their reinsurance business, Lifeco’s subsidiaries may enter into certain agreements, the nature of which precludes the provide letters of credit to other parties or beneficiaries. A beneficiary will possibility of making a reasonable estimate of the maximum potential typically hold a letter of credit as collateral in order to secure statutory credit amount the Corporation or subsidiary could be required to pay third parties, for reserves ceded to or amounts due from Lifeco’s subsidiaries. A letter of as some of these agreements do not specify a maximum amount and credit may be drawn upon demand. If an amount is drawn on a letter of credit the amounts are dependent on the outcome of future contingent events, by a beneficiary, the bank issuing the letter of credit will make a payment to the nature and likelihood of which cannot be determined. 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 32 to the Corporation’s 2011 Consolidated Financial Statements. POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 41 Review of Financial Performance Contingent Liabilities The Corporation and its subsidiaries are from time to time subject to legal dealt with in accordance with the companies’ participating policyholder actions, including arbitrations and class actions, arising in the normal course dividend policies in the ordinary course of business. No awards are to be paid of business. It is inherently difficult to predict the outcome of any of these out to individual class members. proceedings with certainty, and it is possible that an adverse resolution could have a material adverse effect on the consolidated financial position 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. A subsidiary of Lifeco declared a partial windup in respect of an Ontario defined benefit pension plan which will not likely be completed for some time. The partial windup could involve the distribution of the amount of actuarial surplus, if any, attributable to the wound-up portion of the plan. In addition to the regulatory proceedings involving this partial windup, a related class action proceeding has been commenced in Ontario related to the partial windup and three potential partial windups under the plan. The class action also challenges the validity of charging expenses to the plan. The provisions for certain Canadian retirement plans in the amounts of $97 million after tax established by Lifeco’s subsidiaries in the third quarter of 2007 have been reduced to $68 million. Actual results could differ from these estimates. The Court of Appeal for Ontario released a decision on November 3, 2011 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. in 1997. The Court of Appeal made adjustments to the original trial judgment. The impact is expected to be favourable to the Corporation’s overall financial position. Any monies to be returned to the participating accounts will be The plaintiffs have filed an application seeking leave to appeal to the Supreme Court of Canada. During the fourth quarter of 2011, Lifeco re-evaluated and reduced the litigation provision established in the third quarter of 2010, which positively impacted common shareholder net earnings of Lifeco by $223 million after tax. Regardless of the ultimate outcome of this case, all of the participating policy contract terms and conditions will continue to be honoured. Based on information presently known, the original decision, if sustained on further appeal, is not expected to have a material adverse effect on the consolidated financial position of Lifeco. Subsidiaries of Lifeco have an ownership interest in a U.S.-based private equity partnership wherein a dispute arose over the terms of the partnership agreement. Lifeco acquired the ownership interest in 2007 for purchase consideration of US$350 million. The dispute was resolved on January 10, 2012 and Lifeco has established a provision of $99 million after tax. 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. On January 3, 2012, the plaintiffs filed an application in the Supreme Court of Canada for leave to appeal the Appeal Decision. Related Party Transactions In the normal course of business during 2011, Great-West Life entered into During 2011, IGM sold residential mortgage loans to Great-West Life and various transactions with related companies which included providing London Life for $202 million (2010–$226 million). These transactions were at insurance benefits to other companies within the Power Financial market terms and conditions. Corporation group of companies. In all cases, transactions were at market terms and conditions. Commitments/Contractual Obligations The following table provides a summary of future consolidated contractual obligations. PAyMENTS DUE B y PERIOD Long-term debt [1] Deposits and certificates Obligations to securitization entities Operating leases [2] Purchase obligations [3] Contractual commitments [4] Total Letters of credit [5] TOTAL 5,888 151 3,827 710 136 675 LESS T hAN 1 yEAR 1 – 5 yEARS MORE T hAN 5 yEARS 609 131 547 149 65 555 2 15 3,261 395 71 120 5,277 5 19 166 11,387 2,056 3,864 5,467 [1] Please refer to Note 16 to the Corporation’s 2011 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 32 to the Corporation’s 2011 Consolidated Financial Statements. 42 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT Financial Instruments fair v aLue o f f inan ciaL i n s truM ent s The following table presents the fair value of the Corporation’s financial instruments. Fair value represents the amount that would be exchanged in an arm’s- length transaction between willing parties and is best evidenced by a quoted market price, if one exists. Fair values are management’s estimates and are generally calculated using market conditions at a specific point in time and may not reflect future fair values. The calculations are subjective in nature, involve uncertainties and matters of significant judgment (please refer to Note 29 to the Corporation’s 2011 Consolidated Financial Statements). AS AT D ECEMBER 31 ASSETS Cash and cash equivalents Investments (excluding investment properties) Funds held by ceding insurers Derivative financial instruments Other financial assets Total financial assets LIABILITIES Deposits and certificates Funds held under reinsurance contracts Obligation to securitization entities Debentures and other borrowings Capital trust securities Derivative financial instruments Other financial liabilities Total financial liabilities CARRyING VALUE 2011 FAIR VALUE CARRyING VALUE 2010 FAIR VALUE 3,385 3,385 3,656 3,656 113,841 116,170 107,033 108,533 9,923 1,056 3,539 9,923 1,056 3,539 9,856 1,029 3,666 9,856 1,029 3,666 131,744 134,073 125,240 126,740 151 169 3,827 5,888 533 427 152 169 3,930 6,502 577 427 835 149 3,505 6,313 535 244 840 149 3,564 6,823 596 244 4,189 4,189 6,167 6,167 15,184 15,946 17,748 18,383 d erivative finan cia L in s tru M ent s > demonstrating the effectiveness of the hedging relationships; and In the course of their activities, the Corporation and its subsidiaries use derivative financial instruments. When using such derivatives, they only act as limited end-users and not as market-makers in such derivatives. 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: > monitoring the hedging relationship. There were no major changes to the Corporation’s and its subsidiaries’ policies and procedures with respect to the use of derivative instruments in 2011. There has been a slight increase in the notional amount outstanding ($14,948 million at December 31, 2011, compared with $14,923 million at December 31, 2010) and an increase in the exposure to credit risk ($1,056 million at December 31, 2011, compared with $1,029 million at December 31, 2010) > prohibiting the use of derivative instruments for speculative purposes; that represents the market value of those instruments, which are in a > documenting transactions and ensuring their consistency with risk management policies; gain position. See Note 28 to the Corporation’s 2011 Consolidated Financial Statements for more information on the type of derivative financial instruments used by the Corporation and its subsidiaries. Disclosure Controls and Procedures Based on their evaluations as of December 31, 2011, 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, 2011. Internal Control Over Financial Reporting Based on their evaluations as of December 31, 2011, 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, 2011. During the fourth quarter of 2011, 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. Subsequent Events On February 23, 2012, the Corporation issued 10,000,000 5.5% Non-Cumulative First Preferred Shares, Series R for gross proceeds of $250 million. On February 22, 2012, Lifeco issued 10,000,000 5.4% Non-Cumulative First Preferred Shares, Series P for gross proceeds of $250 million. POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 43 Review of Financial Performance Selected Annual Information FOR T hE yEARS ENDED D ECEMBER 31 Total revenue including discontinued operations Operating earnings attributable to common shareholders [1] per share — basic Net earnings attributable to common shareholders per share — basic per share — diluted Earnings from discontinued operations attributable to common shareholders per share — basic per share — diluted Earnings from continuing operations attributable to common shareholders per share — basic per share — diluted Consolidated assets Total 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 [2] Series D Series E Series F Series h Series I Series J [3] Series K Series L Series M Series O [4] Series P [5] [1] Operating earnings and operating earnings per share are non-IFRS financial measures. [2] Redeemed in October 2010. [3] Redeemed in July 2010. [4] Issued in October 2009. [5] Issued in June 2010. 2011 (IFRS) 32,433 1,729 2.44 1,722 2.43 2.41 38 0.05 0.05 1,684 2.38 2.36 252,678 15,184 5,888 13,521 16.26 708.2 1.4000 0.5250 1.3750 1.3125 1.4750 1.4375 1.5000 1.2375 1.2750 1.5000 1.4500 1.1000 2010 (IFRS) 32,559 1,625 2.30 1,468 2.08 2.06 1 1,467 2.08 2.06 244,644 17,748 6,313 12,811 15.26 708.0 2009 (PREVIOUS CANADIAN GA AP) 32,697 1,533 2.05 1,351 1.92 1.91 2 1,349 1.92 1.91 140,231 13,602 5,967 13,207 16.27 705.7 1.4000 1.4000 0.45238 0.42744 0.9750 1.3750 1.3125 1.4750 1.4375 1.5000 0.5875 1.2375 1.2750 1.5000 1.4500 0.6487 1.3000 1.3750 1.3125 1.4750 1.4375 1.5000 1.1750 1.2375 1.2750 1.7538 0.45288 44 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT Consolidated Financial Statements Consolidated Balance Sheets [ IN MILLIONS OF C ANADIAN DOLL ARS ] ASSETS Cash and cash equivalents [Note 5] Investments [Note 6] Bonds Mortgages and other loans Shares Investment properties Loans to policyholders Funds held by ceding insurers [Note 7] Reinsurance assets [Note 13] Investment in associates [Note 8] Owner-occupied properties [Note 9] Capital assets [Note 9] Derivative financial instruments [Note 28] Other assets [Note 10] Deferred tax assets [Note 19] Intangible assets [Note 11] Goodwill [Note 11] Segregated funds for the risk of unit holders [Note 12] Total assets LIABILITIES Insurance contract liabilities [Note 13] Investment contract liabilities [Note 13] Deposits and certificates [Note 14] Funds held under reinsurance contracts Obligation to securitization entities [Note 15] Debentures and other borrowings [Note 16] Capital trust securities [Note 17] Derivative financial instruments [Note 28] Preferred shares of the Corporation [Note 20] Preferred shares of subsidiaries Other liabilities [Note 18] Deferred tax liabilities [Note 19] Insurance and investment contracts on account of unit holders [Note 12] Total liabilities EqUITy Stated capital [Note 20] Perpetual preferred shares Common shares Retained earnings Reserves Total shareholders’ equity Non-controlling interests [Note 22] Total equity Total liabilities and equity Approved by the Board of Directors Signed, Raymond Royer Director DECEMBER 31, 2011 DECEMBER 31, 2010 JANUARy 1, 2010 3,385 3,656 4,855 78,759 21,518 6,402 3,201 7,162 117,042 9,923 2,061 2,222 541 197 1,056 4,653 1,207 5,023 8,786 96,582 252,678 73,582 20,209 6,415 2,957 6,827 109,990 9,856 2,533 2,448 489 176 1,029 4,679 1,220 5,024 8,717 94,827 244,644 67,388 20,613 6,392 2,615 6,957 103,965 10,984 2,800 2,829 479 190 775 4,774 1,262 5,206 8,655 87,495 234,269 114,730 107,405 105,028 782 151 169 3,827 5,888 533 427 – – 5,516 1,258 96,582 229,863 2,005 639 10,743 134 13,521 9,294 22,815 252,678 Signed, R. Jeffrey Orr Director 791 835 149 3,505 6,313 535 244 – – 7,383 1,105 94,827 223,092 2,005 636 9,982 188 12,811 8,741 21,552 244,644 841 907 331 3,310 5,931 540 359 300 199 6,608 978 87,495 212,827 1,725 605 9,523 969 12,822 8,620 21,442 234,269 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 45 Consolidated Financial Statements Consolidated Statements of Earnings FOR T hE yEARS ENDED D ECEMBER 31 [ IN MILLIONS OF C ANADIAN DOLL ARS, E xCEPT PER S hARE AMOUNTS ] 2011 2010 REVENUES Premium income Gross premiums written Ceded premiums Total net premiums Net investment income [Note 6] Regular net investment income Change in fair value Fee income Total revenues ExPENSES Policyholder benefits Insurance and investment contracts Gross Ceded Policyholder dividends and experience refunds Change in insurance and investment contract liabilities Total paid or credited to policyholders Commissions Operating and administrative expenses [Note 25] Financing charges [Note 26] Total expenses Share of earnings (losses) of investment in associates [Note 8] Earnings before income taxes — continuing operations Income taxes [Note 19] Net earnings — continuing operations Net earnings — discontinued operations [Note 4] Net earnings Attributable to Non-controlling interests [Note 22] Perpetual preferred shareholders Common shareholders Earnings per common share [Note 30] Net earnings attributable to common shareholders — Basic — Diluted Net earnings from continuing operations attributable to common shareholders — Basic — Diluted 46 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 20,013 (2,720) 17,293 5,610 4,154 9,764 5,343 32,400 16,591 (1,217) 15,374 1,424 6,245 23,043 2,312 3,006 409 28,770 3,630 (20) 3,610 706 2,904 63 2,967 1,141 104 1,722 2,967 2.43 2.41 2.38 2.36 20,404 (2,656) 17,748 5,815 3,785 9,600 5,174 32,522 17,550 (2,208) 15,342 1,466 6,417 23,225 2,216 3,837 432 29,710 2,812 121 2,933 523 2,410 2 2,412 845 99 1,468 2,412 2.08 2.06 2.08 2.06 Consolidated Statements of Comprehensive Income FOR T hE yEARS ENDED D ECEMBER 31 [ IN MILLIONS OF C ANADIAN DOLL ARS ] 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 transferred 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 transferred to net earnings Income tax expense (benefit) Net unrealized foreign exchange gains (losses) on translation of foreign operations Share of other comprehensive income of associates Other comprehensive income (loss) Total comprehensive income Attributable to Non-controlling interests Perpetual preferred shareholders Common shareholders 2011 2,967 226 (48) (116) 30 92 (24) 10 2 (1) (13) 214 (222) 71 3,038 1,269 104 1,665 3,038 2010 2,412 169 (46) (88) 18 53 77 (27) 2 (1) 51 (574) (446) (916) 1,496 713 99 684 1,496 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 47 Consolidated Financial Statements Consolidated Statements of Changes in Equity STATED CAPITAL RESERVES yEAR ENDED DECEMBER 31, 2011 [ IN MILLIONS OF C ANADIAN DOLL ARS ] PERPETUAL PREFERRED ShARES COMMON ShARES RETAINED EARNINGS ShARE-BASED COMPENSATION Balance, beginning of year 2,005 636 Net earnings Other comprehensive income Total comprehensive income Dividends to shareholders Perpetual preferred shares Common shares Dividends to non-controlling interests Share-based compensation Stock options exercised Effects of changes in ownership and capital on non-controlling interests Other – – – – – – – – – – – – – – – – – 3 – – 9,982 1,826 – 1,826 (104) (991) – – – – 30 108 – – – – – – 8 (5) – – INVESTMENT REVALUATION AND CASh FLOW hEDGES FOREIGN CURRENCy TRANSL ATION 856 – (162) (162) (776) – 105 105 – – – – – – – – – – – – – – NON - CONTROLLING INTERESTS 8,741 1,141 128 1,269 TOTAL EqUIT y 21,552 2,967 71 3,038 – – (104) (991) (640) (640) 2 (2) (76) – 10 (4) (76) 30 TOTAL 188 – (57) (57) – – – 8 (5) – – Balance, end of year 2,005 639 10,743 111 694 (671) 134 9,294 22,815 STATED CAPITAL RESERVES yEAR ENDED DECEMBER 31, 2010 [ IN MILLIONS OF CANADIAN DOLL ARS ] PERPETUAL PREFERRED ShARES COMMON ShARES RETAINED EARNINGS ShARE-BASED COMPENSATION INVESTMENT REVALUATION AND CASh FLOW hEDGES FOREIGN CURRENCy TRANSL ATION Balance, beginning of year 1,725 605 Net earnings Other comprehensive income Total comprehensive income – – – Issue of perpetual preferred shares 280 Dividends to shareholders Perpetual preferred shares Common shares Dividends to non-controlling interests Share-based compensation Stock options exercised Effects of changes in ownership and capital on non-controlling interests Other – – – – – – – – – – – – – – – 31 – – 9,523 1,567 – 1,567 – (99) (991) – – – – (18) 105 864 – – – – – – – 5 (2) – – – (8) (8) – – – – – – – – – – (776) (776) – – – – – – – – NON - CONTROLLING INTERESTS TOTAL EqUIT y 8,620 21,442 845 (132) 713 – – – 2,412 (916) 1,496 280 (99) (991) (637) (637) 3 (2) 44 – 8 27 44 (18) TOTAL 969 – (784) (784) – – – – 5 (2) – – Balance, end of year 2,005 636 9,982 108 856 (776) 188 8,741 21,552 48 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT Consolidated Statements of Cash Flows FOR T hE yEARS ENDED D ECEMBER 31 [ IN MILLIONS OF C ANADIAN DOLL ARS ] OPERATING ACTIVITIES — CONTINUING OPERATIONS Earnings before income taxes — continuing operations Income tax paid, net of refunds received Adjusting items Change in insurance and investment contract liabilities Change in funds held by ceding insurers Change in funds held under reinsurance contracts Change in deferred acquisition costs Change in reinsurance contracts Change in fair value of financial instruments Other FINANCING ACTIVITIES — CONTINUING OPERATIONS Dividends paid By subsidiaries to non-controlling interests Perpetual preferred shares Common shares Issue of common shares by the Corporation [Note 20] Issue of common shares by subsidiaries Issue of perpetual preferred shares by the Corporation [Note 20] Issue of preferred shares by subsidiaries Repurchase of preferred shares by the Corporation [Note 20] Repurchase of common shares by subsidiaries Redemption of preferred shares by subsidiaries Changes in other debt instruments Issue of debentures [Note 16] Repayment of debentures [Note 16] Change in obligations related to assets sold under repurchase agreements Change in obligations to securitization entities Change in deposits and certificates Other INVESTMENT ACTIVITIES — CONTINUING OPERATIONS Bond sales and maturities Mortgage loan repayments Sale of shares Change in loans to policyholders Change in repurchase agreements Investment in bonds Investment in mortgage loans Investment in shares Proceeds on disposal of business [Note 4] Investment in investment properties and other Effect of changes in exchange rates on cash and cash equivalents — continuing operations Increase (decrease) in cash and cash equivalents — continuing operations Cash and cash equivalents, beginning of year Less: Cash and cash equivalents — discontinued operations, beginning of year [Note 5] Cash and cash equivalents — continuing operations, end of year NET CASh FROM CONTINUING OPERATING ACTIVITIES INCLUDE Interest and dividends received Interest paid 2011 3,610 (4) 6,029 464 25 (15) 415 (4,182) (837) 5,505 (640) (104) (991) (1,735) 3 61 – – – (186) – (6) – (450) (408) 319 (4) – 2010 2,933 (197) 6,654 649 (121) (49) 160 (3,838) 342 6,533 (632) (96) (990) (1,718) 31 84 280 400 (305) (157) (507) (54) 700 (200) 5 193 (4) (16) (2,406) (1,268) 20,486 1,756 2,355 (198) (1,053) (20,510) (3,361) (2,643) 199 (137) (3,106) 24 17 3,656 (288) 3,385 5,044 493 19,832 2,102 2,653 (135) 559 (26,624) (2,088) (2,116) – (451) (6,268) (215) (1,218) 4,855 (269) 3,368 5,044 503 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 49 Notes to the Consolidated Financial Statements All tabular amounts are in millions of Canadian dollars, unless otherwise noted. NOTE 1 Corporate Information Power Financial Corporation (Power Financial or the Corporation) is a companies based in Europe, active in the following industries: oil and publicly listed company (TSx: PWF) incorporated and domiciled in Canada. gas, electricity, energy services, water and waste management services, The registered address of the Corporation is 751 Victoria Square, Montréal, industrial minerals, cement and building materials, and wines and spirits. québec, Canada, h2y 2J3. The Consolidated Financial Statements (f inancial statements) of Power Financial is a diversified international management and holding Power Financial for the year ended December 31, 2011 were approved for issue company that holds interests, directly or indirectly, in companies in the by the Board of Directors on March 14, 2012. The Corporation is controlled by financial services industry in Canada, the United States and Europe and, 171263 Canada Inc., which is wholly owned by Power Corporation of Canada. through its indirect investment in Pargesa, has substantial holdings in NOTE 2 Basis of Presentation and Summary of Significant Accounting Policies The financial statements of Power Financial at December 31, 2011 have us e o f e s ti M ate s and M e a sureM ent u n certaint y been prepared in accordance with International Financial Reporting The preparation of financial statements in conformity with IFRS requires Standards (IFRS). The financial statements are prepared using IFRS accounting policies, which were adopted by the Corporation for fiscal periods beginning on January 1, 2011, with an effective transition date of January 1, 2010. These accounting policies are based on IFRS and the interpretations of the IFRS Interpretations Committee that the Corporation applied consistently to all periods presented throughout these financial statements. The Corporation’s f inancial statements were previously prepared in accordance with previous Canadian generally accepted accounting principles — Part V (previous Canadian GAAP), which differs in some areas from IFRS. See Note 3 for an explanation of how the adoption of IFRS has affected the reported financial position, financial performance and accounting policies of the Corporation. This note includes reconciliations and descriptions of the effect of the transition from previous Canadian GAAP to IFRS. The financial statements include the accounts of Power Financial and all its subsidiaries on a consolidated basis after elimination of intercompany transactions and balances. Subsidiaries of the Corporation are fully consolidated from the date of acquisition, being the date on which the Corporation obtains control, and continue to be consolidated until the date that such control ceases. The principal subsidiaries of the Corporation are: > Great-West Lifeco Inc. (direct interest of 68.2% (2010 – 68.3%)), whose major operating subsidiary companies are The Great-West Life Assurance management to exercise judgement in the process of applying accounting policies and requires management to make estimates and assumptions that affect the amounts reported in those financial statements and accompanying notes. Actual results may differ from these estimates. Areas where estimates are exercised by management include: the valuation and classification of insurance and investment contract liabilities, determination of the fair value and classification for certain financial assets and liabilities, goodwill and indefinite life intangible assets, income taxes, deferred selling commissions, contingencies, and pension plans and other post-employment benefits. The reported amounts and note disclosures are determined using management’s best estimates. The key areas where judgment has been applied include: the classification of insurance and investment contracts, the classification of financial instruments, deferred income reserves (DIR) and deferred acquisition costs (DAC), the valuation of deferred income tax assets, the determination of which financial assets should be derecognized, the level of componentization of property, plant and equipment, the determination of relationships with subsidiaries and special purpose entities and the identification of cash generating units. 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 insurance and investment contract liabilities relies upon investment credit ratings. Lifeco’s practice is to use third-party independent credit ratings where available. Company, Great-West Life & Annuity Insurance Company, London Life re ven ue reco G nitio n Insurance Company, The Canada Life Assurance Company, and Putnam For Lifeco, premiums for all types of insurance contracts and contracts with Investments, LLC. > IGM Financial Inc. (direct interest of 57.6% (2010 – 57.0%)), whose major operating subsidiary companies are Investors Group Inc. and Mackenzie Financial Corporation. > IGM Financial Inc. holds 4.0% (2010 – 4.0%) of the common shares of Great-West Lifeco Inc., and The Great-West Life Assurance Company holds 3.6% (2010 – 3.5%) of the common shares of IGM Financial Inc. The Corporation also holds a 50% (2010 – 50%) interest in Parjointco N.V. Parjointco holds a 56.5% (2010 – 54.1%) equity interest in Pargesa holding SA. The Corporation accounts for its investment in Parjointco using the equity method. limited mortality or morbidity risk are generally recognized as revenue when due and collection is reasonably assured. When premiums are recognized, insurance contract liabilities are computed with the result that benefits and expenses are matched with such revenue. For Lifeco, fee income is recognized when the service is performed, the amount is collectible and can be reasonably estimated. Fee income primarily includes fees earned from the management of segregated fund assets, proprietary mutual fund assets, fees earned on the administration of administrative services only (ASO) Group health contracts and fees earned from management services. For IGM, management fees are based on the net asset value of mutual fund assets under management and are recognized on an accrual basis as the service is performed. Administration fees are also recognized on an accrual basis as the service is performed. Distribution fees derived from mutual fund and securities transactions are recognized on a trade-date basis. Distribution fees derived from insurance and other financial services transactions are recognized on an accrual basis. These management, administration and distribution fees are included in fee income in the statements of earnings. 50 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT NOTE 2 Basis of Presentation and Summary of Significant Accounting Policies (CONTINuED) c a s h and c a s h e QuivaLent s The Corporation maximizes the use of observable inputs and minimizes the Cash and cash equivalents include cash, current operating accounts, use of unobservable inputs when measuring fair value. The Corporation overnight bank and term deposits with original maturities of three months obtains quoted prices in active markets, when available, for identical assets at or less, fixed income securities with an original term to maturity of three the balance sheet date to measure bonds at fair value in its fair value through months or less, as well as other highly liquid investments with short-term profit or loss and available-for-sale portfolios. maturities that are readily convertible to known amounts of cash. The Corporation estimates the fair value of bonds not traded in active inve s tM ent s Investments include bonds, mortgages and other loans, shares, investment properties, and loans to policyholders. Investments are classified as either fair value through profit or loss, available for sale, held to maturity, loans and receivables or as non-financial instruments, based on management’s intention relating to the purpose and nature for which the instruments were acquired or the characteristics of the investments. The Corporation currently has not classified any investments as held to maturity. Investments in bonds and shares normally actively traded on a public market are either designated or classified as fair value through profit or loss or classified as available for sale and are recorded on a trade-date basis. Fixed income securities are included in bonds on the Consolidated Balance Sheets (balance sheets). Fair value through profit or loss investments are recognized at fair value on the balance sheets with realized and unrealized gains and losses reported in the Consolidated Statements of Earnings (statements of earnings). Available-for-sale investments are recognized at fair value on the balance sheets with unrealized gains and losses recorded in other comprehensive income. Gains and losses are reclassified from other comprehensive income and recorded in the statements of earnings when the available-for-sale investment is sold or impaired. Interest income earned on both fair value through profit or loss and available-for-sale bonds is recorded as investment income earned in the statements of earnings. Impairment losses on available-for-sale shares are recorded if the loss is significant or prolonged and subsequent losses are recorded in net earnings. Investments in shares where a market value cannot be measured reliably are classified as available for sale and carried at cost. Investments in shares in companies over which the Corporation exerts significant influence but does not control are accounted for using the equity method of accounting. Investments in mortgages and other loans 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 using the effective interest rate method, net of any allowance for credit losses. Interest income earned and realized gains and losses on the sale of investments classified as loans and receivables are recorded in net investment income in the statements of earnings. Investment properties are initially measured at cost and subsequently carried at fair value on the balance sheets. All changes in fair value are recorded as investment income earned in the statements of earnings. Fair values for investment properties are determined using independent qualified appraisal services. Property that is leased that would otherwise be classified as investment property if owned by the Corporation is also included with investment properties. Fair value measurement Financial instrument carrying values necessarily reflect the prevailing market liquidity and the liquidity premiums embedded in the market pricing methods the Corporation relies upon. The following is a description of the methodologies used to value instruments carried at fair value: 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 at fair value through profit or loss and available for sale Fair values for publicly traded shares are generally determined by the last bid price for the security from the exchange where it is principally traded. Fair values for shares for which there is no active market are determined by discounting expected future cash flows. The Corporation maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The Corporation obtains quoted prices in active markets, when available, for identical assets at the balance sheets dates to measure shares at fair value in its fair value through profit or loss and available-for-sale portfolios. Mortgages and other loans, and Bonds classified as Loans and receivables Disclosure of fair values for bonds and mortgages and other loans, classified as loans and receivables, are determined by discounting expected future cash flows using current market rates. Investment properties Fair values for investment properties are determined using independent appraisal services and include management adjustments for material changes in property cash flows, capital expenditures or general market conditions in the interim period between appraisals. 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 be impaired 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 impairment. For impaired mortgages and other loans, and bonds classified as loans and receivables, provisions are established or impairments recorded to adjust the carrying value to the net realizable amount. Wherever possible the fair value of collateral underlying the loans or observable market price is used to establish net realizable value. For impaired available-for-sale bonds, recorded at fair value, the accumulated loss recorded in the investment revaluation reserves 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 fair value through profit or loss are already recorded in earnings, Bonds at fair value through profit or loss and available for sale Fair values for therefore, a reduction due to impairment of these assets will be recorded in bonds classified as fair value through profit or loss or available for sale are earnings. As well, when determined to be impaired, contractual interest is determined with reference to quoted market bid prices primarily provided no longer accrued and previous interest accruals are reversed. by third-party independent pricing sources. Where prices are not quoted in a normally active market, fair values are determined by valuation models. POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 51 Notes to the Consolidated Financial Statements NOTE 2 Basis of Presentation and Summary of Significant Accounting Policies (CONTINuED) tr an sac tio n cos t s If all or substantially all risks and rewards are retained, the financial assets Transaction costs are expensed as incurred for financial instruments are not derecognized and the transactions are accounted for as secured classified or designated as fair value through profit or loss. Transaction costs financing transactions. for financial assets classified 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 method. Transaction costs for financial liabilities classified as other than fair value through profit or loss are deducted from the value of the instrument issued and taken into net earnings using the effective interest method. c aPitaL a ss e t s and o Wner- o ccuPied P ro Pertie s Capital assets and property held for own use are carried at cost less accumulated depreciation and impairments. Depreciation is charged so as to write off the cost of assets, using the straight-line method, over their estimated useful lives, which vary from 3 to 50 years. Capital assets are tested for impairment whenever events or changes in circumstances indicate that inve s tM ent in a sso ciate s the carrying amount may not be recoverable. Associates are all entities in which the Corporation exercises significant > Buildings, owner-occupied properties, and components 10 – 50 years influence over the entity’s management and operating and financial policy, > Equipment, furniture and fixtures without exercising control, and generally implies holding 20% to 50% of > Other capital assets the voting rights. Investment in associates are accounted for using the equity method and are initially measured at cost. Subsequently, the share other a ss e t s 3 – 10 years 3 – 10 years in earnings or losses of the associate attributable to equity holders of Trading account assets consist of investments in Putnam-sponsored funds, the Corporation is recognized in net earnings and the change in equity which are carried at fair value based on the net asset value of these funds. attributable to equity holders of the Corporation is recognized in equity. Investments in these assets are included in other assets on the balance sheet Loan s to PoL ic yh oL d er s of earnings. Loans to policyholders are shown at their unpaid principal balance and are fully secured by the cash surrender values of the policies. The carrying value of loans to policyholders approximates fair value. Also included in other assets are deferred acquisition costs relating to investment contracts. Deferred acquisition costs are recognized if the costs are incremental and incurred due to the contract being issued. with realized and unrealized gains and losses reported in the statements rein sur an ce co ntr ac t s Lifeco, in the normal course of business, is both a user and a provider of reinsurance in order to limit the potential for losses arising from certain exposures. Assumed reinsurance refers to the acceptance of certain insurance risks by Lifeco underwritten by another company. Ceded reinsurance refers to the transfer of insurance risk, along with the respective premiums, to one or more reinsurers who will share the risks. To the extent that assuming reinsurers are unable to meet their obligations, Lifeco remains liable to its policyholders for the portion reinsured. Consequently, allowances are made for reinsurance contracts which are deemed uncollectible. Assumed reinsurance premiums, commissions and claim settlements, as well as the reinsurance assets associated with insurance and investment contracts, are accounted for in accordance with the terms and conditions of the underlying reinsurance contract. Reinsurance assets are reviewed for impairment on a regular basis for any events that may trigger impairment. Impairment occurs when there is objective evidence that Lifeco will not be able to collect amounts due under the terms of the contract. The carrying amount of a reinsurance asset is adjusted through an allowance account with any impairment loss being recorded in the statements of earnings. Any gains or losses on buying reinsurance are recognized in the statement of earnings immediately at the date of purchase and are not amortized. Go o dWiLL and intan Gib Le a ss e t s Goodwill represents the excess of purchase consideration over the fair value of net assets acquired. Following recognition, goodwill is measured at cost less any accumulated impairment losses. Intangible assets represent finite life and indefinite life intangible assets acquired and software acquired or internally developed. Finite life intangible assets include the value of software, some customer contracts, distribution channels, distribution contracts, technology, deferred selling commissions, and property leases. Finite life intangible assets are tested for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives, not exceeding a period of 30 years. Deferred selling commissions Commissions paid by IGM on the sale of certain mutual funds are deferred and amortized over their estimated useful lives, not exceeding a period of seven years. Commissions paid on the sale of deposits are deferred and amortized over their estimated useful lives, not exceeding a period of five years. When a mutual fund client redeems certain units in mutual funds, a redemption fee is paid by the client and is recorded as revenue by IGM. The remaining unamortized deferred selling commission asset attributable to the initial sale of these mutual fund Premiums and claims ceded for reinsurance are deducted from premiums units is recorded as a disposal. IGM regularly reviews the carrying value of earned and insurance and investment contract benefits. Assets and deferred selling commissions with respect to any events or circumstances liabilities related to reinsurance are reported on a gross basis in the balance that indicate impairment. Among the tests performed by IGM to assess sheets. The amount of reserves ceded to reinsurers is estimated in a manner recoverability is the comparison of the future economic benefits derived consistent with the claim liability associated with reinsured risks. from the deferred selling commission asset in relation to its carrying value. d ereco G nitio n IGM enters into transactions where it transfers financial assets recognized on its balance sheets. The determination of whether the financial assets are derecognized is based on the extent to which the risks and rewards of ownership are transferred. If substantially all of the risks and rewards of a financial asset are not retained, IGM derecognizes the financial asset. The gains or losses and the servicing fee revenue for financial assets that are derecognized are reported in net investment income in the statements of earnings. Indefinite life intangible assets include brands and trademarks, some customer contracts, the shareholders’ por tion of acquired future participating account profits, trade names and mutual fund management contracts. Amounts are classified as indefinite life intangible assets when based on an analysis of all the relevant factors, and when there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the Corporation. The identification of indefinite life intangible assets is made by reference to relevant factors such as product life cycles, potential obsolescence, industry stability and competitive position. 52 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT NOTE 2 Basis of Presentation and Summary of Significant Accounting Policies (CONTINuED) Impairment testing Goodwill and indefinite life intangible assets are established by the Canadian Institute of Actuaries. The valuation uses the tested for impairment annually or more frequently if events indicate that Canadian Asset Liability Method (CALM). This method involves the projection impairment may have occurred. Intangible assets that were previously of future events in order to determine the amount of assets that must be set impaired are reviewed at each reporting date for evidence of reversal. In aside currently to provide for all future obligations and involves a significant the event that certain conditions have been met, the Corporation would be amount of judgment. required to reverse the impairment charge or a portion thereof. Investment contract liabilities are measured at fair value through profit and Goodwill has been allocated to groups of cash generating units (CGU), loss, while certain annuity products are measured at amortized cost. representing the lowest level in which goodwill is monitored for internal reporting purposes. Goodwill is tested for impairment by comparing the d eferred in coM e re s erve s carrying value of the groups of CGU to the recoverable amount to which the Included in other liabilities are deferred income reser ves relating to goodwill has been allocated. Intangible assets are tested for impairment by investment contract liabilities. Deferred income reserves are amortized on comparing the asset’s carrying amount to its recoverable amount. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of the asset’s fair value less cost to sell or value in use, which is calculated using the present value of estimated future cash flows expected to be generated. s eG reGated fu nds fo r the ris k o f u nit h o Ld er s Segregated fund assets and liabilities arise from contracts where all financial risks associated with the related assets are borne by unit holders and are presented separately in the balance sheets at fair value. Investment income and changes in market value of the segregated fund assets are offset by a corresponding change in the segregated fund liabilities. in sur an ce and inve s tM ent co ntr ac t L iab iLitie s Contract classification Lifeco’s products are classified at contract inception, for accounting purposes, as insurance, service or investment contracts, depending on the existence of significant insurance risk. Significant insurance risk exists when Lifeco agrees to compensate policyholders or beneficiaries of the contract for specified uncertain future events that adversely affect the policyholder and whose amount and timing are unknown. When significant insurance risk exists, the contract is accounted for as an insurance contract in accordance with IFRS 4, Insurance Contracts. Refer to Note 13 for discussion of insurance risk. a straight-line basis to recognize the initial policy fees over the policy term, not to exceed 20 years, to release revenue as it is earned over the policy term. PoL ic yh oL d er b enefit s Gross benefits and claims for life insurance contracts include the cost of all claims arising during the year, and settlement of claims, as well as changes in the gross valuation of insurance contracts. Death claims and surrenders are recorded on the basis of notifications received. Maturities and annuity payments are recorded when due. finan ciaL L iab iLitie s Financial liabilities, other than insurance and investment contract liabilities, are classified as other liabilities. Debentures and other debt instruments, capital trust securities and other liabilities are initially recorded on the balance sheets at fair value and subsequently carried at amortized cost using the effective interest rate method with amortization expense recorded in the statements of earnings. s hare- ba s ed P ayM ent s 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 share-based compensation reserves. When the stock options are exercised, the proceeds, together with the amount recorded in share-based compensation reserves, are added to the stated In the absence of significant insurance risk, the contract is classified as an capital of the entity issuing the corresponding shares. investment or service contract. Investment contracts with discretionary participating features are accounted for in accordance with IFRS 4 and investment contracts without discretionary participating features are accounted for in accordance with IAS 39, Financial Instruments: Recognition and Measurement. Lifeco has not classified any contracts as investment contracts with discretionary participating features. Service contracts mainly relate to Group administrative services only (ASO) contracts and are accounted for under IAS 18, Revenue Recognition. Lifeco follows the liability method of accounting for share-based awards issued by its subsidiaries Putnam and PanAgora Asset Management, Inc. Compensation expense is recognized as an increase to operating expenses in the statements of earnings and a liability is recognized on the balance sheets over the vesting period of the share-based awards. The liability is remeasured at fair value at each reporting period and is settled in cash when the shares are purchased from employees. Investment contracts may be reclassif ied as insurance contracts rePurcha s e aG reeM ent s after inception if insurance risk becomes significant. A contract that is Lifeco enters into repurchase agreements with third-party broker-dealers in classified as an insurance contract at contract inception remains as such which Lifeco sells securities and agrees to repurchase substantially similar until all rights and obligations under the contract are extinguished or expire. securities at a specified date and price. As substantially all of the risks and Investment contracts are contracts that carry financial risk, which is the risk of a possible future change in one or more of the following: interest rate, commodity price, foreign exchange rate, or credit rating. Refer to Note 24 on Risk Management. Measurement Insurance contract liabilities represent the amounts required, in addition to future premiums and investment income, to provide for future benefit payments, policyholder dividends, commission 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 liabilities to make appropriate provisions for Lifeco’s obligations to policyholders. The Appointed Actuaries determine the liabilities for insurance contracts and investment contracts using generally accepted actuarial practices, according to the standards rewards of ownership of assets are retained, Lifeco does not derecognize the assets. Such agreements are accounted for as investment financings. d erivative finan cia L in s tru M ent 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 are recorded at fair value on the balance sheets. 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 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 53 Notes to the Consolidated Financial Statements NOTE 2 Basis of Presentation and Summary of Significant Accounting Policies (CONTINuED) and realized gains and losses are recorded in net investment income on the fo reiG n curren c y tr an s L atio n statements of earnings. For derivatives designated as hedging instruments, The Corporation and its subsidiaries operate with multiple functional unrealized and realized gains and losses are recognized according to the currencies. The Corporation’s financial statements are prepared in Canadian nature of the hedged item. dollars, which is the functional and presentation currency of the Corporation. Derivatives are valued using market transactions and other market evidence For the purpose of presenting financial statements, assets and liabilities are whenever possible, including market-based inputs to models, broker or dealer translated into Canadian dollars at the rate of exchange prevailing at the quotations or alternative pricing sources with reasonable levels of price balance sheet dates and all income and expenses are translated at an average transparency. When models are used, the selection of a particular model of daily rates. Unrealized foreign currency translation gains and losses on to value a derivative depends on the contractual terms of, and specific risks the Corporation’s net investment in its foreign operations and associates inherent in the instrument, as well as the availability of pricing information are presented separately as a component of other comprehensive income. in the market. The Corporation generally uses similar models to value Unrealized gains and losses are recognized in earnings when there has been similar instruments. Valuation models require a variety of inputs, including a disposal of a foreign operation or associates. contractual terms, market prices and rates, yield curves, credit curves, measures of volatility, prepayment rates and correlations of such inputs. All other assets and liabilities denominated in foreign currencies are translated into each entity’s functional currency at exchange rates prevailing To qualify for hedge accounting, the relationship between the hedged at the balance sheet dates for monetary items and at exchange rates item and the hedging instrument must meet several strict conditions on prevailing at the transaction dates for non-monetary items. Realized and documentation, probability of occurrence, hedge effectiveness and reliability unrealized exchange gains and losses are included in net investment income of measurement. If these conditions are not met, then the relationship and are not material to the financial statements of the Corporation. 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. Pen sio n PL an s and other Pos t- eM PLoyM ent b enefit s Where a hedging relationship exists, the Corporation documents all relationships between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedge The Corporation and its subsidiaries maintain defined benefit pension plans as well as defined contribution pension plans for eligible employees and advisors. transactions. This process includes linking derivatives that are used in The plans provide pension based on length of service and final average hedging transactions to specific assets and liabilities on the balance sheets earnings. The benefit obligation is actuarially determined and accrued or to specific firm commitments or forecasted transactions. The Corporation using the projected benefit method pro-rated on service. Pension expense also assesses, both at the hedge’s inception and on an ongoing basis, whether consists of the aggregate of the actuarially computed cost of pension benefits derivatives that are used in hedging transactions are effective in offsetting provided in respect of the current year’s service, and imputed interest on changes in fair values or cash flows of hedged items. hedge effectiveness is the accrued benefit obligation, less expected returns on plan assets, which reviewed quarterly through correlation testing. are valued at market value. Past service costs are amortized on a straight- Fair value hedges For fair value hedges, changes in fair value of both the hedging instrument and the hedged item are recorded in net investment income and consequently any ineffective portion of the hedge is recorded immediately in net investment income. Cash flow hedges For cash flow hedges, the effective portion of the changes in fair value of the hedging instrument is recorded in the same manner as the hedged item in either net investment income or other comprehensive income, while the ineffective portion is recognized immediately in net investment income. Gains and losses that accumulate in cash flow hedges reserves 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 cash flow hedges reserves to net investment income if and when it is probable that a forecasted transaction is no longer expected to occur. Net investment hedges Foreign exchange forward contracts may be 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. eMb ed d ed d erivative s line basis over the average period until the benefits become vested. Vested past service costs are recognized immediately in pension expense. For the Corporation’s defined benefit plans, actuarial gains and losses are amortized into the statements of earnings using the straight-line method over the average remaining working life of employees covered by the plan to the extent that the net cumulative unrecognized actuarial gains and losses at the end of the previous reporting period exceed corridor limits. The corridor is defined as ten per cent of the greater of the present value of the defined benefit obligation or the fair value of plan assets. The amortization charge is reassessed at the beginning of each year. The cost of pension benefits is charged to earnings using the projected benefit method pro-rated on services. The Corporation and its subsidiaries also have unfunded supplementary pension plans for certain employees. Pension expense related to current services is charged to earnings in the period during which the services are rendered. In addition, the Corporation and its subsidiaries provide certain post- employment healthcare, dental, and life insurance benefits to eligible retirees, employees and advisors. The current cost of post-employment health, dental and life benefits is charged to earnings using the projected Embedded derivatives are treated as separate contracts and are recorded at unit credit method pro-rated on services. fair value on the balance sheets with changes in fair value in the statements of earnings if their economic characteristics and risks are not closely related to those of the host contract and the host contract is not itself recorded at fair value through earnings. Embedded derivatives that meet the definition of an insurance contract are accounted for and measured as an insurance contract. fu nds h eL d by cedin G in surer s / fu nds he Ld u nd er rein sur an ce co ntr ac t s Under certain forms of reinsurance contracts, it is customary for the ceding 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. 54 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT NOTE 2 Basis of Presentation and Summary of Significant Accounting Policies (CONTINuED) in coM e ta Xe s Le a s e s On December 20, 2010, the International Accounting Standards Board (IASB) Leases that do not transfer substantially all the risks and rewards issued “Deferred Tax: Recovery of Underlying Assets (Amendments to IAS 12)” of ownership are classified as operating leases. Payments made under concerning the determination of deferred tax on investment property operating leases, where the Corporation is the lessee, are charged to net measured at fair market value. IAS 12 was updated to include a rebuttable earnings over the period of use. presumption that a deferred tax on investment property measured using the fair value model in IAS 40 should be determined on the basis that its carrying amount will be recovered through sale. The amendments are mandatory for annual periods beginning on or after January 1, 2012, but early adoption is permitted. Lifeco has elected to adopt the amendment effective Where the Corporation is the lessor under an operating lease for its investment property, the assets subject to the lease arrangement are presented within the balance sheets. Income from these leases is recognized in the statements of earnings on a straight-line basis over the lease term. January 1, 2010. e arnin Gs Per s hare The income tax expense for the period represents the sum of current income Basic earnings per share is determined by dividing net earnings available to tax and deferred income tax. Income tax is recognized as an expense common shareholders by the weighted average number of common shares or income in profit or loss except to the extent that it relates to items that are outstanding for the year. Diluted earnings per share is determined using the recognized outside profit or loss (whether in other comprehensive income same method as basic earnings per share, except that the weighted average or directly in equity), in which case the income tax is also recognized outside number of common shares outstanding includes the potential dilutive effect profit or loss. Current income tax Current income tax is based on taxable income for the year. Current tax liabilities (assets) for the current and prior periods are measured at the amount expected to be paid to (recovered from) the taxation authorities using the rates that have been enacted or substantively enacted at the balance sheet date. Current tax assets and current income tax liabilities are offset, if a legally enforceable right exists to offset the recognized amounts and the entity intends either to settle on a net basis, or to realize the assets and settle the liability simultaneously. Deferred income tax Deferred income tax is the tax expected to be payable or recoverable on tax loss carry forwards and on differences arising between the carrying amounts of assets and liabilities in the financial statements and the corresponding bases used in the computation of taxable income and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognized for all taxable temporary differences and deferred tax assets are recognized to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilized. Such assets and liabilities are not recognized if the temporary difference arises from the initial recognition of an asset or liability of outstanding stock options granted by the Corporation and its subsidiaries, as determined by the treasury stock method. future acco u ntin G chan G e s The Corporation continues to monitor the potential changes proposed by the IASB and to consider the impact changes in the standards may have on the Corporation’s operations. In addition, the Corporation may be impacted in the future by the following IFRS and is currently evaluating the impact these future standards will have on its consolidated financial statements when they become effective: IFRS 4 – Insurance Contracts The IASB issued an exposure draft proposing changes to the accounting standard for insurance contracts in July 2010. The proposal would require an insurer to 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 vastly different from the connection between insurance assets and liabilities considered under CALM and may cause significant volatility in the results of Lifeco. The exposure draft also proposes changes to the presentation and disclosure within the financial statements. in a transaction other than a business combination that at the time of the Lifeco will continue to measure insurance contract liabilities using CALM until transaction affects neither accounting nor taxable profit or loss. such time when a new IFRS for insurance contract measurement is issued. Deferred tax assets and liabilities are measured at the tax rates expected to apply in the year when the asset is realized or the liability is settled, based A final standard is not expected to be implemented for several years; Lifeco continues to actively monitor developments in this area. on tax rates (and tax laws) that have been enacted or substantively enacted IFRS 7 – Financial Instruments: Disclosure Effective for the Corporation at the balance sheet date. Deferred tax assets and deferred tax liabilities are on January 1, 2013, the IASB issued amendments to IFRS 7 regarding disclosure offset, if a legally enforceable right exists to set off current tax assets against of offsetting financial assets and financial liabilities. The amendments current income tax liabilities and the deferred income taxes relate to the will allow users of financial statements to improve their understanding same taxable entity and the same taxation authority. of transfer transactions of financial assets (for example, securitizations), The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Unrecognized deferred tax assets are reassessed at each balance sheet date including understanding the possible effects of any risks that may remain with the entity that transferred the assets. The amendments also require additional disclosures if a disproportionate amount of transfer transactions are undertaken near the end of a reporting period. and are recognized to the extent that it has become probable that future IFRS 9 – Financial Instruments The IASB approved the adoption of the taxable profit will allow the deferred tax asset to be recovered. proposed new Financial Instruments standard to be effective January 1, 2015. Deferred tax liabilities are recognized for taxable temporary differences The new standard requires all financial assets to be classified on initial arising on investments in subsidiaries and associates, except where the recognition at amortized cost or fair value while eliminating the existing group controls the timing of the reversal of the temporary difference categories of available for sale, held to maturity, and loans and receivables. and it is probable that the temporary differences will not reverse in the The new standard also requires: foreseeable future. Under the IFRS liability method, a provision for tax uncertainties which meet the probable threshold for recognition is measured. Measurement of the provision is based on the probability weighted average approach. > embedded derivatives to be assessed for classification together with their financial asset host > a single expected loss impairment method be used for financial assets > amendments to the criteria for hedge accounting and measuring effectiveness POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 55 Notes to the Consolidated Financial Statements NOTE 2 Basis of Presentation and Summary of Significant Accounting Policies (CONTINuED) The full impact of IFRS 9 on the Corporation will be evaluated after the IFRS 13 – Fair Value Measurement Effective for the Corporation on January 1, remaining stages of the IASB’s project to replace IAS 39, Financial Instruments: 2013, IFRS 13, Fair Value Measurement provides guidance for the measurement Recognition and Measurement — impairment methodology, hedge accounting, and disclosure of assets and liabilities held at fair value. The standard refines the and asset and liability offsetting — are finalized. The Corporation continues measurement and disclosure requirements and aims to achieve consistency to actively monitor developments in this area. with other standard setters to improve visibility to financial statement users. IFRS 10 – Consolidated Financial Statements Effective for the Corporation IAS 1 – Presentation of Financial Statements Effective for the Corporation on January 1, 2013, IFRS 10, Consolidated Financial Statements uses consolidated on Januar y 1, 2013, IAS 1, Presentation of Financial Statements includes principles based on a revised definition of control. The definition of control is requirements that other comprehensive income be classified by nature and dependent on the power of the investor to direct the activities of the investee, grouped between those items that will be classified subsequently to profit or the ability of the investor to derive variable benefits from its holdings in loss (when specific conditions are met) and those that will not be reclassified. the investee, and a direct link between the power to direct activities and Other amendments include changes to discontinued operations and overall receive benefits. financial statement presentation. IFRS 11 – Joint Arrangements Effective for the Corporation on January 1, IAS 19 – Employee Benefits The IASB published an amended version of this 2013, the IFRS 11, Joint Arrangements separates jointly controlled entities standard in June 2011 that eliminates the corridor approach for actuarial gains between joint operations and joint ventures. The standard has eliminated and losses resulting in those gains and losses being recognized immediately the option of using proportionate consolidation in accounting for interests through other comprehensive income while the net pension asset or liability in joint ventures, now requiring an entity to use the equity method of would reflect the full funded status of the plan on the balance sheets. Further, accounting for interests in joint ventures. the standard includes changes to how the defined benefit obligation and IFRS 12 – Disclosure of Interest in Other Entities Effective for the Corporation on January 1, 2013, IFRS 12, Disclosure of Interest in Other Entities the fair value of the plan assets would be presented within the financial statements of an entity. proposes new disclosure requirements for the interest an entity has in The Corporation will continue to use the corridor method until January 1, 2013, subsidiaries, joint arrangements, associates, and structured entities. when the revised IAS for employee benefits becomes effective. The standard requires enhanced disclosure, including how control was determined and any restrictions that might exist on consolidated assets and liabilities presented within the financial statements. IAS 32 – Financial Instruments: Presentation In December 2011, the IASB issued amendments to IAS 32 which clarify the existing requirements for offsetting financial assets and financial liabilities. The amendments will be As a consequence of the issuance of IFRS 10, 11 and 12, the IASB also effective for the Corporation on January 1, 2014. issued amended and re-titled IAS 27, Separate Financial Statements and IAS 28, Investments in Associates and Joint Ventures. The new requirements are effective for the Corporation on January 1, 2013. NOTE 3 Transition to IFRS Power Financial’s annual financial statements have been prepared in and results of operations. IFRS has also resulted in a number of presentation accordance with IFRS, adopted by the Accounting Standards Board of changes to the Corporation’s financial statements. In order for readers to Canada for financial reporting periods beginning on or after January 1, 2011. understand the effects of adopting IFRS, reconciliations of the Corporation’s References made to International Accounting Standards (IAS) throughout financial statements from previous Canadian GAAP to IFRS, along with refer to the application of IAS and relate to the interpretations of the IFRS narrative explanations, have been provided below. Interpretations Committee. IFRS does not allow the use of hindsight to recreate or revise estimates These are the Corporation’s first annual consolidated financial statements and consequently the estimates previously made by the Corporation under prepared in accordance with IFRS, with 2010 comparative figures restated previous Canadian GAAP were not revised when converting to IFRS, except accordingly. Prior to the adoption of IFRS, the consolidated financial where necessary to reflect any difference in accounting policies. statements were prepared in accordance with previous Canadian GAAP. The following reconciliations of previous Canadian GAAP to IFRS have The effects of the transition to IFRS as of January 1, 2010 on the financial been prepared: position, financial performance and cash flows are noted below. reco n ciLiatio n s o f Pre vio us c anadian G a aP to ifr s i) ii) Reconciliation of the opening balance sheet as at January 1, 2010 Reconciliation of net earnings attributable to shareholders for the year ended December 31, 2010 At transition to IFRS, the Corporation applied IFRS 1, which requires the iii) Reconciliation of total comprehensive income (loss) for the year ended Corporation to reconcile shareholders’ equity and total comprehensive December 31, 2010 income for prior periods presented. The adoption of IFRS has not substantially changed the presentation of the Corporation’s cash flows, however, it has resulted in certain changes to the Corporation’s reported financial position iv) Reconciliation of equity as at January 1, 2010, and December 31, 2010 56 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT NOTE 3 Transition to IFRS (CONTINuED) i) R eco n c i l i at i o n o f t h e o pe n i n g b a l a n c e s h e e t a s at j a n ua Ry 1, 2010 REFERENCE REPORTED UNDER PREVIOUS CGA AP DECEMBER 31, 2009 CONVERSION ADJUSTMENTS PRESENTATION AND RECL ASSI- FICATION ADJUSTMENTS ASSETS Cash and cash equivalents Investments Bonds Mortgages and other loans Shares Investment properties Loans to policyholders Funds held by ceding insurers Reinsurance assets Investment in associates Owner-occupied properties Capital assets Derivative financial instruments Other assets Deferred tax assets Intangible assets Goodwill Segregated funds for the risk of unit holders Total assets LIABILITIES Insurance contract liabilities Investment contract liabilities Deposits and certificates Funds held under reinsurance contracts Obligation to securitization entities Debentures and other borrowings Capital trust securities Derivative financial instruments Preferred shares of the Corporation Preferred shares of subsidiaries Other liabilities Deferred tax liabilities Non-controlling interests Insurance and investment contracts on account of unit holders Total liabilities EqUITy Stated capital Perpetual preferred shares Common shares Retained earnings Contributed surplus Accumulated other comprehensive income (loss) Total shareholders’ equity Non-controlling interests Total equity Total liabilities and equity m f, g, r s s o d, r d m a, i, m, n, p, t q l, n v f, g, h, s, t, u s, t, u s m p m p a, g, h, i, j, k, m, p q p, w v p b, c, p, q w DATE OF TRANSITION TO IFRS JANUARy 1, 2010 4,855 67,388 20,613 6,392 2,615 6,957 – – 3,257 – (85) – – – – – (401) – 3,172 (401) 103,965 – – 154 40 – (62) (140) (6) (7) – – 145 2,800 – 439 (38) – (400) – 847 – 10,984 2,800 2,829 479 190 775 4,774 1,262 5,206 8,655 87,495 87,495 4,855 67,388 17,356 6,392 3,101 6,957 101,194 10,839 – 2,675 – 228 837 5,314 1,268 4,366 8,655 – 140,231 3,151 90,887 234,269 102,651 (29) 2,406 105,028 – 907 186 – 5,967 540 364 300 203 5,930 1,098 8,878 – – – 3,310 (36) – (5) – (4) 678 (120) (258) 841 – 145 – – – – – – – – (8,620) 841 907 331 3,310 5,931 540 359 300 199 6,608 978 – – – 87,495 87,495 127,024 3,536 82,267 212,827 1,725 605 – – 11,165 (1,642) 102 (390) 13,207 – 13,207 3 1,254 (385) – (385) – – – – – – 8,620 8,620 1,725 605 9,523 105 864 12,822 8,620 21,442 140,231 3,151 90,887 234,269 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 57 Notes to the Consolidated Financial Statements NOTE 3 Transition to IFRS (CONTINuED) ii) R eco n c i l i at i o n o f n e t e a R n i n g s at t R i b u ta b l e to s h a R e h o l d e R s FOR T hE yEAR ENDED D ECEMBER 31 REFERENCE 2010 As reported under previous Canadian GAAP Net earnings before non-controlling interests Net earnings attributable to non-controlling interests Net earnings attributable to shareholders under previous Canadian GAAP Adjustments to net earnings as a result of IFRS Derecognition of deferred net realized gains Deferred acquisition costs and deferred income reserves on investment contracts Employee benefits Uncertain income tax provisions Derecognition Deferred selling commissions Investment in associates Recognition of contingent liabilities Business combinations Other adjustments Tax impact of IFRS adjustments Attributable to non-controlling interests Total adjustments to net earnings attributable to shareholders Net earnings attributable to shareholders under IFRS iii) R eco n c i l i at i o n o f tota l co m p R e h e n s i v e i n co m e (lo s s) FOR T hE yEAR ENDED D ECEMBER 31 As reported under previous Canadian GAAP Total comprehensive income (loss) before non-controlling interests Total comprehensive income (loss) attributable to non-controlling interests Total comprehensive income (loss) attributable to shareholders under previous Canadian GAAP Adjustments to net earnings as a result of IFRS (as reconciled above) Adjustments to other comprehensive income (loss) Redesignation of financial assets Tax impact on redesignation of financial assets Cumulative translation losses of foreign operations Attributable to non-controlling interests Adjustments to total comprehensive income attributable to shareholders Total comprehensive income (loss) attributable to shareholders under IFRS g h a, i j m n o k e p q 2,444 (860) 1,584 (12) 18 (26) (26) 36 13 7 (10) (8) (19) (5) (32) 15 (17) 1,567 REFERENCE 2010 c c, q b 1,485 (714) 771 (17) (29) 9 63 43 (14) 29 12 783 58 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT NOTE 3 Transition to IFRS (CONTINuED) iv) R eco n c i l i at i o n o f eq u i t y Equity under previous Canadian GAAP Total adjustments to equity at date of transition — January 1, 2010 Changes in retained earnings IFRS 1 optional elections/exemptions Employee benefits — cumulative unamortized actuarial gains and losses Cumulative translation losses of foreign operations Redesignation of financial assets Fair value as deemed cost for owner-occupied properties Mandatory adjustments Measurement of investment properties at fair value Derecognition of deferred net realized gains Deferred acquisition costs and deferred income reserves on investment contracts Unamortized vested past service costs and other employment benefits Uncertain income tax provisions Derecognition Intangible assets/Deferred selling commissions Investment in associates Recognition of contingent liabilities Business combinations Other adjustments Tax impact of IFRS adjustments Attributable to non-controlling interests Changes in contributed surplus Graded vesting method for share-based payments Attributable to non-controlling interests Changes in accumulated other comprehensive income Redesignation of financial assets Tax impact on redesignation of financial assets Cumulative translation losses of foreign operations Attributable to non-controlling interests Changes in non-controlling interests Presentation of non-controlling interests in equity Total changes in equity for the period Total equity under IFRS, end of period REFERENCE DATE OF TRANSITION TO IFRS JANUARy 1, 2010 13,207 – 13,207 DECEMBER 31, 2010 13,184 8,235 21,419 a b c d f g h i j m l, n o k e p q p p p c c, q b p p, w (316) (1,650) (127) 40 119 110 (508) 123 (240) (127) (10) 154 (25) – (8) 135 688 (1,642) 5 (2) 3 127 (34) 1,650 (489) 1,254 8,620 8,235 – – – – – (12) 18 (26) (26) 36 13 7 (10) (8) (19) (5) 15 (17) 1 (1) – (29) 9 63 (14) 29 121 133 21,442 21,552 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 59 Notes to the Consolidated Financial Statements NOTE 3 Transition to IFRS (CONTINuED) s tateM ent o f c a s h f LoWs continues to use the corridor approach available under the present IAS 19, Under IFRS, the statement of cash flows continues to be presented using the Employee Benefits standard for deferring recognition of actuarial gains and indirect method with limited presentation differences of operating earnings losses that reside within the corridor. being presented before tax and cash flows related to tax expense presented b) Cumulative translation adjustments of foreign operations separately within operating cash flows. The cash flows reported under the The Corporation elected to reset its cumulative translation adjustment previous Canadian GAAP for operating, financing, and investing activities account for all foreign operations to zero as of January 1, 2010. Future have not been substantially impacted by the adoption of IFRS requirements. gains or losses on disposal of any foreign operations and associates will ifr s 1 fir s t -tiM e ad o P tio n o f ifr s In preparing the annual consolidated financial statements, the Corporation has applied IFRS 1, which requires retrospective application of IFRS, except for certain optional exemptions and mandatory exceptions provided in the standard. The optional exemptions adopted by the Corporation and the mandatory exceptions that apply to the Corporation are described below. ifr s o P tio naL e XeM P tio n s a) Employee benefits — cumulative unamortized actuarial gains and losses The Corporation elected to apply the exemption available to recognize all cumulative unamortized actuarial gains and losses of the Corporation’s defined benefit plans in equity upon transition to IFRS. This adjustment, referred to as the “fresh start adjustment”, decreased equity by $316 million before tax (decrease of $210 million in shareholders’ equity and $106 million in non-controlling interests). Subsequent to transition, the Corporation therefore exclude translation differences that arose before January 1, 2010. The balance of the cumulative loss to be reclassified from accumulated other comprehensive income (AOCI) to opening retained earnings at January 1, 2010 was $1,188 million (the adjustment of cumulative translation adjustment before non-controlling interests amounted to $1,650 million). As a result of the foreign exchange revaluation of the transitional IFRS adjustments, the total impact to the cumulative translation adjustment was an increase of $63 million for the year ended December 31, 2010. c) Redesignation of financial assets Lifeco elected to redesignate certain non-participating available-for- sale financial assets to the fair value through profit or loss classification and certain financial assets classified as fair value through profit or loss under previous Canadian GAAP to available for sale. The redesignation had no overall impact on the Corporation’s opening equity at transition but resulted in a reclassification within equity of $127 million before tax and non- controlling interests, between retained earnings and accumulated other comprehensive income. For the year ended December 31, 2010 the redesignation decreased other comprehensive income by $29 million before tax. The financial assets carried at fair value in the most recent previous Canadian GAAP consolidated financial statements and at transition to IFRS are as follows: AS AT JANUARy 1, 2010 Financial assets redesignated to fair value through profit or loss Financial assets redesignated to available for sale d) Fair value as deemed cost for owner-occupied properties The Corporation elected to measure some owner-occupied properties at fair value as its deemed cost at the January 1, 2010 transition date, which resulted in an increase to equity of $40 million before tax (increase of $26 million in shareholders’ equity and $14 million in non-controlling interests). Subsequent to this date, owner-occupied properties are carried at amortized cost. The total fair value as at January 1, 2010 for owner-occupied properties, which includes a transitional adjustment of $40 million, amounted to $479 million. e) Business combinations The Corporation applied the IFRS 1 business combinations exemption and did not restate business combinations that took place prior to the January 1, 2010 transition date, which had no impact on operating figures. The Corporation will apply IFRS 3, Business Combinations, prospectively for business combinations occurring on or after January 1, 2010. Under IFRS, restructuring provisions are only included as part of the acquired liabilities when the acquiree has recognized an existing liability for restructuring in accordance with the applicable IFRS. As a result, restructuring provisions recorded as part of the purchase price allocation under previous Canadian GAAP are charged to earnings under IFRS. This represented an amount of $8 million for the year ended December 31, 2010. FAIR VALUE 373 360 UNREALIzED GAINS RECL ASSIFIED TO AOCI 38 89 M andato ry chan G e s in acco u ntin G Po Licie s at co nver sio n to ifr s m e a s u R e m e n t a n d R eco g n i t i o n d i ffe R e n c e s f) Measurement of investment properties at fair value Under previous Canadian GAAP, real estate was carried at cost net of write-downs and allowance for loss, plus a moving average market value adjustment. Under IFRS, real estate held for investment purposes is classified as investment property and is measured at fair value. This measurement change increased equity at January 1, 2010 by $119 million before tax (increase of $81 million in shareholders’ equity and $38 million in non-controlling interests), with no effect on earnings, offset by the change in accounting for owner-occupied properties, for the year ended December 31, 2010. g) Deferred net realized gains Under previous Canadian GAAP, net realized gains and losses associated with the sale of real estate were deferred and included in deferred net realized gains on the balance sheets. These deferred net realized gains and losses were amortized to earnings at a rate of 3% per quarter on a declining balance basis. Under IFRS, gains and losses associated with the sale of investment properties are immediately recognized in earnings and consequently the balance of the unrecognized net deferred realized gains was recognized in equity at transition. This recognition change increased equity at January 1, 2010 by $110 million before tax (increase of $33 million in shareholders’ equity and $77 million in non-controlling interests), and decreased earnings by $12 million before tax for the year ended December 31, 2010. 60 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT NOTE 3 Transition to IFRS (CONTINuED) h) Deferred acquisition costs (DAC) and deferred income reserves is tested for impairment by reference to the cash generating unit in which (DIR) on investment contracts goodwill is associated. A cash generating unit represents the lowest level in Under previous Canadian GAAP, DAC relating to policyholder liabilities were which goodwill is monitored for internal reporting purposes. This change in deferred in policy liabilities and amortized into consolidated net earnings impairment testing had no impact on the Corporation’s financial statements over the anticipated period of benefit. Under IFRS, DAC on policyholder at transition. liabilities reclassified as investment contract liabilities are no longer deferred and amortized into earnings over the anticipated period of benefit but rather recognized through earnings in the period incurred for those costs not incremental to issuing the contract. In addition to DAC, DIR related to fee income on investment contracts will also be deferred and recognized over the term of the contract. The change in measurement for both DAC and DIR decreased equity at January 1, 2010 by $508 million before tax (decrease of $360 million in shareholders’ equity and $148 million in non-controlling interests), and increased earnings by $18 million before tax for the year ended December 31, 2010. i) Unamortized vested past service costs and other employment benefits Previous Canadian GAAP and IFRS differ in their treatment of other employee benefits, including the timing of recognition of unamortized vested past service costs and certain service awards. The change in recognition for these vested past service costs and other employee benefits under IFRS increased equity at January 1, 2010 by $123 million before tax (increase of $74 million in shareholders’ equity and $49 million in non-controlling interests), and decreased earnings by $26 million before tax for the year ended December 31, 2010. j) Uncertain income tax provisions The difference in the recognition and measurement of uncertain income tax provisions between previous Canadian GAAP and IFRS decreased equity at January 1, 2010 by $240 million (decrease of $164 million in shareholders’ equity and $76 million in non-controlling interests), and has decreased earnings by $26 million for the year ended December 31, 2010. k) Recognition of contingent liabilities Under previous Canadian GAAP, a contingent liability was recognized as a result of a past transaction or event if it was likely that it would result in a loss and the amount of the loss could be reasonably estimated. Under IFRS, the cost of assets acquired outside of a business combination is not adjusted for the tax effect on any differences between the accounting cost and the tax cost at the time of the acquisition. Opening equity was adjusted by $7 million to reflect the difference in amortization expense related to certain intangible assets where deferred taxes increased the cost of the asset acquired. m) Derecognition Under previous Canadian GAAP, derecognition focused on surrendering control over the transferred assets in order to derecognize the assets and recognize a sale. Under IFRS, derecognition focuses to a greater extent on the transfer of the risks and rewards of ownership in order to derecognize the asset and recognize a sale. As a result, IGM’s securitization transactions are accounted for as secured borrowings under IFRS rather than sales, which results in an increase in total assets and liabilities recorded on the balance sheets. The increase in the mortgage balances was $3.5 billion at December 31, 2010 (January 1, 2010 – $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, were adjusted. At December 31, 2010, the decrease in other assets was $91 million (January 1, 2010 – $129 million) and in other liabilities was $85 million (January 1, 2010 – $55 million). In addition, as these transactions are treated as financing transactions rather than sale transactions, a transitional adjustment to opening retained earnings is required to reflect this change in accounting treatment. Opening retained earnings, revenue and expenses have been adjusted to reflect this change. The change related to derecognition decreased equity at January 1, 2010 by $127 million before tax (decrease of $75 million in shareholders’ equity and $52 million in non-controlling interests), and increased earnings by $36 million before tax for the year ended Under IFRS, a provision is recognized when there is a present obligation December 31, 2010. as a result of a past transaction or event, it is “probable” that an outflow of resources will be required to settle the obligation and a reliable estimate can be made of the obligation. The previous Canadian GAAP recognition criterion of “likely” was a higher threshold than “probable” which results in additional provisions being recognized under IFRS. IFRS also provides for the use of the weighted average of all possible outcomes or the midpoint where there is a range of equally possible outcomes. The change in recognition of contingent liabilities decreased equity at January 1, 2010 by $25 million before tax (decrease of $15 million in shareholders’ equity and $10 million in non-controlling interests) and decreased earnings by $10 million before tax for the year ended December 31, 2010. l) Goodwill and intangible asset measurement and impairment testing Goodwill and intangible assets under IFRS are 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 is greater than or approximates the previous Canadian GAAP carrying value at January 1, 2010 and therefore no transitional adjustment was required. At each reporting date, the Corporation reviews goodwill and intangible assets for indicators of impairment or reversals of impairment on the intangible assets. In the event that certain conditions have been met, the Corporation is required to reverse the impairment charge, or a portion thereof, on intangible assets. Under previous Canadian GAAP, goodwill was tested for impairment by comparing the fair value of the reporting unit to which the goodwill was associated with its carrying value. Under IFRS, the carrying value of goodwill n) Deferred selling commissions Under previous Canadian GAAP, deferred selling commissions were finite life intangible assets and were presented in other assets. Previous Canadian GAAP did not specifically address the accounting for disposals of finite life intangible assets and as a result, IGM utilized a shorter amortization period in order to account for disposals. Under IFRS, deferred selling commissions are finite life intangible assets. IFRS more specifically addresses the approach to recording amortization and disposals of intangible assets. The change related to deferred selling commissions decreased equity at January 1, 2010 by $3 million before tax (decrease of $2 million in shareholders’ equity and $1 million in non-controlling interests), and has increased earnings by $13 million before tax for the year ended December 31, 2010. o) Investment in associates The Corporation increased the carrying value of its investment in associates and its shareholders’ equity by an amount of $154 million to reflect amounts previously recognized under IFRS by Pargesa which were not recognized under previous Canadian GAAP as at January 1, 2010. The largest component of this adjustment consists of the Corporation’s share of the reversal in 2009 of an impairment charge recorded by Groupe Bruxelles Lambert for an amount of $139 million. Other adjustments during 2010 resulted in an increase of $7 million for the year ended December 31, 2010. POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 61 Notes to the Consolidated Financial Statements NOTE 3 Transition to IFRS (CONTINuED) p) Other adjustments s) Presentation of reinsurance accounts In addition to the items described above, several other items have been Reinsurance accounts are presented on a gross basis on the balance sheets, identified where the transition from previous Canadian GAAP to IFRS totalling $2,800 million of reinsurance assets with an offsetting increase resulted in measurement changes. These adjustments mainly include (i) the to insurance and investment contract liabilities and no impact to equity. capitalization of transaction costs on other than held-for-trading financial Funds-withheld asset and liability accounts have also been adjusted and liabilities under IFRS, as opposed to being charged to earnings under previous are presented as a gross amount of $145 million. Presentation of gross Canadian GAAP, (ii) the adoption of the graded vesting method to account for reinsurance revenues and expenses is also required within the statements all stock options for some subsidiaries, and the adoption and classification as of earnings. liabilities for certain share-based payments and (iii) Lifeco’s preferred shares previously recorded at fair value are recorded at amortized cost under IFRS. t) Reclassification of deferred acquisition costs The deferred acquisition costs of $447 million recognized on investment Furthermore, the total impact of all the adjustments related to IFRS 1 and contracts that were included within policy liabilities under previous Canadian mandatory changes in accounting policies at conversion (as listed from a) to GAAP have been reclassified to other assets on the balance sheets. q)) to non-controlling interests amounted to $258 million as at January 1, 2010. u) Presentation of insurance and investment contract liabilities q) Tax impact of IFRS adjustments Under previous Canadian GAAP, all policyholder-related liabilities were The tax effect of the above adjustments, excluding the uncertain tax classified as actuarial liabilities and valued using the Canadian Asset Liability provisions, is a decrease to tax liabilities of $120 million at transition (increase Method (CALM). Under IFRS 4, Insurance Contracts, contracts are classified of $92 million in shareholders’ equity and of $28 million in non-controlling and measured depending on the existence of significant insurance risk. interests), and has decreased earnings by $5 million for the year ended If significant insurance risk exists, the contract is classified as an insurance December 31, 2010. pR e s e n tat i o n a n d c l a s s i fi c at i o n d i ffe R e n c e s r) Presentation of real estate properties contract and IFRS permits the Corporation to continue to measure insurance contract liabilities using CALM. If significant insurance risk does not exist, then the contract is classified as an investment contract and measured at either fair value or amortized cost. The change in reclassification had no Properties classified as real estate under previous Canadian GAAP are impact on opening equity at January 1, 2010, or consolidated earnings and reclassified to investment properties ($2,615 million) and to owner-occupied comprehensive income at December 31, 2010. properties ($401 million) in the balance sheets under IFRS. The reconciled amount of policy liabilities under previous Canadian GAAP to insurance and investment contract liabilities under IFRS at transition is as follows: Policy liabilities under previous Canadian GAAP at December 31, 2009: Actuarial liabilities Provision for claims Provision for policyholder dividends Provision for experience rating refunds Policyholder funds IFRS conversion adjustments: Remeasurement of deferred acquisition costs Fair value of investment properties backing liabilities Recognition of deferred net realized gains Subtotal — IFRS conversion adjustments IFRS reclassification adjustments: Deferred acquisition costs to other assets Reinsurance assets offset by reinsurance liabilities Subtotal — IFRS reclassification adjustments Total investment and insurance contract liabilities under IFRS at January 1, 2010 Attributable to Insurance contract liabilities Investment contract liabilities 98,059 1,308 606 317 2,361 102,651 151 (203) 23 (29) 447 2,800 3,247 105,869 105,028 841 105,869 v) Presentation of segregated funds on the balance sheets w) Presentation of non-controlling interests within equity Under IFRS, the assets and liabilities of the segregated funds, totalling Under previous Canadian GAAP, non-controlling interests were presented $87.5 billion at January 1, 2010, are included at fair value on the balance sheets between liabilities and equity, whereas under IFRS non-controlling as a line item within both assets and liabilities. There was no measurement interests are presented within the equity section of the balance sheet. change impacting equity. This reclassification of non-controlling interests represents an increase of $8,878 million to equity as a result of this change in presentation at transition to IFRS. 62 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT NOTE 4 Discontinued Operations On November 16, 2011, IGM completed the sale of 100% of the common shares In accordance with IFRS 5 – Non-Current Assets Held for Sale and Discontinued of M.R.S. Trust Company and M.R.S. Inc. (MRS). Cash consideration was Operations, the operating results and cash flows of MRS, which were $199 million in addition to the repayment of $20 million of subordinated debt previously included in the IGM reportable segment, have been classified as and the assumption of the liability related to amounts held on deposit with discontinued operations. MRS by Investors Group Securities Inc. Net earnings from discontinued operations are as follows: PERIOD ENDED NOVEMBER 15, 2011 yEAR ENDED DECEMBER 31, 2010 REVENUES Net investment income Fee income ExPENSES Operating and administrative expenses Income taxes (recovery) Gain on sale, net of tax Net earnings — discontinued operations Attributable to Non-controlling interests Common shareholders 14 19 33 27 (27) – 33 30 63 25 38 63 14 23 37 31 4 35 2 – 2 1 1 2 Cash flows from discontinued operations are as follows: Net cash flows from operating activities Net cash flows from financing activities Net cash flows from investing activities Net increase in cash and cash equivalents NOTE 5 Cash and Cash Equivalents Cash Cash equivalents Cash and cash equivalents — continuing operations Cash and cash equivalents — discontinued operations PERIOD ENDED NOVEMBER 15, 2011 yEAR ENDED DECEMBER 31, 2010 7 (33) 165 139 DECEMBER 31, 2011 DECEMBER 31, 2010 912 2,473 3,385 – 3,385 678 2,690 3,368 288 3,656 6 (69) 82 19 JANUARy 1, 2010 1,026 3,560 4,586 269 4,855 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 63 Notes to the Consolidated Financial Statements NOTE 6 Investments c arryin G va Lue s and fair va Lue s Carrying values and estimated fair values of investments are as follows: DECEMBER 31, 2011 DECEMBER 31, 2010 JANUARy 1, 2010 CARRyING VALUE FAIR VALUE CARRyING VALUE FAIR VALUE CARRyING VALUE FAIR VALUE Bonds Designated as fair value through profit or loss [1] 60,112 60,112 55,251 55,251 51,269 51,269 Classified as fair value through profit or loss [1] Available for sale Loans and receivables Mortgages and other loans Loans and receivables 1,853 7,050 9,744 78,759 1,853 7,050 10,785 79,800 1,748 7,293 9,290 1,748 7,293 9,942 1,759 5,195 9,165 1,759 5,195 9,421 73,582 74,234 67,388 67,644 21,226 22,514 19,985 20,833 20,372 20,682 Designated as fair value through profit or loss [1] 292 292 224 224 241 241 Shares Designated as fair value through profit or loss [1] Available for sale Investment properties Loans to policyholders 21,518 22,806 20,209 21,057 20,613 20,923 5,502 900 6,402 3,201 7,162 5,502 900 6,402 3,201 7,162 5,364 1,051 6,415 2,957 6,827 5,364 1,051 6,415 2,957 6,827 4,928 1,464 6,392 2,615 6,957 4,928 1,464 6,392 2,615 6,957 117,042 119,371 109,990 111,490 103,965 104,531 [1] Investments can be categorized as fair value through profit or loss in two ways; designated as fair value through profit or loss at the option of management, or classified as fair value through profit or loss if they are actively traded for the purpose of earning investment income. b o n ds and M o rtG aG e s Carrying value of bonds and mortgages due over the current and non-current term are as follows: DECEMBER 31, 2011 Bonds Mortgage loans DECEMBER 31, 2010 Bonds Mortgage loans JANUARy 1, 2010 Bonds Mortgage loans 1 yEAR OR LESS 7,627 2,042 9,669 1 yEAR OR LESS 8,299 1,900 10,199 1 yEAR OR LESS 6,977 1,871 8,848 1 – 5 yEARS 17,450 8,916 26,366 1 – 5 yEARS 16,122 8,201 24,323 1 – 5 yEARS 15,719 7,987 23,706 TERM TO MATURIT y OVER 5 yEARS 53,367 10,249 63,616 TERM TO MATURIT y OVER 5 yEARS 48,833 9,855 58,688 TERM TO MATURIT y OVER 5 yEARS 44,435 10,464 54,899 CARRyING VALUE TOTAL 78,444 21,207 99,651 CARRyING VALUE TOTAL 73,254 19,956 93,210 CARRyING VALUE TOTAL 67,131 20,322 87,453 The above table excludes the carrying value of impaired bonds and mortgages, as the ultimate timing of collectability is uncertain. 64 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT NOTE 6 Investments (CONTINuED) i m pa iRe d i n v e s tm e n t s , a l lo Wa n c e f o R c Re d i t lo s s e s , i n v e s tm e n t s Wi t h Re s t R u c t u Re d t e R m s The carrying amount of impaired investments is as follows: Impaired amounts by type [1] Fair value through profit or loss Available for sale Loans and receivables Total DECEMBER 31, 2011 DECEMBER 31, 2010 JANUARy 1, 2010 290 51 36 377 302 29 51 382 239 23 71 333 [1] Excludes amounts in funds held by ceding insurers of nil at December 31, 2011, $11 million at December 31, 2010 and $6 million at January 1, 2010. 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 changes) Balance, end of year 2011 68 (13) (15) (3) 37 2010 88 (5) (8) (7) 68 The allowance for credit losses is supplemented by the provision for future credit losses included in policy liabilities. Lifeco holds investments with restructured terms or which have been exchanged for securities with amended terms. These investments are performing according to their new terms. The carrying value of these investments is as follows: Bonds Bonds with equity conversion features Mortgages n e t i n v e s tm e n t i n co m e 2011 Regular net investment income: Investment income earned Net realized gains (losses) (available for sale) Net realized gains (losses) (other classifications) Net recovery (provision) for credit losses (loans and receivables) Other income and expenses Changes in fair value on fair value through profit or loss assets: Net realized/unrealized gains (losses) (classified fair value through profit or loss) Net realized/unrealized gains (losses) (designated fair value through profit or loss) Net investment income (loss) DECEMBER 31, 2011 DECEMBER 31, 2010 JANUARy 1, 2010 16 119 17 152 23 150 18 191 36 169 1 206 BONDS MORTGAGE LOANS ShARES INVESTMENT PROPERTIES OThER TOTAL 940 190 254 396 3,780 119 11 20 – – 33 (7) (2) 7 – – – 3,930 964 197 74 4,166 4,240 8,170 – (7) (7) 957 – (280) (280) (83) – – – (65) 189 – 143 143 332 – – – (66) 330 – 58 58 388 5,560 126 44 13 (133) 5,610 74 4,080 4,154 9,764 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 65 Notes to the Consolidated Financial Statements NOTE 6 Investments (CONTINuED) 2010 Regular net investment income: Investment income earned Net realized gains (losses) (available for sale) Net realized gains (losses) (other classifications) Net recovery (provision) for credit losses (loans and receivables) Other income and expenses Changes in fair value on fair value through profit or loss assets: Net realized/unrealized gains (losses) (classified fair value through profit or loss) Net realized/unrealized gains (losses) (designated fair value through profit or loss) Net investment income BONDS MORTGAGE LOANS ShARES INVESTMENT PROPERTIES OThER TOTAL 3,818 960 72 14 5 – – 36 (3) 6 209 12 – – – 3,909 999 221 40 – 3,012 3,052 6,961 (39) (39) 960 – 603 603 824 242 578 5,807 – – – (64) 178 – 162 162 340 – – – (70) 508 – 7 7 515 84 50 2 (128) 5,815 40 3,745 3,785 9,600 Investment income earned comprises income from investments that distributions. Investment properties income includes rental income earned are classified as available for sale, loans and receivables and classified on investment properties, ground rent income earned on leased and sub- or designated as fair value through profit or loss. Investment income leased land, fee recoveries, lease cancellation income, and interest and other from bonds and mortgages includes interest income and premium and investment income earned on investment properties. discount amortization. Income from shares includes dividends and inve s tM ent Pro Pertie s The carrying value of investment properties and changes in the carrying value of investment properties are as follows: Balance, beginning of year Additions Change in fair value through profit or loss Disposals Foreign exchange rate changes Balance, end of year 2011 2,957 161 143 (99) 39 3,201 2010 2,615 353 162 (18) (155) 2,957 NOTE 7 Funds Held by Ceding Insurers Included in funds held by ceding insurers of $9,923 million at December 31, 2011 agreement, CLIRE is required to put amounts on deposit with Standard Life ($9,856 million at December 31, 2010 and $10,984 million at January 1, 2010) is and CLIRE has assumed the credit risk on the portfolio of assets included in an agreement with Standard Life Assurance Limited (Standard Life). During the amounts on deposit. These amounts on deposit are included in funds held 2008, Canada Life International Re Limited (CLIRE), Lifeco’s indirect wholly by ceding insurers on the balance sheets. Income and expenses arising from owned Irish reinsurance subsidiary, signed an agreement with Standard Life, the agreement are included in net investment income on the statements a U.K.-based provider of life, pension and investment products, to assume a of earnings. large block of payout annuities by way of indemnity reinsurance. Under the 66 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT NOTE 7 Funds Held by Ceding Insurers (CONTINuED) At December 31, 2011 CLIRE had amounts on deposit of $9,411 million ($9,333 million at December 31, 2010 and $10,329 million at January 1, 2010). The details of the funds on deposit and related credit risk on the funds are as follows: Carrying values and estimated fair values Cash and cash equivalents Bonds Other assets Supporting: Reinsurance liabilities Surplus DECEMBER 31, 2011 DECEMBER 31, 2010 CARRyING VALUE 49 9,182 180 9,411 9,082 329 9,411 FAIR VALUE 49 9,182 180 9,411 9,082 329 9,411 CARRyING VALUE 138 9,031 164 9,333 8,990 343 9,333 FAIR VALUE 138 9,031 164 9,333 8,990 343 9,333 JANUARy 1, 2010 FAIR VALUE 25 CARRyING VALUE 25 10,121 10,121 183 183 10,329 10,329 9,999 330 9,999 330 10,329 10,329 Included in the amount on deposit are impaired investments with a carrying amount of nil at December 31, 2011 ($11 million at December 31, 2010 and $6 million at January 1, 2010) that are net of impairments of nil at December 31, 2011 ($17 million at December 31, 2010 and $4 million at January 1, 2010). The following table provides details of the carrying value of bonds included in the funds on deposit by industry sector: DECEMBER 31, 2011 DECEMBER 31, 2010 JANUARy 1, 2010 Bonds issued or guaranteed by: Provincial, state and municipal governments Other foreign governments Government-related Supranationals 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 bonds The following table provides details of the carrying value of bonds by asset quality: BOND PORTFOLIO qUALIT y AAA AA A BBB BB and lower Total bonds 88 3,074 369 128 242 73 1,807 747 21 239 404 26 220 381 117 1,135 111 9,182 37 3,250 252 107 244 54 2,040 652 19 241 464 14 147 373 94 950 93 41 3,913 292 115 242 81 2,232 681 16 278 517 13 218 393 97 962 30 9,031 10,121 DECEMBER 31, 2011 DECEMBER 31, 2010 3,520 1,819 3,116 468 259 9,182 3,542 1,725 3,019 396 349 9,031 JANUARy 1, 2010 4,318 1,843 3,181 409 370 10,121 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 67 Notes to the Consolidated Financial Statements NOTE 8 Investment in Associates As at December 31, 2011, Parjointco, 50% held by the Corporation, held a 56.5% equity interest in Pargesa (54.1% as at December 31, 2010). Pargesa’s financial information as at December 31, 2011 can be obtained in its publicly available information. The carrying value of the investment in associates is as follows: Carrying value, beginning of year Share of earnings (losses) Share of other comprehensive income (loss) Dividends Other Carrying value, end of year 2011 2,448 (20) (222) – 16 2,222 2010 2,829 121 (446) (56) – 2,448 During 2011, Pargesa recorded an impairment charge on its investment The net asset value of the Corporation’s interest in Pargesa is $2,047 million in Lafarge S.A. An impairment test was performed as Lafarge’s share as at December 31, 2011. The carrying value of the investment in Pargesa, price has persistently been at a level significantly below its carrying value. adjusted for other comprehensive income amounts, is $2,046 million. In 2011, the test was renewed in a weakened economic environment, and led to determining a value in use below the existing carrying value. The impairment recorded results in a reduction of the carrying value of Lafarge. The Corporation’s share of this charge was $133 million. NOTE 9 Owner-Occupied Properties and Capital Assets The carrying value of owner-occupied properties and capital assets and the changes in the carrying value of owner-occupied properties and capital assets are as follows: DECEMBER 31 Cost, beginning of year Additions Disposal Change in foreign exchange rates Cost, end of year Accumulated amortization, beginning of year Amortization Disposal Change in foreign exchange rates Accumulated amortization, end of year Carrying value, end of year OWNER-OCCUPIED PROPERTIES CAPITAL ASSETS OWNER-OCCUPIED PROPERTIES CAPITAL ASSETS 2011 2010 521 52 – 4 577 (32) (4) – – (36) 541 802 77 (33) (18) 828 (626) (52) 28 19 (631) 197 507 24 – (10) 521 (28) (5) – 1 (32) 489 793 47 (16) (22) 802 (603) (50) 10 17 (626) 176 The following table provides details of the carrying value of owner-occupied properties and capital assets by geographic location: Canada United States Europe DECEMBER 31, 2011 DECEMBER 31, 2010 JANUARy 1, 2010 536 175 27 738 474 166 25 665 453 187 29 669 68 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT NOTE 10 Other Assets Premiums in course of collection Accrued benefit asset [Note 27] Accounts receivable Interest due and accrued Prepaid expenses Income taxes receivable Deferred acquisition costs Other DECEMBER 31, 2011 DECEMBER 31, 2010 JANUARy 1, 2010 422 456 965 1,106 129 181 529 865 4,653 393 355 900 1,042 150 580 508 751 4,679 403 309 952 1,068 144 793 501 604 4,774 It is expected that $3,363 million of other assets will be realized within 12 months from the reporting date. This amount due within 12 months excludes deferred acquisition costs. Changes in deferred acquisition costs for investment contracts are as follows: Balance, beginning of year Additions Amortization Foreign exchange Disposals Balance, end of year 2011 508 123 (71) 6 (37) 529 2010 501 136 (47) (41) (41) 508 NOTE 11 Goodwill and Intangible Assets Goodwill The carrying value of the goodwill and changes in the carrying value of the goodwill are as follows: DECEMBER 31 Balance, beginning of year Additions Change in foreign exchange rates Other, including effect of repurchase of common shares by subsidiaries Balance, end of year 2011 2010 COST ACCU MUL ATED IMPAIRMENT CARRyING VALUE COST ACCU MUL ATED IMPAIRMENT CARRyING VALUE 9,607 – 31 65 (890) – (27) – 8,717 9,599 (944) 8,655 – 4 65 29 (60) 39 – 54 – 29 (6) 39 9,703 (917) 8,786 9,607 (890) 8,717 Intangible assets The carrying value of the intangible assets and changes in the carrying value of the intangible assets are as follows: i) in d e fi n i t e l i fe i n ta n g i b l e a s s e t s DECEMBER 31, 2011 Cost, beginning of year Change in foreign exchange rates Cost, end of year Accumulated impairment, beginning of year Change in foreign exchange rates Accumulated impairment, end of year Carrying value, end of year BRANDS AND TRADEMARKS CUSTOMER CONTRAC T- REL ATED 714 12 726 (91) (3) (94) 632 ShARE hOLDER PORTION OF ACqUIRED FUTURE PARTICIPATING ACCOUNT PROFIT 354 – 354 – – – TRADE NAMES MUTUAL FUND MANAGEMENT CONTRACTS 285 – 285 – – – 740 – 740 – – – TOTAL 4,357 69 4,426 (892) (27) (919) 2,264 57 2,321 (801) (24) (825) 1,496 354 285 740 3,507 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 69 Notes to the Consolidated Financial Statements NOTE 11 Goodwill and Intangible Assets (CONTINuED) BRANDS AND TRADEMARKS CUSTOMER CONTRAC T- REL ATED ShARE hOLDER PORTION OF ACqUIRED FUTURE PARTICIPATING ACCOUNT PROFIT 2,378 – (114) 2,264 (849) 48 (801) 354 – – 354 – – – 746 – (32) 714 (97) 6 (91) 623 MUTUAL FUND MANAGEMENT CONTRACTS TOTAL 737 4,500 TRADE NAMES 285 – – 3 – 285 740 – – – – – – 3 (146) 4,357 (946) 54 (892) 1,463 354 285 740 3,465 BRANDS AND TRADEMARKS 746 (97) 649 CUSTOMER CONTRAC T- REL ATED 2,378 (849) 1,529 ShARE hOLDER PORTION OF ACqUIRED FUTURE PARTICIPATING ACCOUNT PROFIT TRADE NAMES MUTUAL FUND MANAGEMENT CONTRACTS 354 – 354 285 – 285 737 – 737 TOTAL 4,500 (946) 3,554 CUSTOMER CONTRAC T- REL ATED DISTRIBUTION ChANNELS DISTRIBUTION CONTRAC TS TEChNOLOGy AND PROPERT y LEASES SOF T WARE DEFERRED SELLING COMMISSIONS TOTAL 564 100 103 – – 7 – 571 (169) (34) – – (1) – (204) 367 – – – (2) 98 (24) (3) – – – – (27) 71 4 – – – 107 (26) (7) – – – – (33) 74 25 – – – – 25 (17) (5) – – – – (22) 3 449 1,623 2,864 38 (1) 5 54 545 (240) (61) (4) – (3) 13 (295) 250 238 (104) – (206) 1,551 (829) (237) – 60 – 206 (800) 751 280 (105) 12 (154) 2,897 (1,305) (347) (4) 60 (4) 219 (1,381) 1,516 DECEMBER 31, 2010 Cost, beginning of year Additions Change in foreign exchange rates Cost, end of year Accumulated impairment, beginning of year Change in foreign exchange rates Accumulated impairment, end of year Carrying value, end of year JANUARy 1, 2010 Cost Accumulated impairment Carrying value ii) f i n i t e l i f e i n ta n g i b l e a s s e t s DECEMBER 31, 2011 Cost, beginning of year Additions Disposal/redemption Change in foreign exchange rates Other, including write-off of assets fully amortized Cost, end of year Accumulated amortization, beginning of year Amortization Impairment Disposal/redemption Change in foreign exchange rates Other, including write-off of assets fully amortized Accumulated amortization, end of year Carrying value, end of year 70 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 279 (109) (35) (113) 2,864 (1,190) (351) 61 12 163 (1,305) 1,559 TOTAL 2,842 (1,190) 1,652 NOTE 11 Goodwill and Intangible Assets (CONTINuED) DECEMBER 31, 2010 Cost, beginning of year Additions Disposal/redemption Change in foreign exchange rates Other, including write-off of assets fully amortized Cost, end of year Accumulated amortization, beginning of year Amortization Disposal/redemption Change in foreign exchange rates Other, including write-off of assets fully amortized Accumulated amortization, end of year Carrying value, end of year CUSTOMER CONTRAC T- REL ATED DISTRIBUTION ChANNELS DISTRIBUTION CONTRAC TS TEChNOLOGy AND PROPERT y LEASES SOF T WARE DEFERRED SELLING COMMISSIONS TOTAL 1,633 2,842 579 – – (15) – 564 (138) (33) – 2 – (169) 395 108 – – (8) – 100 (22) (4) – 2 – (24) 76 95 8 – – – 103 (19) (7) – – – (26) 77 27 – – (2) – 25 (12) (6) – 1 – (17) 8 400 32 – (10) 27 449 (213) (57) – 7 23 (240) 209 239 (109) – (140) 1,623 (786) (244) 61 – 140 (829) 794 JANUARy 1, 2010 Cost Accumulated impairment Carrying value CUSTOMER CONTRAC T- REL ATED DISTRIBUTION ChANNELS DISTRIBUTION CONTRAC TS TEChNOLOGy AND PROPERT y LEASES SOF T WARE DEFERRED SELLING COMMISSIONS 579 (138) 441 108 (22) 86 95 (19) 76 27 (12) 15 400 (213) 187 1,633 (786) 847 Recoverable amount The recoverable amount of all cash generating units For Lifeco, the key assumptions used for the discounted cash flow calculations is determined as the higher of fair value less cost to sell and value-in-use. Fair are based on past experience and external sources of information. The key value is determined using a combination of commonly accepted valuation assumptions are as follows: methodologies, namely comparable trading multiples, comparable transaction multiples and discounted cash flow analysis. Comparable trading and transaction multiples methodologies calculate value by applying multiples observed in the market against historical results or projections approved by management as applicable. Value calculated by discounted cash flow analysis uses cash flow projections based on financial budgets approved by management covering an initial period (typically four or five years). Value beyond the initial period is derived from applying a terminal value multiple > Risk-adjusted discount rates used for the calculation of present value are based on Lifeco’s weighted average cost of capital. > Economic assumptions are based on market yields on risk-free interest rates at the end of each reporting period. > Terminal growth rate represents the rate used to extrapolate new business contributions beyond the business plan period, and is based on management’s estimate of future growth; it ranges between 1.5% and to the final year of the initial projection period. The terminal value multiple 3.0%, depending on the nature of the business. is a function of the discount rate and the estimated terminal growth rate. For IGM, the valuation models used to assess fair value utilized assumptions The estimated terminal growth rate is not to exceed the long-term average that include levels of growth in assets under management from net sales growth rate (inflation rate) of the markets in which the subsidiaries of the and market, pricing and margin changes, synergies achieved on acquisition, Corporation operates. discount rates, and observable data from comparable transactions. The fair value less cost to sell was compared with the carrying amount of goodwill and indefinite life intangible assets and it was determined there was no impairment in the value of these assets. POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 71 Notes to the Consolidated Financial Statements NOTE 11 Goodwill and Intangible Assets (CONTINuED) Allocation to cash generating units Goodwill and indefinite life intangible assets have been assigned to cash generating units as follows: DECEMBER 31 LIFECO Canada Group Individual insurance/wealth management Europe Insurance and annuities Reinsurance United States Financial services Asset management IGM Investors Group Mackenzie Other and corporate GOODWILL INTANGIBLES TOTAL GOODWILL INTANGIBLES 2011 2010 TOTAL 1,142 3,028 1,563 1 127 – 1,500 1,302 123 8,786 – 973 1,142 4,001 1,142 3,028 – 973 1,142 4,001 107 1,670 1,563 106 1,669 – – 1,402 – 1,003 22 1 127 1,402 1,500 2,305 145 3,507 12,293 – 124 – 1,464 1,273 123 8,717 – – 1,361 – 1,003 22 – 124 1,361 1,464 2,276 145 3,465 12,182 NOTE 12 Segregated Funds for the Risk of Unit Holders s eg R eg at e d f u n d s — co n s o l i dat e d n e t a s s e t s DECEMBER 31, 2011 DECEMBER 31, 2010 Bonds Mortgage loans Shares Investment properties Cash and cash equivalents Accrued income Other liabilities 21,594 2,303 63,885 5,457 5,334 287 (2,278) 96,582 s eg R eg at e d f u n d s — co n s o l i dat e d s tat e m e n t s o f c h a n g e s i n n e t a s s e t s yEARS ENDED DECEMBER 31 Segregated funds net assets, beginning of year Additions (deductions): Policyholder deposits Net investment income Net realized capital gains (losses) on investments Net unrealized capital gains (losses) on investments Unrealized gains (losses) due to changes in foreign exchange rates Policyholder withdrawals Net transfer from General Fund Segregated funds net assets, end of year 19,270 2,058 64,468 5,598 5,414 245 (2,226) 94,827 2011 94,827 13,462 755 1,048 (3,539) 887 (10,876) 18 1,755 96,582 JANUARy 1, 2010 16,056 1,744 59,111 6,012 5,658 195 (1,281) 87,495 2010 87,495 14,074 1,009 1,565 4,801 (3,441) (10,830) 154 7,332 94,827 72 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT NOTE 13 Insurance and Investment Contract Liabilities in sur an ce and inve s tM ent co ntr ac t L iab iLitie s DECEMBER 31, 2011 Insurance contract liabilities Investment contract liabilities DECEMBER 31, 2010 Insurance contract liabilities Investment contract liabilities JANUARy 1, 2010 Insurance contract liabilities Investment contract liabilities GROSS 114,730 782 115,512 GROSS 107,405 791 108,196 GROSS 105,028 841 105,869 CEDED 2,061 – 2,061 CEDED 2,533 – 2,533 CEDED 2,800 – 2,800 NET 112,669 782 113,451 NET 104,872 791 105,663 NET 102,228 841 103,069 coM Positio n o f in sur an ce and inve s tM ent co ntr ac t L iab iLitie s and re L ated su PP o rtin G a ss e t s The composition of insurance and investment contract liabilities of Lifeco is as follows: DECEMBER 31, 2011 Participating Canada United States Europe Non-participating Canada United States Europe DECEMBER 31, 2010 Participating Canada United States Europe Non-participating Canada United States Europe JANUARy 1, 2010 Participating Canada United States Europe Non-participating Canada United States Europe GROSS CEDED NET 26,470 8,639 1,230 27,099 16,657 35,417 115,512 (50) 18 – 919 276 898 2,061 26,520 8,621 1,230 26,180 16,381 34,519 113,451 GROSS CEDED NET 25,093 8,137 1,209 25,415 14,896 33,446 108,196 5 20 – 1,265 301 942 2,533 25,088 8,117 1,209 24,150 14,595 32,504 105,663 GROSS CEDED NET 23,113 8,280 1,456 23,673 14,190 35,157 105,869 (12) 30 – 1,219 363 1,200 2,800 23,125 8,250 1,456 22,454 13,827 33,957 103,069 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 73 Notes to the Consolidated Financial Statements NOTE 13 Insurance and Investment Contract Liabilities (CONTINuED) The composition of the assets supporting insurance and investment contract liabilities and equity of Lifeco is as follows: DECEMBER 31, 2011 Carrying value Participating liabilities Canada United States Europe Non-participating liabilities Canada United States Europe Other Total equity Total carrying value Fair value DECEMBER 31, 2010 Carrying value Participating liabilities Canada United States Europe Non-participating liabilities Canada United States Europe Other Total equity Total carrying value Fair value JANUARy 1, 2010 Carrying value Participating liabilities Canada United States Europe Non-participating liabilities Canada United States Europe Other Total equity Total carrying value Fair value BONDS MORTGAGE LOANS ShARES INVESTMENT PROPERTIES OThER TOTAL 11,862 6,686 3,864 4,059 855 16,674 13,523 20,449 6,563 4,088 78,073 79,114 152 56 4,738 2,369 2,506 484 441 17,432 18,662 – 176 1,329 – 119 – 1,216 6,704 6,772 507 – 22 20 – 3,551 4,428 121 4,338 765 2,092 10,251 26,470 8,639 1,230 27,099 16,657 35,417 6 100,099 107,152 554 3,201 3,201 9,805 16,104 133,358 238,768 133,358 241,107 BONDS MORTGAGE LOANS ShARES INVESTMENT PROPERTIES OThER TOTAL 10,872 6,158 3,775 3,823 804 15,956 12,695 18,970 5,163 3,920 72,203 72,855 169 66 5,069 1,474 2,189 511 479 16,115 16,880 – 185 1,431 – 108 – 1,201 6,700 6,769 419 – 27 13 – 3,869 4,145 127 2,946 727 1,914 10,265 25,093 8,137 1,209 25,415 14,896 33,446 19 565 2,957 2,957 100,716 106,409 8,651 14,816 131,446 229,421 131,446 230,907 BONDS MORTGAGE LOANS ShARES INVESTMENT PROPERTIES OThER TOTAL 10,244 6,025 3,535 3,763 784 14,309 11,915 18,923 2,374 3,835 66,147 66,403 216 77 5,327 1,451 2,535 483 570 16,684 16,891 – 224 991 – 131 243 1,318 6,442 6,503 324 – 33 21 – 1,683 4 548 2,613 2,613 2,985 4,301 338 3,025 824 11,885 95,463 8,437 23,113 8,280 1,456 23,673 14,190 35,157 98,567 14,708 127,258 219,144 127,258 219,668 Cash flows of assets supporting insurance and investment contract liabilities are matched within reasonable limits. Changes in the fair values of these assets are essentially offset by changes in the fair value of insurance and investment contract liabilities. Changes in the fair values of assets backing capital and surplus, less related income taxes, would result in a corresponding change in surplus over time in accordance with investment accounting policies. 74 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT NOTE 13 Insurance and Investment Contract Liabilities (CONTINuED) chan G e s in in sur an ce co ntr ac t L iab iLitie s The change in insurance contract liabilities during the year was the result of the following business activities and changes in actuarial estimates: DECEMBER 31, 2011 Balance, beginning of year Crown Ancillary reclassification Impact of new business Normal change in force Management actions and changes in assumptions Impact of foreign exchange rate changes Balance, end of year PARTICIPATING NON-PARTICIPATING GROSS LIABILIT y REINSURANCE ASSET NET GROSS LIABILIT y REINSURANCE ASSET NET TOTAL NET 34,398 (89) 133 1,719 (139) 281 36,303 25 – – (14) (45) 2 (32) 34,373 73,007 2,508 70,499 104,872 (89) 133 1,733 (94) 279 89 3,088 1,910 (806) 1,139 – (329) 476 (583) 21 89 3,417 1,434 (223) 1,118 – 3,550 3,167 (317) 1,397 36,335 78,427 2,093 76,334 112,669 DECEMBER 31, 2010 Balance, beginning of year Impact of new business Normal change in force Management actions and changes in assumptions Business movement from/to external parties Impact of foreign exchange rate changes Balance, end of year PARTICIPATING NON-PARTICIPATING GROSS LIABILIT y REINSURANCE ASSET NET GROSS LIABILIT y REINSURANCE ASSET NET TOTAL NET 32,798 193 2,021 (5) – (609) 34,398 18 32,780 193 2,012 (5) – 72,230 5,139 (87) (520) (1) 2,782 69,448 102,228 141 (199) (96) – 4,998 112 (424) (1) 5,191 2,124 (429) (1) (607) (3,754) (120) (3,634) (4,241) 34,373 73,007 2,508 70,499 104,872 – 9 – – (2) 25 Under fair value accounting, movement in the market value of the supporting The remaining increase in Europe was primarily due to increased provisions assets is a major factor in the movement of insurance contract liabilities. for policyholder behaviour in reinsurance ($227 million increase), updated Changes in the fair value of assets are largely offset by corresponding changes base life insurance mortality ($50 million increase) and updated morbidity in the fair value of liabilities. The change in the value of the insurance contract assumptions ($15 million increase), partially offset by modelling refinements liabilities associated with the change in the value of the supporting assets in the U.K. and Reinsurance Segments ($69 million decrease), updated base is included in the normal change in force above. annuity mortality ($42 million decrease), and reduced provisions for asset In 2011, the major contributors to the increase in net insurance contract liability matching ($16 million decrease). liabilities were the impact of new business ($3,550 million increase) and the The remaining decrease in the United States was primarily due to updated normal change in the in-force business ($3,167 million increase), primarily due base annuity mortality ($28 million decrease) and updated base life insurance to the change in fair value. mortality ($23 million decrease). Lifeco’s net non-participating insurance contract liabilities decreased Net participating insurance contract liabilities decreased by $94 million by $223 million in 2011 due to management actions and assumption in 2011 due to management actions and assumption changes. The decrease changes including a $68 million decrease in Canada, a $132 million decrease was primarily due to decreases in the provision for future policyholder in Europe and a $23 million decrease in the United States. dividends ($1,556 million decrease), modelling refinements in Canada Lifeco adopted the revised Actuarial Standards of Practice for subsection 2350 relating to future mortality improvement in insurance contract liabilities for life insurance and annuities. The resulting decrease in net non-participating insurance contract liabilities for life insurance was $446 million, including a $182 million decrease in Canada, a $242 million decrease in Europe ($256 million decrease), improved Individual Life mortality ($256 million decrease, including $27 million from the Standards of Practice revision) and updated expenses and taxes ($15 million decrease), partially offset by lower investment returns ($1,952 million increase), and increased provisions for policyholder behaviour ($40 million increase). (primarily reinsurance) and a $22 million decrease in the United States. In 2010, the major contributors to the increase in insurance contract liabilities The resulting change in net insurance contract liabilities for annuities was a were the impact of new business and the normal change in the in-force $47 million increase, including a $53 million increase in Canada, a $58 million business, partially offset by the impact of foreign exchange rates. decrease in Europe and a $52 million increase in the United States. The remaining increase in Canada was primarily due to increased provisions for policyholder behaviour in Individual Insurance ($172 million increase), provision for asset liability matching ($147 million increase), updated base annuity mortality ($43 million increase) and a reclassification from miscellaneous liabilities ($29 million increase), partially offset by updated expenses and taxes ($137 million decrease), updated morbidity assumptions ($101 million decrease), updated base life insurance mortality ($38 million decrease), modelling refinements across the Canadian segment ($40 million decrease) and reinsurance-related management actions ($16 million decrease). POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 75 Notes to the Consolidated Financial Statements NOTE 13 Insurance and Investment Contract Liabilities (CONTINuED) Lifeco’s net non-participating insurance contract liabilities decreased strengthened Group Insurance morbidity ($13 million increase), increased by $424 million in 2010 due to management actions and assumption provisions for policyholder behaviour ($10 million increase) and asset default changes, including a $246 million decrease in Canada, a $123 million decrease in ($8 million increase). The decrease in the United States was primarily due to Europe and a $55 million decrease in the United States. The decrease in Canada improved Life mortality ($52 million decrease), improved longevity ($6 million was primarily due to updated expenses and taxes in Individual Insurance decrease), modelling refinements ($4 million decrease), partially offset by ($86 million decrease), improved Individual Life mortality ($64 million decrease), increased provisions for policyholder behaviour ($8 million increase). 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 ($120 million decrease), modelling refinements across the division ($97 million decrease) and updated expenses ($25 million decrease), partially offset by strengthened Reinsurance life mortality ($71 million increase), strengthened longevity ($16 million increase), Lifeco’s net participating insurance contract 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), increases in the provision for future policyholder dividends ($66 million increase) and increased provisions for policyholder behaviour ($10 million increase). chan G e s in inve s tM ent co ntr ac t L iab iLitie s M e a sured at fair va Lue DECEMBER 31 Balance, beginning of year Normal change in-force business Investment experience Impact of foreign exchange rate changes Balance, end of year GROSS CEDED 791 (54) 35 10 782 – – – – – 2011 NET 791 (54) 35 10 782 GROSS CEDED 841 (28) – (22) 791 – – – – – 2010 NET 841 (28) – (22) 791 The carrying value of investment contract liabilities approximates its fair value. c anadian u niver sa L Life e M b ed d ed d erivative s Annuitant mortality is also studied regularly and the results used to modify Lifeco bifurcated the index-linked component of the universal life contracts established industry experience annuitant mortality tables. Mortality as this embedded derivative is not closely related to the insurance host and improvement has been projected to occur throughout future years is not itself an insurance contract. The forward contracts are contractual for annuitants. agreements in which the policyholder is entitled to the performance of the underlying index. The policyholder may select one or more of the following indices: the TSx, the S&P and the AEx. ac tuariaL a ssuM P tio n s In the computation of insurance contract 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 insurance contract liabilities cover a range of possible outcomes. Margins are reviewed periodically for continued appropriateness. The methods for arriving at these valuation assumptions are outlined below: 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. Property and casualty reinsurance Insurance contract 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, insurance contract liabilities have been established using cash flow valuation techniques, including discounting. The insurance contract liabilities are based on cession statements provided by ceding companies. In certain instances, LRG management adjusts cession statement amounts to reflect management’s interpretation of the treaty. Differences will be resolved via audits and other loss mitigation activities. In addition, insurance contract liabilities also include an amount for incurred but not reported losses which may differ significantly from the Mortality A life insurance mortality study is carried out annually for ultimate loss development. The estimates and underlying methodology each major block of insurance business. The results of each study are are continually reviewed and updated, and adjustments to estimates are used to update Lifeco’s experience valuation mortality tables for that reflected in earnings. LRG analyses the emergence of claims experience business. When there is insufficient data, use is made of the latest industry against expected assumptions for each reinsurance contract separately and experience to derive an appropriate valuation mortality assumption. at the portfolio level. If necessary, a more in-depth analysis is undertaken of The actuarial standards were amended to remove the requirement that, the cedant experience. for life insurance, any reduction in liabilities due to mortality improvement assumption be offset by an equal amount of provision for adverse deviation. Appropriate provisions have been made for future mortality deterioration on term insurance. 76 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT NOTE 13 Insurance and Investment Contract Liabilities (CONTINuED) Investment returns The assets which correspond to the different liability when not, on judgment considering incentives to utilize the option. Generally, categories are segmented. For each segment, projected cash flows from whenever it is clearly in the best interests of an informed policyholder to the current assets and liabilities are used in the Canadian Asset Liability utilize an option, then it is assumed to be elected. Method to determine insurance contract 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 24). Policyholder dividends and adjustable policy features Future policyholder dividends and other adjustable policy features are included in the determination of insurance contract liabilities with the assumption that policyholder dividends or adjustable benefits will change in the future Expenses Contractual policy expenses (e.g., sales commissions) and in response to the relevant experience. The dividend and policy adjustments tax expenses are reflected on a best estimate basis. Expense studies are determined consistent with policyholders’ reasonable expectations, such for indirect operating expenses are updated regularly to determine an expectations being influenced by the participating policyholder dividend appropriate estimate of future operating expenses for the liability type policies and/or policyholder communications, marketing material and past being valued. Improvements in unit operating expenses are not projected. practice. It is Lifeco’s expectation that changes will occur in policyholder An inflation assumption is incorporated in the estimate of future operating dividend scales or adjustable benefits for participating or adjustable business expenses consistent with the interest rate scenarios projected under the respectively, corresponding to changes in the best estimate assumptions, Canadian Asset Liability Method as inflation is assumed to be correlated resulting in an immaterial net change in insurance contract liabilities. Where with new money interest rates. Policy 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 limited. Lifeco has significant exposures in respect of the T-100 and Level Cost 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. Utilization of elective policy 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 re-sets (segregated fund maturity guarantees). The assumed rates of utilization are based on Lifeco or industry experience when it exists and, 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. ris k M anaG eM ent Insurance risk Insurance risk is the risk that the insured event occurs and that there are large deviations between expected and actual actuarial assumptions including mortality, persistency, longevity, morbidity, expense variations and investment returns. As an insurance company, Lifeco is in the business of accepting risk associated with insurance contract liabilities. The objective of Lifeco is to mitigate its exposure to risk arising from these contracts through product design, product and geographical diversification, the implementation of Lifeco’s underwriting strategy guidelines, and through the use of reinsurance arrangements. The following table provides information about Lifeco’s insurance contract liabilities’ sensitivities to management’s best estimate of the approximate impact as a result of changes in assumptions used to determine Lifeco’s liability associated with these contracts. Mortality Annuitant mortality Morbidity Investment returns Parallel shift in yield curve Increase Decrease Change in equity markets Increase Decrease Change in best estimate returns for equities Increase Decrease Expenses Policy termination 2011 2010 ChANGES IN ASSUMPTIONS IMPAC T ON LIFECO PROFIT OR LOSS POWER FINANCIAL’S ShARE ChANGES IN ASSUMPTIONS IMPAC T ON LIFECO PROFIT OR LOSS POWER FINANCIAL’S ShARE 2% 2% 5% 1% 1% 10% 10% 1% 1% 5% 10% (188) (176) (181) 123 (511) 21 (57) 292 (316) (55) (435) (133) (124) (128) 87 (361) 15 (40) 206 (223) (39) (307) 2% 2% 5% 1% 1% 10% 10% 1% 1% 5% 10% (159) (172) (151) 25 (279) (25) (54) 242 (279) (51) (320) (112) (122) (107) (18) (197) 18 (38) 171 (197) (36) (226) POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 77 Notes to the Consolidated Financial Statements NOTE 13 Insurance and Investment Contract Liabilities (CONTINuED) Concentration risk may arise from geographic regions, accumulation of risks and market risks. The concentration of insurance risk before and after reinsurance by geographic region is described below. DECEMBER 31, 2011 DECEMBER 31, 2010 JANUARy 1, 2010 Canada United States Europe GROSS CEDED NET GROSS CEDED NET GROSS CEDED NET 53,569 25,296 36,647 869 294 898 52,700 25,002 35,749 50,508 23,033 34,655 1,270 321 942 49,238 22,712 33,713 46,786 22,470 36,613 115,512 2,061 113,451 108,196 2,533 105,663 105,869 1,207 393 1,200 2,800 45,579 22,077 35,413 103,069 Reinsurance risk Maximum limits per insured life benefit amount (which Reinsurance contracts do not relieve Lifeco from its obligations to vary by line of business) are established for life and health insurance and policyholders. Failure of reinsurers to honour their obligations could result reinsurance is purchased for amounts in excess of those limits. in losses to Lifeco. Lifeco evaluates the financial condition of its reinsurers Reinsurance costs and recoveries as defined by the reinsurance agreement to minimize its exposure to significant losses from reinsurer insolvencies. are reflected in the valuation with these costs and recoveries being Certain of the reinsurance contracts are on a funds withheld basis where appropriately calibrated to the direct assumptions. Lifeco retains the assets supporting the reinsured insurance contract liabilities, thus minimizing the exposure to significant losses from reinsurer insolvency on those contracts. NOTE 14 Deposits and Certificates Included in the assets of the balance sheets are cash and cash equivalents, shares, loans, and accounts and other receivables amounting to $151 million (December 31, 2010–$835 million; January 1, 2010–$907 million) related to deposits and certificates Deposits Certificates TERM TO M ATURIT y DEMAND 122 – 122 1 yEAR OR LESS 1 – 5 yEARS OVER 5 yEARS DECEMBER 31, 2011 TOTAL DECEMBER 31, 2010 TOTAL JANUARy 1, 2010 TOTAL 9 – 9 14 1 15 2 3 5 147 4 151 830 5 835 903 4 907 Deposits related to MRS were nil as at December 31, 2011 (December 31, 2010 – $681 million; January 1, 2010 – $750 million). The deposits were disposed of as part of the sale of MRS (Note 4). NOTE 15 Obligation to Securitization Entities IGM enters into transactions that result in the transfer of financial assets January 1, 2010–$3.26 billion), and has recorded an offsetting liability, to third parties. IGM securitizes residential mortgages through the Canada obligation to securitization entities, of $3.83 billion (December 31, 2010– Mortgage and housing Corporation (CMhC)-sponsored National housing $3.51 billion; January 1, 2010–$3.31 billion) which is carried at amortized cost. Act Mortgage-Backed Securities (NhA MBS) Program and Canada Mortgage Bond (CMB) Program and through Canadian bank-sponsored asset-backed commercial paper (ABCP) programs. IGM has retained prepayment risk and certain elements of credit risk associated with the transferred assets. Accordingly, IGM has recorded these loans on the balance sheets at a carrying value of $3.76 billion at December 31, 2011 (December 31, 2010–$3.47 billion; IGM’s credit risk on its securitization activities is limited through the use of insurance as substantially all securitized mortgages are insured. Additional information related to the management of credit risk can be found in the risk management discussion (Note 24). 78 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT NOTE 16 Debentures and Other Borrowings OTHER BORROWINGS GREAT-WEST LIFECO INC. Commercial paper and other short-term debt instruments with interest rates from 0.20% to 0.39% (0.36% to 0.44% in 2010) Revolving credit facility with interest equal to LIBOR rate plus 1% or U.S. prime rate loan (US$200 million) 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 originally due August 10, 2015, redeemed August 10, 2010, 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% DECEMBER 31, 2011 DECEMBER 31, 2010 JANUARy 1, 2010 CARRyING VALUE FAIR VALUE CARRyING VALUE FAIR VALUE CARRyING VALUE FAIR VALUE 100 204 304 250 – 150 375 125 150 175 150 200 304 – 199 497 100 190 397 175 343 100 204 304 295 – 175 457 148 189 213 185 220 308 – 229 522 115 237 472 170 383 91 213 304 250 450 150 375 125 150 175 150 200 301 – 199 497 100 190 397 169 343 91 213 304 285 458 170 446 138 178 199 174 203 297 – 226 503 110 232 463 161 375 102 273 375 250 450 150 375 125 150 175 150 – 319 200 199 – 100 190 397 180 342 102 273 375 258 478 164 427 127 166 188 164 – 319 207 218 – 105 216 431 138 345 plus the 3-month LIBOR rate, unsecured (US$300 million) 310 298 295 297 312 277 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 994 1,028 993 1,044 991 1,018 497 551 496 556 496 554 3 5,584 5,888 3 6,198 6,502 4 6,009 6,313 4 6,519 6,823 5 5,556 5,931 5 5,805 6,180 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 79 Notes to the Consolidated Financial Statements NOTE 16 Debentures and Other Borrowings (CONTINuED) On May 9, 2011, IGM repaid the $450 million 2001 Series 6.75% debentures On August 10, 2010, Lifeco redeemed the $200 million principal amount 6.75% which had matured. debentures at par that had a maturity date of August 10, 2015. On December 9, 2010, IGM issued $200 million of 2010 Series 6.00% debentures The principal payments on debentures and other borrowings in each of the maturing on December 10, 2040. The debentures are redeemable by IGM, next five years is as follows: in whole or in part, at any time, at the greater of par or a formula price based upon yields at the time of redemption. On August 13, 2010, Lifeco issued $500 million principal amount debentures at par that will mature on August 13, 2020. Interest on the debentures at the rate of 4.65% per annum will be payable semi-annually in arrears on February 13 and August 13 of each year, commencing February 13, 2011, until 2012 2013 2014 2015 2016 the date on which the debentures are repaid. The debentures are redeemable Thereafter at any time in whole or in part at the greater of the Canada yield Price or par, together in each case with accrued and unpaid interest. NOTE 17 Capital Trust Securities 609 1 1 – – 5,277 Capital trust securities 5.995% capital trust securities due December 31, 2052, unsecured (GWLCT) 6.679% capital trust securities due June 30, 2052, unsecured (CLCT) 7.529% capital trust securities due June 30, 2052, unsecured (CLCT) Acquisition-related fair value adjustment Trust securities held by Lifeco as temporary investments Trust securities held by Lifeco as long-term investments DECEMBER 31, 2011 DECEMBER 31, 2010 JANUARy 1, 2010 CARRyING VALUE FAIR VALUE CARRyING VALUE FAIR VALUE CARRyING VALUE FAIR VALUE 350 300 150 800 15 (44) (238) 533 363 307 197 867 – (44) (246) 577 350 300 150 800 17 (44) (238) 535 375 320 198 893 – (44) (253) 596 350 300 150 800 19 (41) (238) 540 383 331 186 900 – (41) (258) 601 Great-West Life Capital Trust (GWLCT), a trust established by Great-West Life, On November 11, 2009 Lifeco launched an issuer bid whereby it offered had issued $350 million of capital trust securities, the proceeds of which were to acquire up to 170,000 of the outstanding Great-West Life Trust used by GWLCT to purchase Great-West Life senior debentures in the amount Securities — Series A (GREATs) of GWLCT and up to 180,000 of the outstanding of $350 million, and Canada Life Capital Trust (CLCT), a trust established by Canada Life Capital Securities — Series A (CLiCS) of CLCT. On December 18, Canada Life, had issued $450 million of capital trust securities, the proceeds 2009, pursuant to this offer Lifeco acquired 116,547 GREATs and 121,788 CLiCS of which were used by CLCT to purchase Canada Life senior debentures in for $261 million, plus accrued and unpaid interest. In connection with this the amount of $450 million. transaction Lifeco issued $144 million aggregate principal amount of 5.998% Distributions and interest on the capital trust securities are classified as debentures due November 16, 2039 and paid cash of $122 million. financing charges on the statements of earnings (refer to Note 26). The fair Subject to regulatory approval, GWLCT and CLCT may redeem the GREATs value for capital trust securities is determined by the bid-ask price. Refer to and CLiCS, in whole or in part, at any time. The CLiCS Series A securities are Note 24 for financial instrument risk management disclosures. callable at par on June 30, 2012 and the GREATs Series A securities are callable at par on December 31, 2012. NOTE 18 Other Liabilities Income taxes payable Repurchase agreements Accrued benefit liability [Note 27] Accounts payable Deferred income reserves Bank overdraft Dividends payable Other 80 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT DECEMBER 31, 2011 DECEMBER 31, 2010 JANUARy 1, 2010 513 250 867 1,506 406 437 330 1,207 5,516 497 1,677 785 1,576 377 429 328 1,714 7,383 482 1,162 697 1,235 357 341 324 2,010 6,608 NOTE 18 Other Liabilities (CONTINuED) It is expected that $3,619 million of other liabilities will be realized within 12 months from the reporting date. This amount due within 12 months excludes deferred income reserves. Changes in deferred income reserves are as follows: Balance, beginning of year Additions Amortization Foreign exchange Disposals Balance, end of year NOTE 19 Income Taxes effec tive in co M e ta X r ate The Corporation’s effective income tax rate is derived as follows: yEARS ENDED DECEMBER 31 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 Earnings of investment in associates Impact of rate changes on deferred income taxes Loss consolidation transaction Other Effective income tax rate 2011 377 97 (38) 5 (35) 406 2011 % 28.0 (3.4) (2.5) (0.4) (0.2) (0.4) (1.5) 19.6 2010 357 108 (27) (33) (28) 377 2010 % 30.4 (3.8) (2.2) (1.9) (0.2) – (4.5) 17.8 As of January 1, 2011, the federal corporate tax rate decreased from 18% to 16.5%. As of July 1, 2011, the Ontario provincial corporate tax rate decreased from 12% to 11.5%. in coM e ta X e XPen s e The components of income tax expense on continuing operations recognized in net earnings are: yEARS ENDED DECEMBER 31 Current income taxes Deferred income taxes d eferred in coM e ta Xe s Deferred income taxes consist of the following taxable temporary differences on: 2011 519 187 706 2010 474 49 523 Insurance and investment contract liabilities Loss carry forwards Investments Deferred selling commissions Intangible assets Other Classified on the balance sheets as: Deferred income tax assets Deferred income tax liabilities DECEMBER 31, 2011 DECEMBER 31, 2010 JANUARy 1, 2010 (321) 1,007 (788) (197) 162 86 (51) 1,207 (1,258) (51) (475) 888 (540) (214) 208 248 115 1,220 (1,105) 115 (442) 909 (78) (238) 238 (105) 284 1,262 (978) 284 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 81 Notes to the Consolidated Financial Statements NOTE 19 Income Taxes (CONTINuED) A deferred tax liability has not been recognized in respect of the investment income is derived principally from tax planning strategies, some of which in subsidiaries, branches and associates as the Corporation is able to control have already been executed. Certain state net operating losses in the amount the timing, which is not probable in the foreseeable future, of the reversal of of $17 million which were incurred before 2010 have been excluded from the the temporary difference. deferred tax assets. One of Lifeco’s subsidiaries has had a history of recent losses. The subsidiary As at December 31, 2011, the Corporation and its subsidiaries have non-capital has a deferred tax asset balance of $1,078 million as at December 31, 2011 losses of $311 million ($459 million in 2010) available to reduce future taxable composed principally of net operating losses and future deductions related to income for which the benefits have not been recognized. These losses goodwill which has been previously impaired for book accounting purposes. expire at various dates to 2031. In addition, the Corporation has capital loss Management of Lifeco has concluded that it is probable that the subsidiary carry forwards that can be used indefinitely to offset future capital gains of and other historically profitable subsidiaries with which it files a consolidated approximately $61 million ($61 million in 2010) for which the benefits have U.S. income tax return will generate sufficient taxable income against which not been recognized. the unused U.S. losses and deductions will be utilized. The future taxable NOTE 20 Stated Capital auth o rized Unlimited number of first preferred shares, issuable in series; of second preferred shares, issuable in series; and of common shares. issu ed and o ut s tandinG 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 ] DECEMBER 31, 2011 DECEMBER 31, 2010 NUMBER OF ShARES STATED CAPITAL NUMBER OF ShARES STATED CAPITAL 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 – – – 100 150 200 150 150 200 250 200 175 150 280 – – 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 – – – 100 150 200 150 150 200 250 200 175 150 280 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 ] 708,173,680 639 708,013,680 636 705,726,680 2,005 2,005 COMMON ShARES Balance, beginning of year 708,013,680 636 705,726,680 605 705,726,680 Issued under Stock Option Plan 160,000 3 2,287,000 31 – Balance end of year 708,173,680 639 708,013,680 636 705,726,680 JANUARy 1, 2010 STATED CAPITAL 150 150 300 100 150 200 150 150 200 250 200 175 150 – 1,725 605 605 – 605 82 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT NOTE 20 Stated Capital (CONTINuED) [ i ] On October 31, 2010, the Corporation redeemed all its outstanding [ x ] The 5.10% Non-Cumulative First Preferred Shares, Series L are entitled 5.20% Non-Cumulative, Series C First Preferred Shares at a redemption to fixed non-cumulative preferential cash dividends at a rate equal to price of $25.40 per share, for a total consideration of $152 million. $1.2750 per share per annum. The Corporation may redeem for cash the [ 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. [ iv ] The 5.50% Non-Cumulative First Preferred Shares, Series D are entitled to fixed non-cumulative preferential cash dividends at a rate equal to $1.375 per share per annum. On and after January 31, 2013, the Corporation 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. [ vi ] The 5.90% Non-Cumulative First Preferred Shares, Series F are entitled to fixed non-cumulative preferential cash dividends at a rate equal to $1.475 per share per annum. The Corporation may redeem for cash the Series F 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. 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 per share if redeemed thereafter and prior to October 31, 2013, $25.50 per share if redeemed thereafter and prior to October 31, 2014, $25.25 per share if redeemed thereafter and prior to October 31, 2015, and $25.00 per share if redeemed thereafter, in each case together with all declared and unpaid dividends to, but excluding, the date of redemption. [ xi ] The 6.00% Non-Cumulative First Preferred Shares, Series M are entitled to fixed non-cumulative preferential cash dividends at a rate equal to $1.50 per share per annum. On January 31, 2014 and on January 31 every five years thereafter, the Corporation may redeem for cash the Series M 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 M First Preferred Shares are convertible to 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. [ xii ] The 5.80% Non-Cumulative First Preferred Shares, Series O are entitled to fixed non-cumulative preferential cash dividends at a rate equal to $1.45 per share per annum. On and after October 31, 2014, the Corporation may redeem for cash the Series O First Preferred Shares in whole or in part, at the Corporation’s option, at $26.00 per share if redeemed prior to October 31, 2015, $25.75 per share if redeemed on or after October 31, 2015 and prior to October 31, 2016, $25.50 per share if redeemed on or after October 31, 2016 and prior to October 31, 2017, $25.25 per share if redeemed on or after October 31, 2017 and prior to [ vii ] The 5.75% Non-Cumulative First Preferred Shares, Series h are entitled October 31, 2018, and $25.00 per share if redeemed on or after October 31, to fixed non-cumulative preferential cash dividends at a rate equal to 2018, in each case together with all declared and unpaid dividends to, $1.4375 per share per annum. The Corporation may redeem for cash the but excluding, the date of redemption. Series h 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. [ xiii ] In the second quarter of 2010, the Corporation issued 11,200,000 4.40% Non-Cumulative 5-year Rate Reset First Preferred Shares, Series P for cash proceeds of $280 million. The 4.40% Non-Cumulative First [ viii ] The 6.00% Non-Cumulative First Preferred Shares, Series I are entitled Preferred Shares, Series P are entitled to fixed non-cumulative to fixed non-cumulative preferential cash dividends at a rate equal to preferential cash dividends at a rate equal to $1.10 per share per annum. $1.50 per share per annum. The Corporation may redeem for cash the On January 31, 2016 and on January 31 every five years thereafter, Series I First Preferred Shares in whole or in part, at the Corporation’s the Corporation may redeem for cash the Series P First Preferred option, at $25.25 per share if redeemed prior to April 30, 2012, and Shares in whole or in part, at the Corporation’s option, at $25.00 per $25.00 per share if redeemed thereafter, in each case together with all share plus all declared and unpaid dividends to the date fixed for declared and unpaid dividends to, but excluding, the date of redemption. redemption, or the Series P First Preferred Shares are convertible to [ 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 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. the Corporation’s option, at $25.75 per share if redeemed prior to [ xiv ] During the year, 160,000 common shares (2,287,000 in 2010) were issued October 31, 2012, $25.50 per share if redeemed thereafter and prior to under the Corporation’s Employee Stock Option Plan for a consideration October 31, 2013, $25.25 per share if redeemed thereafter and prior to of $3 million ($31 million in 2010). October 31, 2014, and $25.00 per share if redeemed thereafter, in each case together with all declared and unpaid dividends to, but excluding, For the year ended December 31, 2011, dividends declared on the Corporation’s common shares amounted to $1.40 per share ($1.40 per share in 2010). the date of redemption. POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 83 Notes to the Consolidated Financial Statements NOTE 21 Share-Based Compensation Deferred share unit plan On October 1, 2000, the Corporation established or in the event of the death of a Director, by a lump sum cash payment, a deferred share unit plan for the Directors of the Corporation to promote based on the value of a deferred share unit at that time. At December 31, a greater alignment of interests between Directors and shareholders of the 2011, the value of the deferred share units outstanding was $10.1 million Corporation. Under this plan, each Director may elect to receive his or her ($9.8 million in 2010). In addition, Directors may also participate in the annual retainer and attendance fees entirely in the form of deferred share Directors Share Purchase Plan. units, entirely in cash, or equally in cash and deferred share units. The number of deferred 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 the Common Shares, based on the value of a deferred share unit at that time. A deferred share unit shall be redeemable, at the time a Director’s membership on the Board is terminated Employee Share Purchase Program 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 $0.1 million in 2011 ($0.2 million in 2010). Stock Option Plan Compensation expense is recorded for options granted under the Corporation’s and its subsidiaries’ stock option plans based on the fair value of the options at the grant date, amortized over the vesting period. During the year ended December 31, 2011, 777,503 options (717,818 options in 2010) were granted under the Corporation’s Employee Stock Option Plan. The fair value of these options was estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions: Dividend yield Expected volatility Risk-free interest rate Expected life (years) Fair value per stock option ($/option) Weighted-average exercise price ($/option) 2011 4.9% 19.2% 2.3% 9 $2.47 $26.54 2010 4.5% 20.4% 2.8% 9 $3.61 $28.36 For the year ended December 31, 2011, compensation expense relating to the grants of 972,395 options in 2008 which vest equally over a period of five stock options granted by the Corporation and its subsidiaries amounted to years beginning in 2009; a grant of 136,182 options in 2009 which vest equally $10 million ($8 million in 2010). Under the Corporation’s Employee Stock Option Plan, 17,421,600 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 of grant and no later than five years from date of grant. Options recently 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; grants of 743,080 options which vest equally over a period of five years beginning in 2012; grants of 34,423 options which vest as follows: the first 50% three years from the date of grant, and the remaining 50% four years from the granted, which are not fully vested, have the following vesting conditions: date of grant. A summary of the status of the Corporation’s Employee Stock Option Plan as at December 31, 2011 and 2010, 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 OPTIONS 8,480,115 777,503 (160,000) 9,097,618 7,267,535 2011 WEIGhTED-AVERAGE ExERCISE PRICE $ 27.77 26.54 16.87 27.85 27.82 OPTIONS 10,049,297 717,818 (2,287,000) 8,480,115 7,069,914 2010 WEIGhTED-AVERAGE ExERCISE PRICE $ 24.48 28.36 13.50 27.77 27.49 84 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT NOTE 21 Share-Based Compensation (CONTINuED) The following table summarizes information about stock options outstanding at December 31, 2011: RANGE OF E xERCISE PRICES $ 21.65 26.22 – 28.13 29.05 – 30.18 31.59 – 32.46 34.46 – 37.13 OPTIONS OUTSTANDING OPTIONS E xERCISABLE WEIGhTED- AVERAGE REMAINING LIFE WEIGhTED- AVERAGE ExERCISE PRICE OPTIONS WEIGhTED- AVERAGE ExERCISE PRICE OPTIONS 3,000,000 1,608,787 865,403 2,567,777 1,055,651 9,097,618 (yRS) $ 1.6 8.8 6.7 4.1 6.2 4.6 21.65 3,000,000 27.12 29.63 240,378 498,588 32.11 2,529,484 34.81 999,085 27.85 7,267,535 $ 21.65 27.45 29.60 32.10 34.68 27.82 Equity incentive plan of Putnam Effective September 25, 2007 Putnam Lifeco uses the fair-value based method to account for restricted Class B sponsors the Putnam Investments, LLC Equity Incentive Plan (the EIP). Under Shares and options on Class B Shares granted to employees under the the terms of the EIP, Putnam is authorized to grant or sell Class B Shares of EIP. The fair value of restricted Class B Shares and options on Class B Putnam (the Putnam Class B Shares), subject to certain restrictions and to Shares is determined on each grant date. During 2011, Putnam granted grant options to purchase Putnam Class B Shares (collectively, the Awards) 1,189,169 (225,998 in 2010) restricted Class B common shares and no options to certain senior management and key employees of Putnam at fair value in 2011 or 2010 to certain members of senior management and key employees. at the time of the award. Fair value is determined under the valuation methodology outlined in the EIP. Awards vest over a period of up to five years and are specified in the individual’s award letter. holders of Putnam Class B Shares are not entitled to vote other than in respect of certain matters in regards to the EIP and have no rights to convert their shares into any other securities. The number of Putnam Class B Shares that may be subject to Awards under the EIP is limited to 10,000,000. The share-based payments awarded under the EIP are cash-settled and included within other liabilities on the balance sheets. NOTE 22 Non-Controlling Interests Compensation expense recorded for the year ended December 31, 2011 related to restricted Class B common shares and Class B stock options earned was $3 million ($43 million in 2010) and is recorded in operating and administrative expenses in the statements of earnings. At December 31, 2011, the carrying value and intrinsic value of the restricted Class B Share liability is $98 million. DECEMBER 31, 2011 DECEMBER 31, 2010 JANUARy 1, 2010 Non-controlling interests include Participating account surplus in subsidiaries Preferred shareholders of subsidiaries Common shareholders of subsidiaries 2,227 2,044 5,023 9,294 yEARS ENDED DECEMBER 31 Earnings attributable to non-controlling interests include Earnings attributable to common shareholders of subsidiaries Dividends to preferred shareholders of subsidiaries Earnings (losses) attributable to participating account surplus in subsidiaires 2,045 2,047 4,649 8,741 2011 916 105 120 1,141 2,045 1,951 4,624 8,620 2010 742 111 (8) 845 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 85 Notes to the Consolidated Financial Statements NOTE 23 Capital Management As an investment holding company, Power Financial’s objectives in managing Lifeco’s subsidiaries Great-West Life and Great-West Life & Annuity are its capital are: > To provide sufficient financial flexibility to pursue its growth strategy and support its group companies and other investments. > 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 subject to minimum regulatory capital requirements. Lifeco’s practice is to maintain the 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, 2011, the MCCSR ratio capital structure, the Corporation may adjust the amount of dividends paid for Great-West Life was 204%. to shareholders, return capital to shareholders or issue new forms of capital. The capital structure of the Corporation consists of preferred shares, debentures and equity composed of stated capital, retained earnings and non-controlling interests in the equity of subsidiaries of the Corporation. > At December 31, 2011, the Risk-Based Capital ratio (RBC) of Great-West Life & Annuity, Lifeco’s regulated U.S. operating company, was 430% of the Company Action Level set by the National Association of Insurance Commissioners. Great-West Life & Annuity reports its RBC ratio annually The Corporation utilizes perpetual preferred shares as a permanent and cost- to U.S. insurance regulators. 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. > In the United Kingdom, Canada Life UK is required to satisfy the capital resources requirements set out in the Integrated Prudential Sourcebook, part of the Financial Services Authority handbook. The capital requirements are prescribed by a formulaic capital requirement (Pillar 1) and an individual capital adequacy framework which requires an entity to self-assess an appropriate amount of capital it should hold, The Corporation’s major operating subsidiaries are subject to regulatory based on the risks encountered from its business activities. At the end of capital requirements along with capital standards set by peers or 2011, Canada Life UK complied with the capital resource requirements in rating agencies. the United Kingdom. > As at December 31, 2010 and 2011, 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. NOTE 24 Risk Management Power Financial and its subsidiaries have policies relating to the identification, less operating expenses, financing charges and income taxes. The ability of measurement, monitoring, mitigating and controlling of risks associated Lifeco and IGM, which are also holding companies, to meet their obligations with financial instruments. The key risks related to financial instruments and pay dividends depends in particular upon receipt of sufficient funds from are liquidity risk, credit risk and market risk (currency, interest rate and their own subsidiaries. equity price). Power Financial seeks to maintain a sufficient level of liquidity to meet all its The Corporation and its subsidiaries have also established policies and cash flow requirements. In addition, Power Financial and its parent, Power procedures designed to identify, measure and report all material risks. Corporation of Canada, jointly have a $100 million uncommitted line of credit Management is responsible for establishing capital management procedures with a Canadian chartered bank. for implementing and monitoring the capital plan. The Board of Directors of the Corporation and the boards of directors of its subsidiaries review and approve all capital transactions undertaken by management. Principal payments on debentures (other than those of Lifeco and IGM discussed below) represent the only significant contractual liquidity requirement of Power Financial. LiQuidit y ris k Liquidity risk is the risk that the Corporation and its subsidiaries will not be DECEMBER 31, 2011 able to meet all cash outflow obligations as they come due. Debentures Power Financial is a holding company. As such, corporate cash flows from LESS Th AN 1 yEAR – 1 – 5 yEARS – AFTER 5 yEARS 250 TOTAL 250 operations, before payment of dividends, are principally made up of dividends Power Financial’s liquidity position and its management of liquidity risk have received from its subsidiaries and associates, and income from investments, not changed materially since December 31, 2010. 86 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT NOTE 24 Risk Management (CONTINuED) For Lifeco, the following policies and procedures are in place to manage > Management of Lifeco monitors the use of lines of credit on a regular basis, liquidity risk: and assesses the ongoing availability of these and alternative forms of > Lifeco closely manages operating liquidity through cash flow matching of operating credit. assets and liabilities and forecasting earned and required yields, to ensure > Management of Lifeco closely monitors the solvency and capital positions consistency between policyholder requirements and the yield of assets. of its principal subsidiaries opposite liquidity requirements at the holding Approximately 72% of insurance and investment contract liabilities are company. Additional liquidity is available through established lines of non-cashable prior to maturity or subject to market value adjustments. credit or the capital markets. Lifeco maintains a $200 million committed line of credit with a Canadian chartered bank. 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. DECEMBER 31, 2011 Debentures and other debt instruments Capital trust securities[1] Purchase obligations Pension contributions PAyMENTS DUE B y PERIOD 1 yEAR 609 – 65 150 824 2 yEARS 3 yEARS 4 yEARS 5 yEARS 1 – 35 – 36 1 – 16 – 17 – – 16 – 16 – – 4 – 4 AFTER 5 yEARS 3,702 800 – – TOTAL 4,313 800 136 150 4,502 5,399 [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 > third parties, including Canada Mortgage and housing Corporation management processes; stress testing of various operating scenarios; (CMhC) or Canadian bank-sponsored securitization trusts; and oversight over liquidity management by committees of the board of > institutional investors through private placements. directors of IGM. For IGM, a key liquidity requirement is the funding of commissions paid on the sale of mutual funds. Commissions on the sale of mutual funds continue to be paid from operating cash flows. Certain subsidiaries of Investors Group are approved issuers of National housing Act Mortgage-Backed Securities (NhA MBS) and approved sellers into the Canada Mortgage Bond Program (CMB Program). This issuer and seller status provides IGM with additional funding sources for residential IGM also maintains sufficient liquidity to fund and temporarily hold mortgages. IGM’s continued ability to fund residential mortgages through mortgages. Through its mortgage banking operations, residential mortgages Canadian bank-sponsored securitization trusts and NhA MBS is dependent are sold or securitized to: on securitization market conditions that are subject to change. > Investors Mortgage and Short Term Income Fund and Investors Canadian Liquidity requirements for a trust subsidiary which engages in financial Corporate Bond Fund; IGM’s contractual maturities were as follows: DECEMBER 31, 2011 Deposits and certificates Derivative instruments Obligations to securitization entities Long-term debt Operation leases Total contractual obligations intermediary activities are based on policies approved by a committee of its board of directors. As at December 31, 2011, the trust subsidiary’s liquidity was in compliance with these policies. DEMAND 122 – – – – 122 LESS Th AN 1 yEAR 9 34 547 – 48 638 1 – 5 yEARS 15 73 3,261 – 135 3,484 AFTER 5 yEARS 5 4 19 1,325 80 1,433 TOTAL 151 111 3,827 1,325 263 5,677 In addition to IGM’s current balance of cash and cash equivalents, liquidity IGM accessed capital markets most recently in December 2010; IGM’s is available through IGM’s operating lines of credit. IGM’s operating lines ability to access capital markets to raise funds in future is dependent on of credit with various Schedule I Canadian chartered banks totalled market conditions. $325 million as at December 31, 2011, unchanged from December 31, 2010. The operating lines of credit as at December 31, 2011 consisted of committed lines of $150 million (2010–$150 million) and uncommitted lines of $175 million (2010– $175 million). IGM has accessed its uncommitted operating lines of credit in the past; however, any advances made by the banks under the uncommitted operating lines are at the banks’ sole discretion. As at December 31, 2011 and 2010, IGM was not utilizing its committed lines of credit or its uncommitted operating lines of credit. IGM’s liquidity position and its management of liquidity risk have not changed materially since December 31, 2010. POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 87 Notes to the Consolidated Financial Statements NOTE 24 Risk Management (CONTINuED) credit ris k For Lifeco, the following policies and procedures are in place to manage Credit risk is the potential for financial loss to the Corporation and its credit risk: subsidiaries if a counterparty in a transaction fails to meet its obligations. > Investment guidelines are in place that require only the purchase of For Power Financial, cash and cash equivalents, fixed income securities, and investment-grade assets and minimize undue concentration of assets in derivatives are subject to credit risk. The Corporation monitors its credit risk any single geographic area, industry and company. management policies continuously to evaluate their effectiveness. > Investment guidelines specify minimum and maximum limits for each Cash and cash equivalents amounting to $277 million and fixed income asset class. Credit ratings are determined by recognized external credit securities amounting to $430 million consist primarily of highly liquid rating agencies and/or internal credit review. temporary deposits with Canadian chartered banks as well as bankers’ > Investment guidelines also specify collateral requirements. acceptances and short-term securities guaranteed by the Canadian government. The Corporation regularly reviews the credit ratings of its counterparties. The maximum exposure to credit risk on these financial instruments is their carrying value. The Corporation mitigates credit risk on these financial instruments by adhering to its Investment Policy which outlines credit risk parameters and concentration limits. 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 economic hedges even if specific hedge accounting requirements are not met. The Corporation regularly reviews the credit ratings of derivative financial instrument > 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. > Lifeco is exposed to credit risk relating to premiums due from policyholders 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. counterparties. Derivative contracts are over-the-counter traded with > Reinsurance is placed with counterparties that have a good credit rating counterparties that are highly rated financial institutions. The exposure to and concentration of credit risk is managed by following policy guidelines credit risk of these derivatives is limited to their fair values which was nil at set each year by the board of directors of Lifeco. Management of Lifeco December 31, 2011. continuously monitors and performs an assessment of creditworthiness of reinsurers. m a x i m u m e x p o s u R e to c R e d i t R i s k f o R l i feco 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. Cash and cash equivalents Bonds Fair value through profit or loss Available for sale Loans and receivables Mortgage loans Loans to policyholders Funds held by ceding insurers [1] Reinsurance assets Other financial assets [1] Derivative assets DECEMBER 31, 2011 2,056 DECEMBER 31, 2010 1,840 61,709 6,620 9,744 17,432 7,162 9,923 2,061 3,764 968 56,333 6,580 9,290 16,115 6,827 9,856 2,533 3,934 984 JANUARy 1, 2010 3,427 52,375 4,607 9,165 16,684 6,957 10,984 2,800 4,115 717 Total balance sheet maximum credit exposure 121,439 114,292 111,831 [1] Includes $9,411 million ($9,333 million at December 31, 2010 and $10,329 million at January 1, 2010) of funds held by ceding insurers where Lifeco retains the credit risk of the assets supporting the liabilities ceded. Credit risk is also mitigated by entering into collateral agreements. co n c e n t R at i o n o f c R e d i t R i s k f o R l i feco The amount and type of collateral required depends on an assessment of Concentrations of credit risk arise from exposures to a single debtor, a the credit risk of the counterparty. Guidelines are implemented regarding group of related debtors or groups of debtors that have similar credit risk the acceptability of types of collateral and the valuation parameters. characteristics in that they operate in the same geographic region or in Management of Lifeco monitors the value of the collateral, requests similar industries. The characteristics are similar in that changes in economic additional collateral when needed and performs an impairment valuation or political environments may impact their ability to meet obligations as when applicable. Lifeco has $21 million of collateral received in 2011 ($24 million they come due. of collateral received at December 31, 2010 and $35 million of collateral received at January 1, 2010) relating to derivative assets. 88 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT NOTE 24 Risk Management (CONTINuED) The following table provides details of the carrying value of bonds of Lifeco by industry sector and geographic distribution: DECEMBER 31, 2011 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 Supranationals 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 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 Supranationals 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 CANADA UNITED STATES EUROPE TOTAL 4,328 6,430 271 185 1,293 443 2,696 26 2,168 855 233 508 1,848 695 1,127 608 1,721 3,792 2,024 2 1,980 2,857 25 – 12 3,401 638 416 1,449 748 221 42 53 1,006 8,216 955 211 803 146 1,858 1,615 214 501 1,813 1,771 825 560 – 672 2,689 814 212 554 1,610 624 3,158 277 4,372 8,463 4,134 8,426 2,248 666 6,900 810 4,442 3,919 1,195 1,230 5,432 1,732 2,241 2,218 3,017 9,639 3,115 31,251 2,980 34,231 19,122 23,826 323 571 19,445 24,397 74,199 3,874 78,073 CANADA UNITED STATES EUROPE TOTAL 3,548 5,619 335 216 1,057 381 2,728 25 2,183 1,057 201 589 – 1,815 2,851 11 – 11 3,450 745 442 1,359 587 246 31 62 976 7,617 946 223 842 111 1,993 1,470 182 477 1,608 1,419 1,495 726 561 – 563 2,433 628 181 422 1,400 464 2,794 232 544 997 422 1,557 3,266 1,728 28,061 2,822 30,883 3,579 7,496 4,162 7,844 2,003 615 7,020 881 4,618 3,886 970 1,312 4,522 1,451 1,980 1,822 2,584 8,493 2,588 17,847 21,918 816 739 18,663 22,657 67,826 4,377 72,203 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 89 Notes to the Consolidated Financial Statements NOTE 24 Risk Management (CONTINuED) JANUARy 1, 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 Supranationals 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 CANADA UNITED STATES EUROPE TOTAL 2,264 4,917 240 212 937 516 2,636 46 2,201 1,021 151 598 1,384 516 1,000 559 1,414 3,008 1,489 1 1,333 2,620 – – 4 3,306 842 453 1,336 571 276 14 58 758 6,652 916 436 851 60 2,299 1,507 198 473 1,351 1,664 651 710 – 585 2,172 562 206 581 1,216 495 2,701 182 2,279 6,308 3,618 6,864 1,853 956 6,793 948 4,953 3,864 920 1,347 4,399 1,373 2,291 1,775 2,494 7,881 2,233 25,109 2,406 27,515 16,773 21,267 455 137 17,228 21,404 63,149 2,998 66,147 The following table provides details of the carrying value of mortgage loans of Lifeco by geographic location: DECEMBER 31, 2011 Canada United States Europe DECEMBER 31, 2010 Canada United States Europe JANUARy 1, 2010 Canada United States Europe SINGLE-FAMILy RESIDENTIAL MULTI-FAMILy RESIDENTIAL 1,591 – 79 1,670 3,407 811 108 4,326 SINGLE-FAMILy RESIDENTIAL MULTI-FAMILy RESIDENTIAL 1,622 – – 1,622 3,528 464 26 4,018 SINGLE-FAMILy RESIDENTIAL MULTI-FAMILy RESIDENTIAL 1,695 – – 1,695 3,965 485 29 4,479 COMMERCIAL 7,022 1,999 2,415 11,436 COMMERCIAL 6,691 1,517 2,267 10,475 COMMERCIAL 6,371 1,509 2,630 10,510 TOTAL 12,020 2,810 2,602 17,432 TOTAL 11,841 1,981 2,293 16,115 TOTAL 12,031 1,994 2,659 16,684 90 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT NOTE 24 Risk Management (CONTINuED) a ss e t QuaLit y BOND PORTFOLIO qUALIT y AAA AA A BBB BB and lower Total bonds DERIVATIVE PORTFOLIO qUALIT y Over-the-counter contracts (counterparty ratings): AAA AA A Total DECEMBER 31, 2011 DECEMBER 31, 2010 29,612 12,894 22,066 12,399 1,102 78,073 28,925 11,436 19,968 10,649 1,225 72,203 DECEMBER 31, 2011 DECEMBER 31, 2010 12 361 595 968 5 491 488 984 JANUARy 1, 2010 24,653 10,684 19,332 10,113 1,365 66,147 JANUARy 1, 2010 5 338 374 717 loa n s o f l i feco p a s t d u e , b u t n ot i m pa i R e d 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 DECEMBER 31, 2011 DECEMBER 31, 2010 JANUARy 1, 2010 3 1 1 5 7 2 2 11 45 6 9 60 The following outlines the future asset credit losses provided for in insurance and investment contract liabilities. These amounts are in addition to the allowance for asset losses included with assets: Participating Non-participating DECEMBER 31, 2011 DECEMBER 31, 2010 852 1,648 2,500 802 1,516 2,318 JANUARy 1, 2010 755 1,712 2,467 For IGM, cash and cash equivalents, securities holdings, mortgage and IGM regularly reviews the credit quality of the mortgage portfolios related investment loan portfolios, and derivatives are subject to credit risk. to IGM’s mortgage banking operations and its intermediary operations, IGM monitors its credit risk management practices continuously to evaluate as well as the adequacy of the collective allowance. As at December 31, their effectiveness. 2011, mortgages related to continuing operations totalled $4.09 billion and With respect to IGM, at December 31, 2011, cash and cash equivalents of consisted of residential mortgages: $1,052 million consisted of cash balances of $97 million on deposit with > Sold to securitization programs which are classified as loans and Canadian chartered banks and cash equivalents of $955 million. Cash receivables and totalled $3.76 billion compared to $3.47 billion at equivalents are composed primarily of Government of Canada treasury bills December 31, 2010. In applying the derecognition criteria under IAS 39 — totalling $521 million, provincial government and government-guaranteed Financial Instruments, IGM has recorded these loans on its balance commercial paper of $340 million and bankers’ acceptances issued by sheet following securitization. An offsetting liability, Obligations to Canadian chartered banks of $94 million. IGM regularly reviews the credit securitization entities, has been recorded and totalled $3.83 billion at ratings of its counterparties. The maximum exposure to credit risk on these December 31, 2011, compared to $3.51 billion at December 31, 2010. financial instruments is their carrying value. IGM manages credit risk related to cash and cash equivalents by adhering to its Investment Policy that outlines credit risk parameters and concentration limits. > Related to IGM’s mortgage banking operations which are classified as held for trading and totalled $292.1 million, compared to $187.3 million at December 31, 2010. These loans are held by IGM pending sale Fair value through profit or loss securities include Canada Mortgage Bonds or securitization. with a fair value of $227 million and fixed income securities comprising the restructured notes of the master asset vehicle conduits with a fair value of $29 million. These fair values represent the maximum exposure to credit risk > Related to IGM’s intermediary operations which are classified as loans and receivables and totalled $31.3 million at December 31, 2011, compared to $39.5 million at December 31, 2010. of IGM at December 31, 2011. POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 91 Notes to the Consolidated Financial Statements NOTE 24 Risk Management (CONTINuED) As at December 31, 2011, the mortgage portfolios related to IGM’s intermediary IGM’s exposure to credit risk related to cash and cash equivalents, fixed operations were geographically diverse, 100% residential (2010 – 100%) income securities and mortgage and investment loan portfolios has been and 99.4% insured (2010 – 99.0%). As at December 31, 2011, impaired and significantly reduced since December 31, 2010 as a result of the sale of MRS. uninsured non-performing mortgages over 90 days were nil, unchanged from however, IGM’s management of credit risk on its continuing operations has December 31, 2010. The characteristics of the mortgage portfolios have not not changed materially since December 31, 2010. changed significantly during 2011. IGM utilizes derivatives to hedge interest rate risk and reinvestment risk IGM purchases portfolio insurance from CMhC on newly funded qualifying associated with its mortgage banking and securitization activities, as well conventional mortgages. Under the NhA MBS and CMB Programs, it is a as market risk related to certain stock-based compensation arrangements. requirement that securitized mortgages be insured against default by an approved insurer, and IGM has also insured substantially all loans securitized through ABCP programs. At December 31, 2011, 93.0% of the securitized portfolio and the residential mortgages classified as held for trading were insured, compared to 94.1% at December 31, 2010. As at December 31, 2011, impaired loans on these portfolios were $1 million, compared to $1 million at December 31, 2010. At December 31, 2011, there were no uninsured non- performing mortgages over 90 days in these portfolios, compared to $0.3 million at December 31, 2010. IGM participates in the CMB Program by entering into back-to-back swaps whereby Canadian Schedule I chartered banks designated by IGM are between IGM and the Canadian housing Trust. IGM receives coupons on NhA MBS and eligible principal reinvestments and pays coupons on the Canada Mortgage Bonds. IGM also enters into interest rate swaps to hedge interest rate and reinvestment risk associated with the CMB Program. The negative fair value of these swaps totalled $26 million at December 31, 2011 and the outstanding notional amount was $4.4 billion. Certain of these swaps relate to securitized mortgages that have been recorded on IGM’s balance The collective allowance for credit losses related to continuing operations sheet with an associated obligation. Accordingly, these swaps, with an was $1 million at December 31, 2011, compared to $1 million at December 31, outstanding notional amount of $2.7 billion and having a negative fair value 2010, and is considered adequate by management to absorb all credit-related of $33 million, are not reflected on the balance sheet. Principal reinvestment losses in the mortgage portfolios. IGM retains cer tain elements of credit risk on securitized loans. At December 31, 2011, 96.2% of securitized loans were insured against credit losses. The fair value of IGM’s retained interests in securitized mortgages was $24 million at December 31, 2011, compared to $107 million at December 31, 2010. Retained interests include: > Cash reserve accounts and rights to future net interest income — which were $11 million and $91 million, respectively, at December 31, 2011. Cash reserve accounts are reflected on the balance sheet, whereas rights to future net interest income are not reflected on the balance sheet and will be recorded over the life of the mortgages. The portion of this amount pertaining to Canadian bank-sponsored securitization trusts of $45 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 previously discussed, and IGM’s credit risk on insured loans is to the insurer. At December 31, 2011, 86.5% of the $1.1 billion in outstanding mortgages securitized under these programs were insured. Rights to future net interest income under the NhA MBS and CMB Programs totalled $56 million. Under the NhA MBS and CMB Programs, IGM has an obligation to make timely payments to security holders regardless of whether amounts are received from mortgagors. All mortgages securitized under the NhA MBS and CMB Programs are insured by CMhC or another approved insurer under the programs. Outstanding mortgages securitized under these programs are $2.7 billion. > Fair value of principal reinvestment account swaps — had a negative fair value of $77 million at December 31, 2011 which is reflected on the balance sheet. These swaps represent the component of a swap entered into under the CMB Program whereby IGM pays coupons on Canada Mortgage Bonds and receives investment returns on the reinvestment of repaid mortgage principal. The notional amount of these swaps was $556 million at December 31, 2011. account swaps and hedges of reinvestment and interest rate risk, with an outstanding notional amount of $1.7 billion and having fair value of $7 million, are reflected on the balance sheet. The exposure to credit risk, which is limited to the fair value of swaps in a gain position, totalled $87 million at December 31, 2011, compared to $22 million at December 31, 2010. IGM utilizes interest rate swaps to hedge interest rate risk associated with mortgages securitized through Canadian bank-sponsored ABCP programs. The negative fair value of these interest rate swaps totalled $23 million on an outstanding notional amount of $1.0 billion at December 31, 2011. The exposure to credit risk, which is limited to the fair value of swaps in a gain position, totalled $1 million at December 31, 2011, compared to $1 million at December 31, 2010. IGM also utilizes interest rate swaps to hedge interest rate risk associated with its investments in Canada Mortgage Bonds. The negative fair value of these interest rate swaps totalled $7 million on an outstanding notional amount of $200 million at December 31, 2011. The exposure to credit risk, which is limited to the fair value of the interest rate swaps which are in a gain position, was nil at December 31, 2011, compared to $15 million at December 31, 2010. 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 as well as total return swaps and forward agreements on IGM’s common shares utilized to hedge deferred compensation arrangements. The fair value of interest rate swaps, total return swaps and forward agreements was nil on an outstanding notional amount of $76 million at December 31, 2011, compared to a fair value of $1 million on an outstanding notional amount of $118 million at December 31, 2010. The exposure to credit risk, which is limited to the fair value of those instruments which are in a gain position, was $1 million at December 31, 2011, unchanged from December 31, 2010. The aggregate credit risk exposure related to derivatives that are in a gain position of $89 million does not give effect to any netting agreements or collateral arrangements. The exposure to credit risk, considering netting agreements and collateral arrangements, was $0.3 million at December 31, 2011. Counterparties are all Canadian Schedule I chartered banks and, as a result, management of IGM has determined that IGM’s overall credit risk related to derivatives was not significant at December 31, 2011. Management of credit risk has not changed materially since December 31, 2010. 92 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT NOTE 24 Risk Management (CONTINuED) M arke t ris k Interest rate risk Interest rate risk is the risk that the fair value of future Market risk is the risk that the fair value or future cash flows of a financial cash flows of a financial instrument will fluctuate because of changes in the instrument will fluctuate as a result of changes in market factors. Market market interest rates. factors include three types of risks: currency risk, interest rate risk and Power Financial’s financial instruments are essentially cash and cash equity price risk. equivalents, fixed income securities, and long-term debt that do not have Currency risk Currency risk relates to the Corporation, its subsidiaries significant exposure to interest rate risk. and its investment in associates operating in different currencies and For Lifeco, the following policies and procedures are in place to mitigate converting non-Canadian earnings at different points in time at different exposure to interest rate risk: foreign exchange levels when adverse changes in foreign currency exchange rates occur. > Lifeco utilizes a formal process for managing the matching of assets and liabilities. This involves grouping general fund assets and liabilities into Power Financial’s financial assets are essentially cash and cash equivalents segments. Assets in each segment are managed in relation to the liabilities and fixed income securities. In managing its own cash and cash equivalents, in the segment. Power Financial may hold cash balances denominated in foreign currencies and thus be exposed to fluctuations in exchange rates. In order to protect against such fluctuations, Power Financial may from time to time enter into currency-hedging transactions with highly rated financial institutions. As at December 31, 2011, essentially all of Power Financial’s cash and cash equivalents were denominated in Canadian dollars or in foreign currencies with currency hedges in place. For Lifeco, if the assets backing insurance and investment contract liabilities are not matched by currency, changes in foreign exchange rates can expose Lifeco to the risk of foreign exchange losses not offset by liability decreases. Lifeco has net investments in foreign operations. In addition, Lifeco’s debt obligations are mainly denominated in Canadian dollars. In accordance with IFRS, foreign currency translation gains and losses from net investments in foreign operations, net of related hedging activities and tax effects, are recorded in accumulated other comprehensive income. Strengthening or weakening of the Canadian dollar spot rate compared to the U.S. dollar, British pound and euro spot rates impacts Lifeco’s total share capital and surplus. Correspondingly, Lifeco’s book value per share and capital ratios monitored by rating agencies are also impacted. The following policies and procedures are in place to mitigate Lifeco’s exposure to currency risk: > Lifeco uses financial measures such as constant currency calculations to monitor the effect of currency translation fluctuations. > 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 insurance and investment contract 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 insurance and investment contract liabilities and their supporting assets by approximately the same amount, resulting in an immaterial change in net earnings. > 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. > For products with fixed and highly predictable benefit payments, 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. hedging instruments are employed where necessary when there is a lack of suitable permanent investments to minimize loss exposure to interest rate changes. To the extent these cash flows are matched, protection against 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. > For products with less predictable timing of benefit payments, investments 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 insurance contract 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 IGM’s financial instruments are generally denominated in Canadian dollars, deterioration in the best estimate assumptions and provide reasonable and do not have significant exposure to changes in foreign exchange rates. assurance that insurance contract liabilities cover a range of possible outcomes. Margins are reviewed periodically for continued appropriateness. 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 0.19% (0.21% in 2010). The calculation for future credit losses on assets is based on the credit quality of the underlying asset portfolio. POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 93 Notes to the Consolidated Financial Statements NOTE 24 Risk Management (CONTINuED) Testing under several interest rate scenarios (including increasing and Equity price risk Equity price risk is the uncertainty associated with the decreasing rates) is done to assess reinvestment risk. valuation of assets arising from changes in equity markets. To mitigate One way of measuring the interest rate risk associated with this assumption is to determine the effect on the insurance and investment contract liabilities impacting the shareholder earnings of Lifeco of a 1% immediate parallel shift equity price risk, the Corporation and its subsidiaries have investment policy guidelines in place that provide for prudent investment in equity markets within clearly defined limits. in the yield curve. These interest rate changes will impact the projected Power Financial’s financial instruments are essentially cash and cash cash flows. equivalents, fixed income securities, and long-term debt that do not have > The effect of an immediate 1% parallel increase in the yield curve would exposure to equity price risk. be to decrease these insurance and investment contract liabilities by For Lifeco, the risks associated with segregated fund guarantees have been approximately $180 million, causing an increase in net earnings of Lifeco mitigated through a hedging program for lifetime Guaranteed Minimum of approximately $123 million (Power Financial’s share — $87 million). Withdrawal Benefit guarantees (GMWB) using equity futures, currency > The effect of an immediate 1% parallel decrease in the yield curve would be to increase these insurance and investment contract liabilities by approximately $731 million, causing a decrease in net earnings of Lifeco of forwards, and interest rate derivatives. For policies with segregated fund guarantees, Lifeco generally determines insurance contract liabilities at a conditional tail expectation of 75 (CTE75) level. approximately $511 million (Power Financial’s share — $360 million). Some insurance and investment contract liabilities are supported by In addition to the above, if this change in the yield curve persisted for an extended period the range of the tested scenarios might change. The effect of an immediate 1% parallel decrease or increase in the yield curve persisting for a year would have immaterial additional effects on the reported insurance and investment contract liabilities. IGM is exposed to interest rate risk on its loan portfolio, fixed income securities, Canada Mortgage Bonds and on certain of the derivative financial instruments used in IGM’s mortgage banking and intermediary operations. The objective of IGM’s asset and liability management is to control interest rate risk related to its intermediary operations by actively managing its investment properties, common stocks and private equities, for example, segregated fund products and products with long-tail cash flows. Generally these liabilities will fluctuate in line with equity market values. There will be additional impacts on these liabilities as equity market values fluctuate. A 10% increase in equity markets would be expected to additionally decrease non-participating insurance and investment contract liabilities by approximately $27 million, causing an increase in net earnings of Lifeco of approximately $21 million (Power Financial’s share — $15 million). A 10% decrease in equity markets would be expected to additionally increase non- participating insurance and investment contract liabilities by approximately $77 million, causing a decrease in net earnings of Lifeco of approximately interest rate exposure. As at December 31, 2011, the total gap between deposit $57 million (Power Financial’s share — $40 million). assets and liabilities was within IGM’s trust subsidiaries’ stated guidelines. IGM utilizes interest rate swaps with Canadian Schedule I chartered bank counterparties in order to reduce the impact of fluctuating interest rates on its mortgage banking operations, as follows: The best estimate return assumptions for equities are primarily based on long-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 > IGM has funded fixed rate mor tgages with ABCP as par t of the be expected to decrease non-participating insurance contract liabilities by securitization transactions with bank-sponsored securitization trusts. approximately $389 million, causing an increase in net earnings of Lifeco IGM enters into interest rate swaps with Canadian Schedule I chartered of approximately $292 million (Power Financial’s share — $206 million). A 1% banks to hedge the risk that ABCP rates rise. however, IGM remains decrease in the best estimate assumption would be expected to increase exposed to the basis risk that ABCP rates are greater than the bankers’ non-participating insurance contract liabilities by approximately $424 million, acceptance rates that it receives on its hedges. causing a decrease in net earnings of Lifeco of approximately $316 million > IGM has in certain instances funded floating rate mortgages with fixed (Power Financial’s share — $223 million). rate Canada Mortgage Bonds as part of the securitization transactions IGM is exposed to equity price risk on its proprietary investment funds which under the CMB Program. IGM enters into interest rate swaps with are classified as available-for-sale securities. Unrealized gains and losses on Canadian Schedule I chartered banks to hedge the risk that the interest these securities are recorded in other comprehensive income until they are rates earned on floating rate mortgages declines. As previously discussed, realized or until management of IGM determines there is objective evidence as part of the CMB Program, IGM also is entitled to investment returns of impairment in value, at which time they are recorded in the statements on reinvestment of principal repayments of securitized mortgages and of earnings. is obligated to pay Canada Mortgage Bond coupons that are generally fixed rate. IGM hedges the risk that reinvestment returns decline by entering into interest rate swaps with Canadian Schedule I chartered IGM sponsors a number of deferred compensation arrangements where payments to participants are linked to the performance of the common shares of IGM Financial Inc. IGM hedges this risk through the use of forward bank counterparties. agreements and total return swaps. > 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 Canadian 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, 2011, the impact to annual net earnings of IGM of a 100-basis-point change in interest rates would have been approximately $4 million (Power Financial’s share — $3 million). IGM’s exposure to and management of interest rate risk has not changed materially since December 31, 2010. 94 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT NOTE 24 Risk Management (CONTINuED) Caution related to risk sensitivities In this document the Corporation > actual experience differing from the assumptions; and its subsidiaries have provided estimates of sensitivities and risk exposure measures for certain risks. These include the sensitivity due to specific changes in interest rate levels projected and market prices as at the valuation date. Actual results can differ significantly from these estimates for a variety of reasons, including: > assessment of the circumstances that led to the scenario may lead to changes in (re)investment approaches and interest rate scenarios considered; > changes in actuarial, investment return and future investment activity assumptions; > changes in business mix, effective tax rates and other market factors; > interactions among these factors and assumptions when more than one changes; and > the general limitations of internal models. For these reasons, the sensitivities should only be viewed as directional estimates of the underlying sensitivities for the respective factors based on the assumptions outlined below. Given the nature of these calculations, the Corporation cannot provide assurance that the actual impact on net earnings attributed to shareholders will be as indicated. Segregated funds guaranteed exposure Lifeco offers retail segregated fund products, unitized with profits products and variable annuity products that provide for certain guarantees that are tied to the market values of the investment funds. A significant decline in the market value of these funds could increase Lifeco’s liability exposure for providing these guarantees. Lifeco’s exposure to these guarantees at the balance sheet date was: DECEMBER 31, 2011 Canada United States Europe Total DECEMBER 31, 2010 Canada United States Europe Total INVESTMENT DEFICIENC y By BENEFIT T yPE FAIR VALUE INCOME MATURIT y DEATh TOTAL [1] 22,883 8,013 2,214 33,110 – 641 1 642 42 – 121 163 301 119 134 554 304 760 134 1,198 INVESTMENT DEFICIENC y By BENEFIT T yPE FAIR VALUE INCOME MATURIT y DEATh TOTAL [1] 23,324 7,985 2,095 33,404 – 342 – 342 24 – 118 142 135 113 119 367 137 454 119 710 [1] A policy can only receive a payout from one of the three trigger events (income election, maturity or death). Total deficiency measures the point-in-time exposure assuming the most costly trigger event for each policy occurred on December 31, 2011 and December 31, 2010. NOTE 25 Operating and Administrative Expenses yEARS ENDED DECEMBER 31 Salaries and other employee benefits Amortization and depreciation Premium taxes Other NOTE 26 Financing Charges yEARS ENDED DECEMBER 31 Interest on debentures and other borrowings Net interest on capital trust securities Dividends on preferred shares classified as liabilities Other 2011 2,019 170 264 553 3,006 2011 351 33 – 25 409 2010 2,041 162 256 1,378 3,837 2010 353 32 12 35 432 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 95 Notes to the Consolidated Financial Statements NOTE 27 Pension Plans and Other Post-Employment Benefits The Corporation and its subsidiaries maintain funded defined benefit pension Subsidiaries of Lifeco have declared partial windups in respect of certain plans for certain employees and advisors as well as unfunded supplementary defined pension plans, the impact of which has not been reflected in the employee retirement plans (SERP) for certain employees. The Corporation’s pension plan accounts. subsidiaries also maintain defined contribution pension plans for eligible employees and advisors. The Corporation and its subsidiaries provide post- employment health, dental and life insurance benefits to eligible retirees and advisors. PL an a ss e t s , b en efit o b LiGatio n s and fu nd ed s tatus ChANGE IN FAIR VALUE OF PLAN ASSETS Fair value of plan assets, beginning of year Expected return on plan assets Employee contributions Employer contributions Actuarial gain (losses) Benefits paid Settlement Foreign exchange and other Fair value of plan assets, end of year ChANGE IN DEFINED BENEFIT OBLIGATIONS Defined benefit obligation, beginning of year Employer current service cost Employee contributions Interest on defined obligations Actuarial (gains) losses Benefits paid Past service cost Settlement Foreign exchange and other Defined benefit obligation, end of year FUNDED STATUS Fund surplus (deficit) Unamortized past service costs Unamortized net actuarial losses (credits) Unrecognized amount due to limit on asset Accrued benefit asset (liability) The aggregate accrued benefit obligations of plan assets are as follows: yEARS ENDED DECEMBER 31 Wholly or partly funded plans Wholly unfunded plans 2011 2010 PENSION PL ANS OThER POST- EMPLOyMENT BENEFITS PENSION PL ANS OThER POST- EMPLOyMENT BENEFITS 3,363 208 20 101 (153) (193) – 13 3,359 – – – 18 – (18) – – – 3,154 195 20 96 108 (159) (2) (49) 3,363 – – – 18 – (18) – – – 3,548 442 3,106 382 77 20 194 197 (193) 6 – 19 3 – 24 (2) (18) – – – 59 20 189 376 (159) 27 (2) (68) 3,868 449 3,548 (185) 3 247 (63) 2 (509) 5 599 (71) 24 (449) (33) 47 – (435) 2011 3,491 377 3 – 23 51 (18) 2 – (1) 442 (442) (41) 51 – (432) 2010 3,200 348 The Corporation and its subsidiaries expect to contribute $130 million to their funded and unfunded defined benefit pension and other post-employment benefit plans in 2012. 96 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT NOTE 27 Pension Plans and Other Post-Employment Benefits (CONTINuED) The net accrued benefit asset (liability) shown above is presented in these financial statements as follows: AS AT D ECEMBER 31 Accrued benefit asset [Note 10] Accrued benefit liability [Note 18] Accrued benefit asset (liability) PENSION PL ANS 456 (432) 24 OThER POST- EMPLOyMENT BENEFITS – (435) (435) 2011 TOTAL 456 (867) (411) PENSION PL ANS 355 (353) 2 OThER POST- EMPLOyMENT BENEFITS – (432) (432) 2010 TOTAL 355 (785) (430) Pen sio n an d other Pos t- eM PLoyM ent b enefit e XPen s e yEARS ENDED DECEMBER 31 Amounts arising from events in the period Defined benefit current service cost Employee contribution Past service cost recognized Interest on defined benefit obligations Actuarial (gain) loss recognized Expected return on plan assets Amount recognized due to limit on asset Amortization corridor Defined contribution current service cost 2011 2010 PENSION PL ANS OThER POST- EMPLOyMENT BENEFITS PENSION PL ANS OThER POST- EMPLOyMENT BENEFITS 97 (20) 77 3 194 (1) (208) 8 1 29 103 3 – 3 (8) 24 1 – – – – 20 79 (20) 59 21 189 20 (195) (14) – 29 109 3 – 3 (8) 23 – – – – – 18 2010 % 51 37 12 100 a ss e t a LLo c atio n by M aJ o r c ate Go ry W eiG hted by PL an a ss e t s — d efined b enefit P en sio n PL an s Equity securities Debt securities All other assets 2011 % 47 41 12 100 No plan assets are directly invested in the Corporation’s or subsidiaries’ securities. With respect to Lifeco, plan assets include investments in segregated funds managed by subsidiaries of Lifeco of $1,430 million ($1,438 million in 2010). Plan assets do not include any property occupied or other assets used by Lifeco. POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 97 Notes to the Consolidated Financial Statements NOTE 27 Pension Plans and Other Post-Employment Benefits (CONTINuED) siG nific ant a ssuM P tio n s % 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-EMPLOyMENT BENEFITS 2011 2010 2011 2010 5.5 6.2 3.7 5.1 3.6 6.2 6.3 3.9 5.5 3.7 5.5 – – 5.1 – 6.7 4.5 6.3 – – 5.5 – 7.0 4.5 2024 2024 The overall expected rate of return on plan assets for the year is determined the defined benefit obligation for defined benefit plans. The mortality based on long-term market expectations prevailing at the beginning of the assumptions applied by the Corporation and its subsidiaries take into year for each asset class, weighted by portfolio allocation, less an allowance consideration average life expectancy, including allowances for future in respect to all expenses expected to be charged to the fund. Anticipated mortality improvement as appropriate, and reflect variations in such future long-term performance of individual asset categories is considered, factors as age, gender and geographic location. The assumptions also take reflecting management’s best estimates of expected future inflation and into consideration an estimation of future improvements in longevity. This expected real yields on fixed income securities and equities. Since the prior estimate is subject to considerable uncertainty and judgment is required in year-end there have been no changes in the method used to determine the establishing this assumption. overall expected rate of return. In 2011, the actual return on plan assets was $55 million ($304 million in 2010). The mortality tables are reviewed at least annually, and assumptions are in accordance with accepted actuarial practice in Canada. Emerging plan The period of time over which benefits are assumed to be paid is based experience is reviewed and considered in establishing the best estimate for on best estimates of future mortality, including allowances for mortality future mortality. improvements. Mortality assumptions are significant in measuring iM Pac t o f chan G e s to a ssu M ed he a Lth c are r ate s — other P os t- eM PLoyM ent b enefit s IMPAC T ON END -OF-yEAR ACCRUED POST-EMPLOyMENT BENEFIT OBLIGATION IMPAC T ON POST-EMPLOyMENT BENEFIT SERVICE AND INTEREST COST 2011 2010 2011 2010 46 (38) 45 (37) 2 (2) 2 (2) DEFINED BENEFIT PENSION PL ANS OThER POST-EMPLOyMENT BENEFITS 2011 2010 (3,868) 3,359 (509) (197) (153) (3,548) 3,363 (185) (376) 108 2011 (449) – (449) 2 – 2010 (442) – (442) (51) – 1% increase in assumed healthcare cost trend rate 1% decrease in assumed healthcare cost trend rate suM M arized PL an info r M atio n Defined benefit obligation Fair value of plan assets Funded status of plan Experience adjustment on plan liabilities Experience adjustment on plan assets 98 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT NOTE 28 Derivative Financial Instruments In the normal course of managing exposure to fluctuations in interest rates, foreign exchange rates, and to market risks, the Corporation and its subsidiaries are end users of various derivative financial instruments. Contracts are either exchange traded or over-the-counter traded with counterparties that are credit-worthy financial intermediaries. The following table summarizes the portfolio of derivative financial instruments of the Corporation and its subsidiaries at December 31: 2011 DERIVATIVES NOT DESIGNATED AS ACCOUNTING hEDGES 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 CASh FLOW hEDGES Interest rate contracts Swaps Foreign exchange contracts Cross-currency swaps FAIR VALUE hEDGES Interest rate contracts Swaps NOTIONAL AMOUNT 1 yEAR OR LESS 1 – 5 yEARS OVER 5 yEARS TOTAL MA xIMUM CREDIT RISK TOTAL ESTIMATED FAIR VALUE – – 1,021 – 1,021 224 43 267 40 7 146 193 55 5 2,940 968 3,968 – 1,509 1,509 18 – 2 20 – – 1,495 139 1,634 – 4,693 4,693 – – – – 55 5 5,456 1,107 6,623 224 6,245 6,469 58 7 148 213 – – 434 54 488 – 551 551 – – – – 1,481 5,497 6,327 13,305 1,039 – – – – – – 10 10 10 10 31 31 1,500 1,531 1,510 1,541 92 92 102 102 11 6 17 – – – – 294 53 347 (1) 314 313 (16) – (1) (17) 643 11 (23) (12) (2) (2) 1,481 5,517 7,950 14,948 1,056 629 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 99 Notes to the Consolidated Financial Statements NOTE 28 Derivative Financial Instruments (CONTINuED) 2010 DERIVATIVES NOT DESIGNATED AS ACCOUNTING hEDGES 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 CASh FLOW hEDGES Interest rate contracts Swaps Foreign exchange contracts Cross-currency swaps FAIR VALUE hEDGES Interest rate contracts Swaps NOTIONAL AMOUNT 1 yEAR OR LESS 1 – 5 yEARS OVER 5 yEARS TOTAL MA xIMUM CREDIT RISK TOTAL ESTIMATED FAIR VALUE 57 165 1,199 226 1,647 221 70 291 43 8 38 89 1 – 3,135 846 3,982 – 1,284 1,284 21 – – 21 – – 1,321 221 1,542 – 4,454 4,454 – – – – 58 165 5,655 1,293 7,171 221 5,808 6,029 64 8 38 110 – – 250 31 281 5 704 709 – – – – 2,027 5,287 5,996 13,310 990 – – – 55 55 – – – – – 58 58 1,500 1,558 1,500 1,558 – – 55 55 12 27 39 – – – – 153 31 184 5 589 594 (20) – – (20) 758 12 15 27 – – 2,082 5,287 7,554 14,923 1,029 785 The amount subject to credit risk is limited to the current fair value of the Foreign exchange contracts Cross-currency swaps are used in instruments which are in a gain position. The credit risk is presented without combination with other investments to manage foreign currency risk giving effect to any netting agreements or collateral arrangements and associated with investment activities and insurance and investment does not reflect actual or expected losses. The total estimated fair value contract liabilities. Under these swaps, principal amounts and fixed and represents the total amount that the Corporation and its subsidiaries would floating interest payments may be exchanged in different currencies. receive (or pay) to terminate all agreements at year-end. however, this The Corporation and its subsidiaries also enter into certain foreign exchange would not result in a gain or loss to the Corporation and its subsidiaries as forward contracts to hedge certain product liabilities. the derivative instruments which correlate to certain assets and liabilities provide offsetting gains or losses. Other derivative contracts Equity index swaps, futures and options are used to hedge certain product liabilities. Equity index swaps are also used Swaps Interest rate swaps, futures and options are used as part of a as substitutes for cash instruments and are used to periodically hedge the portfolio of assets to manage interest rate risk associated with investment market risk associated with certain fee income. activities and insurance and investment contract liabilities and to reduce the impact of fluctuating interest rates on the mortgage banking operations and intermediary operations. Interest rate swap agreements require the periodic exchange of payments without the exchange of the notional principal amount on which payments are based. Changes in fair value are recorded in net investment income in the 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. Lifeco may use credit derivatives to manage its credit exposure and for risk diversification in its investment portfolio. IGM also enters into total return swaps and forward agreements to manage its exposure to fluctuations in the total return of its common shares related to deferred compensation arrangements. Total return swap and forward agreements require the exchange of net contractual payments periodically or at maturity without the exchange of the notional principal amounts on which the payments are based. Certain of these instruments are not designated as hedges. Changes in fair value are recorded in operating expenses in the statements of earnings for those instruments not designated as hedges. 100 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT NOTE 29 Fair Value of Financial Instruments The following table presents the fair value of the Corporation’s financial instruments using the valuation methods and assumptions described below. Fair values are management’s estimates and are generally calculated using market conditions at a specific point in time and may not reflect future fair values. The calculations are subjective in nature, involve uncertainties and matters of significant judgment. ASSETS Cash and cash equivalents DECEMBER 31, 2011 DECEMBER 31, 2010 JANUARy 1, 2010 CARRyING VALUE FAIR VALUE CARRyING VALUE FAIR VALUE CARRyING VALUE FAIR VALUE 3,385 3,385 3,656 3,656 4,855 4,855 Investments (excluding investment properties) 113,841 116,170 107,033 108,533 101,350 101,916 Funds held by ceding insurers Derivative financial instruments Other financial assets Total financial assets LIABILITIES Deposits and certificates Funds held under reinsurance contracts Obligation to securitization entities Debentures and other borrowings Capital trust securities Preferred shares of the Corporation Preferred shares of subsidiaries Derivative financial instruments Other financial liabilities Total financial liabilities 9,923 1,056 3,539 9,923 1,056 3,539 9,856 1,029 3,666 9,856 1,029 3,666 10,984 10,984 775 3,820 775 3,820 131,744 134,073 125,240 126,740 121,784 122,350 151 169 3,827 5,888 533 – – 427 4,189 152 169 3,930 6,502 577 – – 427 4,189 835 149 3,505 6,313 535 – – 244 6,167 840 149 3,564 6,823 596 – – 244 6,167 907 331 3,310 5,931 540 300 199 359 916 331 3,349 6,180 601 318 199 359 5,519 5,519 15,184 15,946 17,748 18,383 17,396 17,772 Fair value is determined using the following methods and assumptions: restrictions. Level 1 assets also include liquid open-end investment fund > 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 units, and investments in Government of Canada Bonds and Canada Mortgage Bonds in instances where there are quoted prices available from active markets. of collection, accounts payable, repurchase agreements, dividends and > Level 2 inputs utilize other-than-quoted prices included in Level 1 that interest payable, and income tax payable. are observable for the asset or liability, either directly or indirectly. > 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. For mortgage and loans, bonds, loans and other receivables, the fair value is determined by discounting the expected future cash flows at market interest rates for loans with similar credit risks and maturities (refer to Note 2). > 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. > Obligations to securitization entities are valued by discounting the expected future cash flows by prevailing market yields for securities issued by these securitization entities having like maturities and characteristics. > Debentures and other borrowings are determined by reference to current market prices for debt with similar terms, risks and maturities. 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 rate 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 quality and average life, government and agency securities, restricted stock, some private bonds and equities, most investment-grade and high-yield corporate bonds, most asset-backed securities and most 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 > Preferred shares are valued using quoted prices from active markets. and internal pricing models. Financial assets and liabilities utilizing > 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 IFRS 7, 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. Financial assets and liabilities utilizing Level 1 inputs include actively exchange-traded equity securities and mutual and segregated funds which have available prices in an active market with no redemption Level 3 inputs include certain bonds, certain asset-backed securities, some private equities and investments in mutual and segregated funds where there are redemption restrictions, certain over-the-counter derivatives and restructured notes of the master asset vehicle. In certain cases, the inputs used to measure fair value may fall into different 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 significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 101 Notes to the Consolidated Financial Statements NOTE 29 Fair Value of Financial Instruments (CONTINuED) 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, 2011, December 31, 2010 and January 1, 2010 and indicates the fair value hierarchy of the valuation techniques utilized by the Corporation to determine such fair value: DECEMBER 31, 2011 ASSETS Shares Available for sale Fair value through profit or loss Bonds Available for sale Fair value through profit or loss Mortgage and other loans Fair value through profit or loss Derivatives LIABILITIES Derivatives Other liabilities DECEMBER 31, 2010 ASSETS Shares Available for sale Fair value through profit or loss Bonds Available for sale Fair value through profit or loss Mortgage and other loans Fair value through profit or loss Derivatives LIABILITIES Derivatives Other liabilities JANUARy 1, 2010 ASSETS Shares Available for sale Fair value through profit or loss Bonds Available for sale Fair value through profit or loss Mortgage and other loans Fair value through profit or loss Derivatives Other assets LIABILITIES Derivatives Other liabilities 102 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT LEVEL 1 LEVEL 2 LEVEL 3 TOTAL 132 5,485 – 227 – – 7 3 7,010 61,406 292 1,056 1 14 40 332 – – 140 5,502 7,050 61,965 292 1,056 5,844 69,774 387 76,005 – – – 350 – 350 77 26 103 427 26 453 LEVEL 1 LEVEL 2 LEVEL 3 TOTAL 238 4,947 – 638 – – 9 – 7,251 56,021 224 1,027 1 417 42 340 – 2 248 5,364 7,293 56,999 224 1,029 5,823 64,532 802 71,157 – – – 216 – 216 28 18 46 244 18 262 LEVEL 1 LEVEL 2 LEVEL 3 TOTAL 563 4,783 – 625 – – 10 1 – 5,128 51,761 241 745 7 1 145 67 642 – 30 – 565 4,928 5,195 53,028 241 775 17 5,981 57,883 885 64,749 – – – 353 – 353 6 16 22 359 16 375 NOTE 29 Fair Value of Financial Instruments (CONTINuED) 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, 2011 and 2010: DECEMBER 31, 2011 Balance, beginning of year Total gains (losses) In net earnings In other comprehensive income Purchases Sales Settlements Transfers out of Level 3 Balance, end of year DECEMBER 31, 2010 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 ShARES BONDS AVAIL ABLE FOR SALE FAIR VALUE ThROUGh PROFIT OR LOSS AVAIL ABLE FOR SALE FAIR VALUE ThROUGh PROFIT OR LOSS DERIVATIVES, NET 1 – – – – – – 1 417 42 340 35 – 65 (6) – (497) 14 1 2 – – (5) – 40 54 – – (4) (58) – 332 (26) (62) – – – 11 – (77) OThER ASSETS (LIABILITIES) (18) (5) – (3) – – – (26) ShARES BONDS AVAIL ABLE FOR SALE FAIR VALUE ThROUGh PROFIT OR LOSS AVAIL ABLE FOR SALE FAIR VALUE ThROUGh PROFIT OR LOSS DERIVATIVES, NET OThER ASSETS (LIABILITIES) 1 – – – – – – – 1 145 16 – 288 (30) – – (2) 417 67 642 24 (16) (2) 2 – – (5) – (20) 42 16 – – (76) (95) 5 (152) 340 (61) – 1 – 7 – 3 (1) – (6) – 5 – – (26) (18) TOTAL 756 23 2 62 (10) (52) (497) 284 TOTAL 863 (32) 2 283 (106) (88) 5 (171) 756 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 103 Notes to the Consolidated Financial Statements NOTE 30 Earnings per Share The following is a reconciliation of the numerators and the denominators used in the computations of earnings per share: yEARS ENDED DECEMBER 31 Net earnings attributable to shareholders Dividends on perpetual preferred shares Net earnings attributable to common shareholders Dilutive effect of subsidiaries Diluted net earnings attributable to common shareholders Weighted average number of common shares outstanding (millions) — Basic Exercise of stock options Shares assumed to be repurchased with proceeds from exercise of stock options Weighted average number of common shares outstanding (millions) — Diluted 2011 1,826 (104) 1,722 (12) 1,710 708.1 3.0 (2.3) 708.8 2010 1,567 (99) 1,468 (7) 1,461 707.0 4.9 (3.9) 708.0 For 2011, 6,097,618 stock options (3,623,428 in 2010) have been excluded from the computation of diluted earnings per share as the exercise price was higher than the market price. yEARS ENDED DECEMBER 31 Basic earnings per common share ($) From continuing operations From discontinued operations Diluted earnings per common share ($) From continuing operations From discontinued operations 2011 2.38 0.05 2.43 2.36 0.05 2.41 2010 2.08 – 2.08 2.06 – 2.06 104 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT NOTE 31 Contingent Liabilities The Corporation and its subsidiaries are from time to time subject to legal During the fourth quarter of 2011, in response to the Appeal Decision, Lifeco actions, including arbitrations and class actions, arising in the normal course re-evaluated and reduced the litigation provision established in the third of business. It is inherently difficult to predict the outcome of any of these quarter of 2010, which positively impacted common shareholder net earnings proceedings with certainty, and it is possible that an adverse resolution of Lifeco by $223 million after tax (Power Financial’s share — $158 million). could have a material adverse effect on the consolidated financial position 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. A subsidiary of Lifeco has declared a partial windup in respect of an Ontario defined benefit pension plan which will not likely be completed for some time. The partial windup could involve the distribution of the amount of actuarial surplus, if any, attributable to the wound-up portion of the plan. In addition to the regulatory proceedings involving this partial windup, a related class action proceeding has been commenced in Ontario related to the partial windup and three potential partial windups under the plan. The class action also challenges the validity of charging expenses to the plan. The provisions for certain Canadian retirement plans in the amounts of $97 million after tax established by Lifeco’s subsidiaries in the third quarter of 2007 have been reduced to $68 million. Actual results could differ from these estimates. The Court of Appeal for Ontario released a decision on November 3, 2011 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. in 1997 (the “Appeal Decision”). Regardless of the ultimate outcome of this case, all of the participating policy contract terms and conditions will continue to be honoured. Based on information presently known, the Trial Decision, if affirmed on further appeal, is not expected to have a material adverse effect on the consolidated financial position of Lifeco. Subsidiaries of Lifeco have an investment in a U.S.-based private equity partnership wherein a dispute arose over the terms of the partnership agreement. Lifeco acquired the investment in 2007 for purchase consideration of US$350 million. The dispute was resolved on January 10, 2012 and Lifeco has established a provision of $99 million after tax. 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. sub s eQuent e vent On January 3, 2012 the plaintiffs filed an application in the Supreme Court of The Appeal Decision made substantial adjustments to the original trial Canada for leave to appeal the Appeal Decision. judgement (the “Trial Decision”). The impact is expected to be favourable to Lifeco’s overall financial position. Any monies to be returned to the participating accounts will be dealt with in accordance with Lifeco’s participating policyholder dividend policies in the ordinary course of business. No awards are to be paid out to individual class members. NOTE 32 Commitments and Guarantees Guar antee s s yndic ated L e t ter s o f credit In the normal course of operations, the Corporation and its subsidiaries Clients residing in the United States are required, pursuant to their insurance execute agreements that provide for indemnifications to third parties in laws, to obtain letters of credit issued on behalf of London Reinsurance Group transactions such as business dispositions, business acquisitions, loans and (LRG) from approved banks in order to further secure LRG’s obligations under securitization transactions. The Corporation and its subsidiaries have also certain reinsurance contracts. agreed to indemnify their directors and certain of their officers. The nature of these agreements precludes the possibility of making a reasonable estimate of the maximum 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, the nature and likelihood of which cannot be determined. historically, the Corporation has not made any payments under such indemnification agreements. No amounts have been accrued related to these agreements. LRG has a syndicated letter of credit facility providing US$650 million in letters of credit capacity. The facility was arranged in 2010 for a five-year term expiring November 12, 2015. Under the terms and conditions of the facility, collateralization may be required if a default under the letter of credit agreement occurs. LRG has issued US$479 million in letters of credit under the facility as at December 31, 2011 (US$507 million at December 31, 2010). In addition, LRG has other bilateral letter of credit facilities totalling US$18 million (US$18 million in 2010). LRG issued US$7 million in letters of credit under these facilities as of December 31, 2011 (US$6 million at December 31, 2010). POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 105 Notes to the Consolidated Financial Statements NOTE 32 Commitments and Guarantees (CONTINuED) PLed Gin G o f a ss e t s With respect to Lifeco, the amounts of assets which have a security interest by way of pledging is $577 million at December 31, 2011 ($554 million at December 31, 2010 and $595 million at January 1, 2010) in respect of reinsurance agreements. coM MitM ent 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 2012 149 2013 127 2014 106 2015 90 2016 72 2017 AND ThEREAFTER 166 TOTAL 710 NOTE 33 Related Party Transactions The ultimate controlling party of the Corporation is Power Corporation of Canada, which is incorporated and domiciled in Canada. Principal subsidiaries The financial statements of the Corporation include the operations of the following subsidiaries: CORPORATION Great-West Lifeco Inc. The Great-West Life Assurance Company London Life Insurance Company The Canada Life Assurance Company INCORPORATED IN PRIMARy BUSINESS OPERATION Canada Canada Canada Canada Financial services holding company Insurance and wealth management Insurance and wealth management Insurance and wealth management Great-West Life & Annuity Insurance Company United States Insurance and wealth management Putnam Investments, LLC United States IGM Financial Inc. Investors Group Inc. Mackenzie Financial Corporation Parjointco N.V. Pargesa holding SA Canada Canada Canada Netherlands Switzerland Financial services Financial services Financial services Financial services holding company holding company % hELD 68.2% 100.0% 100.0% 100.0% 100.0% 97.6% 57.6% 100.0% 100.0% 50.0% 56.5% Balances and transactions between the Corporation and its subsidiaries, During 2011, IGM sold residential mortgage loans to Great-West Life and which are related parties of the Corporation, have been eliminated on London Life for $202 million (2010 – $226 million). consolidation and are not disclosed in this note. Details of transactions between the Corporation and other related parties are disclosed below. Key management compensation Key management personnel are those persons having authority and responsibility for planning, directing Transactions with related parties In the normal course of business, and controlling the activities of the Corporation, directly or indirectly. Great-West Life enters into various transactions with related companies The persons included in the key management personnel are the members of which include providing insurance benefits to other companies within the the Board of Directors of the Corporation, as well as certain management Power Financial Corporation group of companies. In all cases, transactions executives of the Corporation and subsidiaries. were at market terms and conditions. The following table describes all compensation paid to, awarded to, or earned by each of the key management personnel for services rendered in all capacities to the Corporation and its subsidiaries: yEARS ENDED DECEMBER 31 Short-term employee benefits Post-employment benefits Share-based payment 2011 15 4 9 28 2010 14 12 7 33 106 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT NOTE 34 Subsequent Events On February 23, 2012, the Corporation issued 10,000,000 5.5% Non-Cumulative First Preferred Shares, Series R for gross proceeds of $250 million. On February 22, 2012, Lifeco issued 10,000,000 5.4% Non-Cumulative First Preferred Shares, Series P for gross proceeds of $250 million. NOTE 35 Segmented Information The following strategic business units constitute the Corporation’s > Parjointco holds the Corporation’s interest in Pargesa, a holding company reportable operating segments: > Lifeco offers, in Canada, the United States and 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, cement and building materials, 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 investment products to its client base. IGM derives its revenues from in Note 2 — Basis of Presentation and Summary of Significant Accounting a range of sources, but primarily from management fees, which are Policies of the financial statements. The Corporation evaluates the charged to its mutual funds for investment advisory and management performance based on the operating segment’s contribution to consolidated services. IGM also earns revenue from fees charged to its mutual funds net earnings. Revenues and assets are attributed to geographic areas based for administrative services. on the point of origin of revenues and the location of assets. 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 CORPOR ATION 2011 ANNuAL REPORT 107 Notes to the Consolidated Financial Statements NOTE 35 Segmented Information (CONTINuED) in fo r M atio n o n P ro fit M e a sure FOR T hE yEAR ENDED D ECEMBER 31, 2011 LIFECO IGM PARJOINTCO OThER TOTAL – 161 2,571 2,732 – 895 638 103 1,636 1,096 – 1,096 250 846 63 909 392 – 517 909 – – – – – – – – – – (20) (20) – (20) – (20) – – (20) (20) – 17,293 (99) (131) (230) 9,764 5,343 32,400 – 23,043 (131) 54 17 (60) (170) – (170) (9) (161) – 2,312 3,006 409 28,770 3,630 (20) 3,610 706 2,904 63 (161) 2,967 (106) 104 (159) (161) 1,141 104 1,722 2,967 TOTAL 8,786 IGM PARJOINTCO OThER 2,925 10,839 6,625 CANADA 61,960 – 49,622 4,087 10,280 – – 2,222 1,065 252,678 – 574 229,863 UNITED STATES EUROPE TOTAL 27,403 31,064 120,427 – 22,359 3,050 1,769 2,222 24,601 12,501 1,760 2,222 96,582 19,638 13,809 125,949 54,581 72,148 252,678 17,064 6,123 9,213 32,400 17,293 9,702 2,903 29,898 23,043 1,548 2,314 289 27,194 2,704 – 2,704 465 2,239 – 2,239 855 – 1,384 2,239 LIFECO 5,861 238,552 222,664 REVENUES Premium income, net Investment income, net Fee income ExPENSES Total paid or credited to policyholders Commissions Operating and administrative expenses Financing charges Share of earnings (losses) of investment in associates Earnings before income taxes — continuing operations Income taxes Contribution to net earnings — continuing operations Contribution to net earnings — discontinued operations Contribution to net earnings Attributable to Non-controlling interests Perpetual preferred shareholders Common shareholders in fo r M atio n o n a ss e t s and L iab iLitie s M e a sure DECEMBER 31, 2011 Goodwill Total assets Total liabilities Geo Gr a Phic info r M atio n DECEMBER 31, 2011 Invested assets Investment in associates Segregated funds for the risk of unit holders Other assets Goodwill and intangible assets Total assets Total revenues 108 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT NOTE 35 Segmented Information (CONTINuED) info r M atio n o n P ro fit M e a sure FOR T hE yEAR ENDED D ECEMBER 31, 2010 LIFECO IGM PARJOINTCO OThER TOTAL 17,748 9,534 2,821 30,103 23,225 1,477 3,150 288 28,140 1,963 – 1,963 254 1,709 – 1,709 600 – 1,109 1,709 LIFECO 5,857 229,221 214,605 REVENUES Premium income, net Investment income, net Fee income ExPENSES Total paid or credited to policyholders Commissions Operating and administrative expenses Financing charges Share of earnings (losses) of investment in associates Earnings before income taxes — continuing operations Income taxes Contribution to net earnings — continuing operations Contribution to net earnings — discontinued operations Contribution to net earnings Attributable to Non-controlling interests Perpetual preferred shareholders Common shareholders info r M atio n o n a ss e t s and L iab iLitie s M e a sure DECEMBER 31, 2010 Goodwill Total assets Total liabilities Geo Gr a Phic info r M atio n DECEMBER 31, 2010 Invested assets Investment in associates Segregated funds for the risk of unit holders Other assets Goodwill and intangible assets Total assets Total revenues Geo Gr a Phic info r M atio n JANUARy 1, 2010 Invested assets Investment in associates Segregated funds for the risk of unit holders Other assets Goodwill and intangible assets Total assets – 146 2,468 2,614 – 854 636 111 1,601 1,013 – 1,013 270 743 2 745 330 – 415 745 – – – – – – – – – – 121 121 – 121 – 121 – – 121 121 – 17,748 (80) (115) (195) 9,600 5,174 32,522 – 23,225 (115) 51 33 (31) (164) – (164) (1) (163) – 2,216 3,837 432 29,710 2,812 121 2,933 523 2,410 2 (163) 2,412 (85) 99 (177) (163) 845 99 1,468 2,412 TOTAL 8,717 IGM PARJOINTCO OThER 2,860 11,902 7,920 CANADA 59,203 – 50,001 5,066 10,259 – – 2,448 1,073 244,644 – 567 223,092 UNITED STATES EUROPE TOTAL 25,714 28,729 113,646 – 21,189 2,929 1,717 2,448 23,637 11,987 1,765 2,448 94,827 19,982 13,741 124,529 51,549 68,566 244,644 16,779 6,522 9,221 32,522 CANADA 54,911 – 45,006 4,148 10,247 114,312 UNITED STATES EUROPE TOTAL 24,632 29,277 108,820 – 22,799 13,888 1,721 63,040 2,829 19,690 3,228 1,893 2,829 87,495 21,264 13,861 56,917 234,269 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 109 Independent Auditor’s Report to t h e s h a R e h o l d e R s o f p o W e R f i n a n c i a l c o R p o R at i o n We have audited the accompanying consolidated financial statements of Power Financial Corporation, which comprise the consolidated balance sheets as at December 31, 2011, December 31, 2010 and January 1, 2010, and the consolidated statements of earnings, statements of comprehensive income, statements of changes in equity and statements of cash flows for the years ended December 31, 2011 and December 31, 2010, and a summary of significant accounting policies and other explanatory information. Management’s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, 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. Auditor’s Responsibility 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 at December 31, 2011, December 31, 2010 and January 1, 2010, and its financial performance and its cash flows for the years ended December 31, 2011 and December 31, 2010 in accordance with International Financial Reporting Standards. Signed, Deloitte & Touche LLP 1 March 14, 2012 Montréal, québec 1 Chartered accountant auditor permit No. 9569 110 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT Power Financial Corporation Five-Year Financial Summary DECEMBER 31 [ IN MILLIONS OF C ANADIAN DOLL ARS, E xCEPT PER S hARE AMOUNTS ] (UNAUDITED) 2011 2010 2009 2008 2007 PREVIOUS CANADIAN GA AP CONSOlIDaTED BalaNCE SHEETS Cash and cash equivalents Total assets Shareholders’ equity Consolidated assets and assets under management CONSOlIDaTED STaTEmENTS Of EaRNINGS REVENUES Premium income, net Investment income, net Fee income ExPENSES Total paid or credited to policyholders Commissions Operating and administrative expenses Intangible and goodwill impairment Financing charges Share of earnings (losses) of investment in associates Income taxes Net earnings — continuing operations Net earnings — discontinued operations Net earnings Attributable to Non-controlling interests Perpetual preferred shareholders Common shareholders PER ShARE Operating earnings before other 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 Quarterly Financial Information [ IN MILLIONS OF C ANADIAN DOLL ARS, E xCEPT PER S hARE AMOUNTS ] (UNAUDITED) 2011 First quarter Second quarter Third quarter Fourth quarter 2010 First quarter Second quarter Third quarter Fourth quarter 3,385 3,656 4,855 4,689 5,625 252,678 244,644 140,231 141,546 130,114 13,521 12,811 13,207 13,419 12,865 496,781 500,181 471,775 452,158 521,439 17,293 17,748 18,033 30,007 18,753 9,764 5,343 9,600 5,174 9,678 4,998 1,163 5,540 4,587 5,327 32,400 32,522 32,709 36,710 28,667 23,043 23,225 23,809 26,774 19,122 2,312 3,006 – 409 28,770 3,630 (20) 706 2,904 63 2,967 1,141 104 1,722 2,967 2.44 0.05 2.43 1.4000 16.26 31.98 23.62 25.54 2,216 3,837 – 432 29,710 2,812 121 523 2,088 3,607 – 494 29,998 2,711 71 565 2,410 2,217 2 – 2,412 2,217 845 99 1,468 2,412 2.30 – 2.08 1.4000 15.26 34.23 27.00 30.73 778 88 1,351 2,217 2.05 – 1.92 1.4000 16.27 31.99 14.66 31.08 2,172 3,675 2,178 438 35,237 1,473 (181) 16 1,276 692 1,968 631 74 1,263 1,968 1.98 0.71 1.79 1.3325 16.80 40.94 20.33 23.90 2,236 3,199 – 408 24,965 3,702 171 938 2,935 203 3,138 1,094 75 1,969 3,138 2.63 0.21 2.79 1.1600 16.26 42.69 35.81 40.77 TOTAL REVENUES NET EARNINGS EARNINGS PER ShARE — BASIC EARNINGS PER ShARE — DILUTED 6,919 7,784 9,126 8,571 8,937 7,996 9,711 5,878 616 803 593 955 608 689 485 630 0.52 0.72 0.44 0.75 0.51 0.60 0.42 0.55 0.52 0.71 0.44 0.75 0.51 0.59 0.41 0.55 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT 111 Board of Directors J. Brian Aune* President, Aldervest Inc. Marc A. Bibeau[2] President and Chief Executive Officer, Beauward Shopping Centres Ltd. André Desmarais, O.C., O.q.[1, 5] Co-Chairman of the Corporation and Deputy Chairman, President and Co-Chief Executive Officer, Power Corporation of Canada The Honourable Paul Desmarais, P.C., C.C., O.q.[1, 5] Chairman of the Executive Committee, Power Corporation of Canada Paul Desmarais, jr., O.C., O.q.[1, 5] Co-Chairman of the Corporation and Chairman and Co-Chief Executive Officer, Power Corporation of Canada Gérald Frère [3, 4] Managing Director, Frère-Bourgeois S.A. Anthony R. Graham, LL.D.[5] President, Wittington Investments, Limited Robert Gratton Deputy Chairman, Power Corporation of Canada V. Peter Harder, LL.D. [3, 4] Senior Policy Adviser, Fraser Milner Casgrain LLP The Right Honourable Donald F. Mazankowski*, P.C., O.C., A.O.E.[1] Company Director Raymond L. McFeetors* Vice-Chairman of the Corporation and Chairman, Great-West Lifeco Inc. Jerry E.A. Nickerson* [2] Chairman of the Board, H.B. Nickerson & Sons Limited R. Jeffrey Orr [1] President and Chief Executive Officer of the Corporation Michel Plessis-Bélair*, FCA Vice-Chairman, Power Corporation of Canada Henri-Paul Rousseau*, 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 Raymond Royer, O.C., O.q., FCA [1, 2, 3, 4, 5] Company Director T. Timothy Ryan, jr. President and Chief Executive Officer, Securities Industry and Financial Markets Association Amaury de Seze* Vice-Chairman of the Corporation Emo˝ke J.E. Szathmáry, C.M., O.M., PH.D., FRSC[2] President Emeritus, university of Manitoba DIRECTORS EMERITuS James W. Burns, O.C., O.M. The Honourable P. Michael Pitfield, P.C., q.C. [1] Member of the Executive Committee [2] Member of the Audit Committee [3] Member of the Compensation Committee [4] Member of the Related Party and Conduct Review Committee [5] Member of the Governance and Nominating Committee 112 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT * Not standing for re-election Officers Paul Desmarais, jr., O.C., O.q. Co-Chairman André Desmarais, O.C., O.q. Co-Chairman R. Jeffrey Orr President and Chief Executive Officer Raymond L. McFeetors Vice-Chairman Henri-Paul Rousseau, 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 Vasseur, 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 CORPOR ATION 2011 ANNuAL REPORT 113 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: PO W E R F I N A N C I A L CO R P O R AT I O N 751 Victoria Square or Suite 2600, Richardson Building Montréal, québec Canada H2Y 2J3 S T O C K LI S T I N G S 1 Lombard Place Winnipeg, Manitoba Canada R3B 0x5 Shares of Power Financial Corporation are listed on the Toronto Stock Exchange: CO M M O N S H A R E S : P W F F I R S T P R E F E R R E D S H A R E S : 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 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 Series R: PWF.PR.R TR A N S F E R A G E N T A N D R E G I S T R A R Computershare Investor Services Inc. Offices in: Montreal (qC); Toronto (ON) www.computershare.com S H A R E H O L D E R S E R V I C E S 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, Canada M5J 2Y1 Telephone: 1-800-564-6253 (toll-free in Canada and the u.S.) or 514-982-7555 www.computershare.com 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. W E B S I T E www.powerfinancial.com Si vous préférez recevoir ce rapport annuel en français, veuillez vous adresser au secrétaire : CO R P O R AT I O N F I N A N C I è R E PO W E R 751, square Victoria ou Bureau 2600, Richardson Building Montréal (québec) Canada H2Y 2J3 1 Lombard Place Winnipeg (Manitoba) Canada R3B 0x5 114 POWER FINANCIAL CORPOR ATION 2011 ANNuAL REPORT thanks to calia, 3 years old, for gracing the cover page of this annual report. design: www.ardoise.com a d a n a c n i d e t n i r p