Showing the way 2 0 1 3 A N N U A L R E P O R T Showing the way Anticipating what lies ahead and preparing to meet new challenges is how we learn and grow. It is how we gain confidence about the future. Some of these lessons we learn on our own, while others require guidance from those we trust. For the Power Financial Group, anticipating what lies ahead is essential to what we do. This is why our employees and the financial advisors who work with us develop relationships of trust with our clients to encourage them to save and prepare for their future. This, too, we call showing the way. TABLE OF CONTENTS FINANCIAL HIGHLIGHTS GROUP ORGANIZATION CHART DIRECTORS’ REPORT TO SHAREHOLDERS RESPONSIBLE MANAGEMENT GREAT-WEST LIFECO GREAT-WEST LIFE, LONDON LIFE, CANADA LIFE CANADA LIFE – EUROPE, IRISH LIFE GREAT-WEST FINANCIAL PUTNAM INVESTMENTS 1 2 4 14 16 17 18 19 20 IGM FINANCIAL INVESTORS GROUP MACKENZIE INVESTMENTS PARGESA GROUP REVIEW OF FINANCIAL PERFORMANCE 21 22 23 24 26 CONSOLIDATED FINANCIAL STATEMENTS AND NOTES 46 FIVE-YEAR FINANCIAL SUMMARY BOARD OF DIRECTORS OFFICERS CORPORATE INFORMATION 119 120 121 122 This Annual Report is intended to In addition, selected information or Great-West Financial); provide interested shareholders concerning the business, operations, Great-West Lifeco Inc. and other interested persons with financial condition, financial (Great-West Lifeco or Lifeco); selected information concerning performance, priorities, ongoing Groupe Bruxelles Lambert (GBL); Power Financial Corporation. objectives, strategies and outlook IGM Financial Inc. (IGM Financial For further information concerning the of Power Financial Corporation’s or IGM); Investment Planning Corporation, shareholders and other subsidiaries and associates is derived Counsel Inc. (Investment Planning interested persons should consult the from public information published by Counsel); Investors Group Inc. Corporation’s disclosure documents, such subsidiaries and associates and (Investors Group); Irish Life Group such as its Annual Information Form is provided here for the convenience Limited (Irish Life); Lafarge SA (Lafarge); and Management’s Discussion and of the shareholders of Power Financial London Life Insurance Company Analysis. Copies of the Corporation’s Corporation. For further information (London Life); Mackenzie Financial continuous disclosure documents can concerning such subsidiaries and Corporation (Mackenzie or Mackenzie be obtained from the Corporation’s associates, shareholders and other Investments); Pargesa Holding SA website at www.powerfinancial.com, interested persons should consult (Pargesa); Parjointco N.V. (Parjointco); from www.sedar.com, or from the the websites of, and other publicly Power Corporation of Canada (Power Office of the Secretary at the addresses available information published by, Corporation); Putnam Investments, shown at the end of this report. such subsidiaries and associates. LLC (Putnam Investments or Putnam); Readers should also review the The selected performance measures note further in this report, in the shown on pages 1 through 25 are section entitled Review of Financial as of December 31, 2013 unless Performance, concerning the use otherwise noted. of Forward-Looking Statements, which applies to the entirety of this Annual Report. The following abbreviations are used throughout this report: Power Financial Corporation (Power Financial or the Corporation); Great-West Life & Annuity Insurance Company (Great-West Life & Annuity SGS SA (SGS); Suez Environnement Company (Suez Environnement); The Canada Life Assurance Company (Canada Life); The Great-West Life Assurance Company (Great-West Life); Total SA (Total). In addition, IFRS refers to International Financial Reporting Standards and CGAAP refers to previous Canadian generally accepted accounting principles. FINANCIAL HIGHLIGHTS FOR THE YEARS ENDED DECEMBER 31 [IN MILLIONS OF CANADIAN DOLL ARS, EXCEPT PER SHARE AMOUNTS] 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) 2013 2012 28,830 32,934 1,708 2.40 1,896 2.67 1.40 341,711 646,303 16,113 27,103 18.78 711.2 1,678 2.37 1,618 2.29 1.40 268,586 512,854 13,563 23,665 15.95 709.1 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 1 GROUP ORGANIZATION CHART 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, Europe and Asia. It also has substantial holdings in a diversified industrial group based in Europe. POWER FINANCIAL CORPORATION 67.0% GREAT-WEST LIFECO [1] 4.0% 2013 Operating earnings attributable to common shareholders $2,052 MILLION 2013 Return on shareholders’ equity 15.0% Total assets under administration $758 BILLION 100% 100% [2] 100% 100% 100% 100% GREAT-WEST FINANCIAL PUTNAM INVESTMENTS GREAT-WEST LIFE LONDON LIFE CANADA LIFE IRISH LIFE Percentages denote participating equity interest as at December 31, 2013. [1] Representing 65% of the voting rights. [2] Denotes voting interest. Operating earnings is a non-IFRS financial measure. Return on shareholders’ equity is calculated using operating earnings. 2 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 2013 OPERATING EARNINGS ATTRIBUTABLE TO COMMON SHAREHOLDERS 2013 RETURN ON SHAREHOLDERS’ EQUITY CONSOLIDATED ASSETS AND ASSETS UNDER MANAGEMENT TOTAL ASSETS UNDER ADMINISTRATION $1,708 MILLION 14.1% $646 BILLION $877 BILLION 58.6% 3.6% IGM FINANCIAL 2013 Operating earnings available to common shareholders $764 MILLION 2013 Return on shareholders’ equity 17.3% Total assets under management $132 BILLION PARGESA [3] 2013 Operating earnings SF251 MILLION Net asset value SF8.8 BILLION 100% 100% 97.5% 50.0% [4] INVESTORS GROUP MACKENZIE INVESTMENTS INVESTMENT PLANNING COUNSEL GROUPE BRUXELLES LAMBERT [4] Representing 52% of the voting rights. [3] Through its wholly owned subsidiary, Power Financial Europe, Power Financial held a 50% interest in Parjointco. Parjointco held a voting interest of 75.4% and an equity interest of 55.6% in Pargesa. POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 3 IMERYS 56.2%LAFARGE 21.0%GDF SUEZ 2.4% TOTAL 3.6%PERNOD RICARD 7.5%SUEZ ENVIRONNEMENT7.2% SGS 15.0% DIRECTORS’ REPORT TO SHAREHOLDERS Power Financial and its subsidiaries experienced positive momentum across many parts of their business in 2013, contributing to an elevated sense of optimism for the future. Increased earnings from financial services were driven by higher product sales and strong financial market conditions. Sales of investment and insurance products increased through most distribution channels, driven by company strategies and actions, as well as increased consumer and business confidence in the geographies where we operate. For the first time since the financial crisis began, the Power Financial group made a significant acquisition in the financial services industry, with Great-West Lifeco’s €1.3 billion purchase of Irish Life in July 2013. The acquisition establishes the group as the leading insurance company in Ireland and is expected to be accretive to Power Financial and Great-West Lifeco. 4 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT Senior leadership transition occurred at each of the Our companies also have a long and proud history Corporation’s principal subsidiaries during 2013. Mr. Paul of contributing to the well-being of the communities Mahon was appointed President and Chief Executive in which they operate. The principles underlying our Officer of Great-West Lifeco Inc. and Mr. Jeffrey Carney approach in this area are outlined later in this report under was appointed Co-President and Chief Executive Officer of “Responsible Management.” IGM Financial Inc. and President and Chief Executive Officer of Mackenzie Financial Corporation. The management FINANCIAL RESULTS teams across the group are fully engaged in developing and implementing strategies to meet the needs of their clients and distribution partners well into the future, through innovation, product and service excellence and value to customers. Core to the businesses of our companies is the ability to honour the promises they make to clients over the long term, which itself is a function of financial strength and responsible governance. This is why our group companies have maintained their prudent approach to balance sheet Power Financial’s operating earnings attributable to common shareholders for the year ended December 31, 2013 were $1,708 million or $2.40 per share, compared with $1,678 million or $2.37 per share in 2012. Other items represented a contribution of $188 million in 2013, compared with a charge of $60 million in 2012. Net earnings attributable to common shareholders, including other items, were $1,896 million or $2.67 per share, compared with $1,618 million or $2.29 per share in 2012. management and a strong risk-management culture over Dividends declared by Power Financial totalled many years. This is evident in the maintenance of solid $1.40 per common share in 2013, unchanged from 2012. credit ratings across our group. Our governance is rooted in a long-term perspective, and RESULTS OF GROUP COMPANIES focuses upon key factors such as strategy, people, capital G R E AT- W E S T L I F E C O and risk. We oversee our principal investments through Great-West Lifeco’s operating earnings attributable to boards of directors comprising a mix of experienced common shareholders, a non-IFRS financial measure, individuals both from within our group and from were $2.1 billion or $2.108 per share in 2013, compared with the outside. $1.9 billion or $2.049 per share in 2012. POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 5 DIRECTORS’ REPORT TO SHAREHOLDERS Great-West Lifeco’s return on equity (ROE) of 15.0 per cent The Minimum Continuing Capital and Surplus on operating earnings and 16.6 per cent on net earnings for Requirements (MCCSR) ratio for Great-West Life was the twelve months ended December 31, 2013 continued to 223 per cent on a consolidated basis at December 31, 2013. rank among the strongest in the financial services sector. This measure of capital strength is slightly higher than the Other measures of Great-West Lifeco’s performance upper end of Great-West Life’s target operating range of in 2013 include: 175–215 per cent. > Premiums and deposits of $74.8 billion, compared with $60.2 billion in 2012. > An increase in general fund and segregated fund assets from $253.9 billion in 2012 to $325.9 billion in 2013. > Total assets under administration at December 31, 2013 of $758 billion, compared with $546 billion twelve In Canada, Great-West Lifeco’s companies maintained leading market positions in 2013 in their individual and group businesses, and experienced strong organic growth. This was achieved by focusing on three broad goals: improving products and services for clients and advisors, maintaining strong financial discipline, and improving tools, information and processes to enable greater productivity months ago. and effectiveness. Dividends declared on Great-West Lifeco’s common shares were $1.23 in 2013, unchanged from the prior year. The group retirement services business recorded strong growth, the group insurance business had strong sales Great-West Lifeco’s companies benefit from prudent and in all segments while continuing to experience excellent conservative investment policies and practices with persistency, and individual segregated fund and mutual respect to the management of their consolidated assets. fund businesses maintained positive net cash flows. Its conservative product underwriting standards and Individual insurance sales in Canada remained constant disciplined approach to introducing new products have and sales of proprietary retail investment funds increased proved beneficial for the company and its subsidiaries 4.9 per cent year over year. over the long term. Also, Great-West Lifeco’s approach to asset and liability management has minimized exposure to interest rate movements. The company continues to offer segregated fund guarantees in a prudent and disciplined manner, thereby limiting its risk exposure. As a result, Great-West Lifeco’s balance sheet is one of the strongest in The Canadian operations offer group retirement and savings plans that are tailored to the unique needs of small, medium and large businesses and organizations. Group capital accumulation plans are a core business for Great-West Life. Providing an engaging experience for its plan members continues to be a top priority for this business. the industry. 6 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT Together, Great-West Lifeco’s subsidiaries Great-West Life, return, innovative income solutions, and lower volatility. London Life and Canada Life remain Canada’s number one Putnam’s “New Ways of Thinking” campaign is designed provider of individual insurance solutions. From term, to help investors address the dynamic set of ongoing universal and participating life insurance to individual market challenges, and is supported by the firm’s disability and critical illness insurance, their broad range awareness-building efforts. of products gives advisors choice and flexibility in meeting clients’ diverse individual needs. For the third time in five years, Barron’s ranked Putnam among the top fund families based on total return across In the United States, Great-West Life & Annuity’s new asset classes. Putnam also ranked second among all fund Great-West Financial® brand and the various initiatives of families assessed over the past five years. the company’s five-year strategic plan contributed to solid growth in 2013. In Europe, Great-West Lifeco, through its Canada Life and Irish Life subsidiaries, has operations in the United In a survey conducted by Plan Adviser magazine, 401(k) plan Kingdom, Isle of Man, Germany and Ireland. advisors voted Great-West Financial No. 1 in best value for In July 2013, Great-West Lifeco completed the acquisition price and best wholesalers. of Irish Life. The closing of this transaction marked Improved name recognition combined with strategic a significant milestone for its companies in Ireland. initiatives contributed to a 39 per cent increase in sales Combining the businesses of Irish Life and Canada Life in in 2013 over the previous year. The company experienced Ireland under the Irish Life brand name will help ensure strong momentum in its deferred contribution retirement that the new Irish Life maintains and builds on its leading business, its Individual Retirement Account business and in positions in the life, pensions and investment management its annuity sales through institutional partners. sectors in Ireland. Integration is well underway and on Putnam’s assets under management ended 2013 at target for completion in mid-2015. US$150 billion, reflecting strong market conditions and With a continued focus on delivering outstanding sales momentum from several key product offerings. service, Irish Life business continued to grow in 2013. In 2013, Putnam continued its focus on investment performance and innovation, highlighted by the Life and pension sales and asset management inflows outperformed the market and the company gained market introduction of six new funds to pursue new drivers of share. All business units continue to perform well. POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 7 I G M F I N A N C I A L IGM Financial and its operating companies experienced an increase in operating earnings and assets under Net earnings available to common shareholders were $762 million or $3.02 per share in 2013, compared with $759 million or $2.97 per share in 2012. management in 2013. Total assets under management at December 31, 2013 Investors Group and Mackenzie Investments, the company’s principal businesses, continued to generate business growth through product innovation, improved totalled $131.8 billion. This compared with total assets under management of $120.7 billion at December 31, 2012, an increase of 9.2 per cent. sales, pricing enhancements, additional investment Dividends were $2.15 per share for the year, unchanged from management resources and overall resource management the prior year. throughout the year. Investors Group continued to expand the number of its IGM Financial is well diversified through its multiple region offices in 2013, for a total of 109 across Canada. Its distribution channels, product types, investment consultant network grew by 155 during the same period. As management units and fund brands. Assets under at December 31, 2013, there were 4,673 consultants working management are diversified by country of investment, with clients to help them understand the benefits of long- industry sector, security type and management style. term financial planning. Operating earnings available to common shareholders, Investors Group continued to respond to the complex excluding other items, were $764 million or $3.02 per share financial needs of its clients by delivering a diverse in 2013, compared with $746 million or $2.92 per share range of products and services in the context of in 2012. personalized financial advice. In July, it introduced a 8 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT DIRECTORS’ REPORT TO SHAREHOLDERS new series of funds for households with financial assets December 31, 2012. Mutual fund gross sales were $6.7 billion, in excess of $500,000, which provides separate pricing compared with $5.5 billion in 2012, an increase of 22 per cent, for fund management and an advisory fee charged to and reflects Mackenzie’s best result in the last five years. client accounts. Mutual fund net redemptions were $0.5 billion in 2013, Investors Group mutual fund assets under management compared with net redemptions of $2.0 billion during 2012. were $68.3 billion at the end of 2013, compared with IGM Financial continues to build its business through its $60.6 billion at the end of 2012. Mutual fund sales were extensive network of distribution opportunities delivering $6.7 billion, compared with $5.8 billion in 2012, an increase high-quality advice and innovative, flexible solutions for of more than 15 per cent. The company’s redemption rate investors. Its investment in technology and operations on long-term mutual funds was 9.4 per cent during 2013, continue to help the company manage its resources compared with 10 per cent during 2012. Net sales of mutual effectively and develop long-term growth in the business. funds in 2013 were $159 million. The strength of IGM’s businesses, combined with its Mackenzie undertook several important initiatives in 2013. The company simplified and restructured its product lineup to be more relevant and launched in-demand funds to meet the evolving needs of investors and advisors. It also introduced a new series of funds, offering a channel- appropriate fee structure to “do-it-yourself” investors. Mackenzie maintained its focus on delivering consistent long-term investment performance by attracting key investment management talent and analytical personnel as it continued to support advisors in all aspects of their business. Mackenzie’s total assets under management were $65.3 billion at the end of 2013, compared with $61.5 billion at December 31, 2012. Mutual fund assets under management were $46.0 billion, compared with $40.4 billion at association with the Power Financial Corporation group of companies, gives IGM Financial a strong foundation to build upon. PA R G E S A Through Belgian holding company Groupe Bruxelles Lambert (GBL), the Pargesa group holds significant positions in major companies based in Europe: Imerys, a producer of mineral-based specialities for industry; Lafarge, which produces cement, aggregates and concrete; Total, in the oil, gas and alternative energy industry; GDF Suez, a provider of electricity, natural gas, and energy and environmental services; Suez Environnement, active in water and waste management services; Pernod Ricard, a leader in wines and spirits; and SGS, engaged in testing, inspection and certification. POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 9 In addition to its strategic holdings, which will still form At the end of December 2013, Pargesa’s adjusted net most of the portfolio, GBL undertook in 2012 to develop asset value was SF8.8 billion. This represents a value of over time: an incubator portfolio comprising interests in a SF104.2 per Pargesa share, compared with SF90.4 at the end reduced number of listed and unlisted companies — these of 2012, an increase of 15.3 per cent. investments would be smaller commitments than the strategic holdings — and investments in private equity and other funds where GBL acts as an anchor investor. At the next annual meeting of shareholders on May 6, 2014, Pargesa’s board of directors will propose paying a dividend of SF2.64 per bearer share, an increase of 2.7 per cent over Pargesa’s operating earnings were SF251 million in 2013, last year. compared with SF346 million in 2012. This decrease is mainly attributable to non-cash charges from: the increase in value of call options on shares embedded in the exchangeable and convertible bonds issued by GBL in 2012 and 2013, a lower contribution from Lafarge, and a decrease PROTECTING AND IMPROVING THE LONG-TERM FINANCIAL HEALTH OF CANADIANS in the contribution of GDF Suez following GBL’s partial Around the world, countries face the fundamental disposal of that holding. Including non-operating income consisting primarily of gains on the partial disposals by GBL of its interest in Total and in GDF Suez, and of an impairment charge recorded by GBL on its investment in GDF Suez, Pargesa’s net income in 2013 was SF394 million, compared with SF405 million in 2012. challenge of protecting and improving the long-term financial health of their citizens. The recent period of economic uncertainty and market volatility has provided a powerful reminder of the importance of careful and long-term planning, both by governments seeking to establish appropriate policies and incentives, and by individuals in their savings and investing choices. 10 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT DIRECTORS’ REPORT TO SHAREHOLDERS Achieving retirement income security requires balancing Securing the long-term financial health of Canadians is and important and competing objectives, including income should continue to be an important priority for Canada. adequacy, intergenerational equity, responsibility and Canada’s retirement system is a successful, well-balanced individual choice. It is also defined by the specific social, blend of public and private responsibility which offers demographic, fiscal, and economic circumstances that a mix of government-provided, employer-sponsored each country faces. and individual savings programs. As such, targeted, In Canada, landmark research by McKinsey & Company to understand the detailed financial situation and behaviour incremental changes to the existing system that focus on facilitating and incenting savings are a more efficient, of Canadian households continues to yield important insights. While Canadians appear well prepared for reliable and sustainable way to address Canadians’ many different retirement security challenges than retirement overall, the level of readiness of individual one-size-fits-all solutions. households varies. A close look at each segment of society, analyzed by age and income cohorts, shows that 75 per cent BOARD OF DIRECTORS of Canadian households are well prepared for retirement and that a smaller group of 25 per cent need to save more. The 25 per cent who are not ready are the middle and higher income segments. Mr. Robert Gratton will not be standing for re-election to the Corporation’s Board of Directors at the May 14, 2014 Annual Meeting of Shareholders. Mr. Gratton is Deputy Chairman of Power Corporation. He served as President Indeed, government programs currently provide significant and Chief Executive Officer of Power Financial from income replacement for most lower and middle income 1990 until 2005, and then as Chairman of its Board until populations. By contrast, higher income households are 2008. He was Chairman, President and Chief Executive more reliant on workplace and individual savings, and thus Officer of Power Financial’s subsidiary, the Montreal need to save more in order to keep their standard of living Trust Company, from 1982 until 1989. In recognition of his upon retirement. The challenges for these segments of outstanding contribution to the Power group of companies society are varied but revolve around their willingness to over many years, Mr. Gratton will be appointed by the save, the incentives to do so, and the time period available Board of Directors of Power Corporation as Deputy to save enough for retirement. Chairman Emeritus. POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 11 DIRECTORS’ REPORT TO SHAREHOLDERS FUTURE OUTLOOK so by helping clients through a one-on-one relationship with a financial advisor or through savings and retirement As we enter 2014, the global economy continues to show programs at their place of employment. signs of progress, anchored by solid improvement in the United States and increased stability in Europe. Interest rates have begun moving up from their historic lows and investors have become more confident in their investment choices. Excellence and innovation in products and services and value to the customer are critical factors in clients’ selections. Financial strength and the ability to honour long-term commitments will be equally important. Our companies are focused upon delivering on each of More fundamental than any short-term economic outlook, these dimensions. however, is the strong and growing long-term need of people across the markets where we operate to achieve financial security. The companies in our group are in the business of helping millions of people meet their financial needs through the different stages of their lives. They do 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 2013. Signed, Signed, Paul Desmarais, Jr., o.c., o.q. André Desmarais, o.c., o.q. Co-Chairman of the Board Co-Chairman of the Board On behalf of the Board of Directors, Signed, R. Jeffrey Orr President and Chief Executive Officer March 19, 2014 12 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT The Honourable Paul Desmarais, P.C., C.C., O.Q.: A TRIBUTE On October 8, 2013, the entire Power group was deeply saddened by the death of Paul Desmarais at the age of 86. We at Power Financial and Power Corporation lost a devoted father, leader, colleague and friend. We were most privileged to have known and worked with this remarkable man, whom we respected and loved so dearly. Mr. Desmarais gained control of Power Corporation in 1968 and served as its Chairman and Chief Executive Officer until 1996. At the time of his death, he was a Director of Power Financial and of Power Corporation; he was also Chairman of the Executive Committee of Power Corporation and its controlling shareholder. His service to Power spanned nearly 50 years and his visionary leadership has left an indelible mark on the entire Power group. A memorial service held December 3 in Montréal drew hundreds of friends and business colleagues from across Canada and around the world and celebrated the many contributions Paul Desmarais made to his family, to business and to his country. POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 13 RESPONSIBLE MANAGEMENT Responsible management has been a guiding principle for the Corporation for many years. We view responsible management, and all that it entails, as an effective means to mitigate risk and as a catalyst for long-term value creation. It has been and continues to be fundamental to our success, enabling us to earn the confidence of our customers, business partners, shareholders, employees and the communities where we are present. Our responsible management approach is predicated on our core values of integrity, trust, respect and corporate CREATING VALUE THROUGH OUR ACTIVE OWNERSHIP APPROACH citizenship. These values have guided the development of our Code of Business Conduct and Ethics and our Corporate Social Responsibility (CSR) Statement. Because we act as owners of the companies in which we have major Power Financial has a strong governance model through which we become an active owner in the companies in which we invest. investments, we recognize our responsibility to lead by By having our executives sit on the boards of our portfolio example and live up to the high standards of ethical conduct companies, Power Financial exercises its active ownership expected of us. In 2013, we updated our Code of Business Conduct and Ethics to provide greater clarity on what we deem to be ethical behaviour and the individual decisions and actions such behaviour demands. To ensure the Code and its purpose is through regular engagement with senior management. It allows Power Financial to ascertain that the investment is being managed in a manner consistent with our responsible management philosophy, including our CSR Statement and our Code of Business Conduct and Ethics. relevant to employees in their daily work, we will introduce The Governance and Nominating Committee of the Board business conduct and ethics training for our staff later has formal responsibility for CSR. The committee reviews this year. Also in 2013, we formalized the Corporation’s Global Anti- Bribery Policy, aimed at preventing all possible forms of corruption under applicable laws, and revised our CSR at least annually the implementation and performance of our CSR initiatives. The Board has delegated leadership on CSR initiatives to the Vice-President, General Counsel and Secretary. Statement to confirm our commitment to support and In 2013, we continued to meet regularly with our publicly respect the protection of internationally proclaimed traded subsidiaries to align our commitments and to share human rights. knowledge on CSR initiatives. 14 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT INVESTING IN SUSTAINABLE COMPANIES WITH LONG-TERM GROWTH PROSPECTS Companies in the Power Financial group have a rich tradition of acting in a responsible manner and of being We invest in quality companies with sustainable franchises and attractive growth prospects that demonstrate they are managed in a responsible manner. We take a prudent approach to risk, and incorporate analysis of environmental, social and governance (ESG) factors into our investment process whenever relevant. actively present in the communities where they operate. We value our reputation as a good corporate citizen and have recently taken steps to raise public awareness of some of our CSR activities which are conducted through our parent company, Power Corporation. In 2013, Power Corporation established a community investment microsite to showcase some of the exceptional work being done by organizations Companies in the Power Financial portfolio share our that it supports financially. These organizations, many of philosophy and commitment to acting responsibly and them run by innovative social entrepreneurs, work in the ethically, and to serving the community. Given the mainstay areas of health, education, arts and culture, community of our investments are in financial services, we believe we development, and the environment. The microsite will represent a positive force in society. Our portfolio companies be updated on a regular basis to highlight our ongoing offer life and health insurance, retirement savings programs community investments and to support employees’ and a broad range of investment vehicles, including socially volunteering initiatives. responsible investment funds. We effectively enable our customers to manage their retirement and healthcare needs, accumulate wealth and achieve financial security through savings. In the course of selling customers financial products and services, our companies also foster financial literacy, an important part of our contribution to a prosperous, empowered society. EMPOWERING OUR PEOPLE We operate our business in an efficient and environmentally responsible manner. As a holding company, we have limited direct environmental impact. Our head office has no production, manufacturing or service operations. Despite this limited impact, we work continuously to improve our environmental performance in the areas of resource conservation, energy efficiency and waste management. In 2013, we formalized and strengthened our environmental policy. We also reported to the Carbon Disclosure Project for Responsible management also defines the manner in which the second year in a row and received a ranking consistent we recruit and develop our employees. Our people typically with our efforts to improve our ongoing performance. A LONG-TERM AND SUSTAINABLE FUTURE Responsible management is a business strategy that allows us to generate long-term value and sustainable growth. By upholding the principles and values that responsible management demands, we are confident that our investments have robust business models, we have excellent relationships with our stakeholders and, most importantly, the potential to create sustained earnings year after year for Power Financial’s shareholders, while contributing to the broader good of society at large. fulfill the role of trusted advisor to our customers, helping them address their financial and insurance needs. We hire individuals who are skilled at building these “relationships of trust” and creating bonds of professionalism and mutual respect. In turn, we provide them with challenging and rewarding careers, give them the resources to develop their expertise and leadership skills, and support their volunteer efforts within the communities where we operate. A well-balanced, involved and motivated workforce gives us significant competitive advantage. STRENGTHENING RELATIONSHIPS AND MAKING A DIFFERENCE We are a large corporate group with a number of well- known brands. We recognize that our actions attract the interest of a broad cross-section of stakeholders. Again, as an element of our responsible management philosophy, we will continue to communicate meaningful information on our CSR activities via our website and other means. Where appropriate, we will also engage directly with key stakeholders. POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 15 GREAT-WEST LIFECO Great-West Lifeco Inc. 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, Irish Life, Great-West Financial and Putnam Investments. Great-West Lifeco and its companies have $758 billion in total assets under administration. 2013 Operating earnings attributable to common shareholders $2,052 MILLION 2013 Return on shareholders’ equity [1] 15.0% Total assets under administration $758 BILLION SUBSIDIARIES OPERATING EARNINGS ATTRIBUTABLE TO COMMON SHAREHOLDERS (in millions of Canadian dollars) 1,627 1,819 2009 CGAAP 2010 1,898 2011 1,946 2012 2,052 2013 100% GREAT-WEST LIFE 100% LONDON LIFE 100% 100% 100% 100%[2] CANADA LIFE IRISH LIFE GREAT-WEST FINANCIAL PUTNAM INVESTMENTS [1] Return on shareholders’ equity is calculated using operating earnings. [2] Denotes voting interest. 16 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT CANADA Great-West Life is a leading Canadian insurer, with interests GREAT-WEST LIFE LONDON LIFE CANADA LIFE 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. PRODUCTS & SERVICES > Life, disability, health and critical illness insurance for individuals, business owners and families > Retirement savings and income plans for individuals and groups > Asset management, investment management and advisory services > 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 DISTRIBUTION CHANNELS > 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 brokers associated with Canada Life > National accounts advisors, including Investors Group, associated with Canada Life > 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 MARKET POSITION > Serves the financial security needs of more than 12 million Canadians > 32% market share of individual life insurance measured by premium [1] > 24% market share of individual living benefits measured by premium [1] [1] As at September 30, 2013 [2] As at December 31, 2013 [3] As at December 31, 2012 > 27% market share of individual segregated funds [2] > 22% market share of group insurance [3] > 18% market share of group capital accumulation plan assets, serving 1.2 million member accounts [4] [4] As at June 30, 2013 > Leading market share for creditor insurance revenue premium [2] HIGHLIGHTS > No. 1 ranking of combined life insurance portfolio in Canada by sales premium > Great-West Life: 7,961 Gold Key independent advisors and independent brokers > London Life: 3,559 Freedom 55 Financial and Wealth and Estate Planning Group financial security advisors > Canada Life: 14,066 independent brokers associated with managing general agencies (MGAs), advisors associated with national accounts, Investors Group consultants who actively sell Canada Life products, direct brokers and producer groups POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 17 EU RO PE Canada Life and its Irish Life subsidiary in Europe provide a broad CANADA LIFE IRISH LIFE range of protection and wealth management products, including: payout annuities, investments and group insurance in the United Kingdom; investments and individual insurance in the Isle of Man; insurance, pension and investment products in Ireland; and pensions, critical illness and disability insurance in Germany. PRODUCTS & SERVICES > 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 DISTRIBUTION CHANNELS > Independent financial advisors and employee benefit consultants in the U.K. and Isle of Man > Independent brokers, pension and investment consultants, direct sales force and tied bank distribution in Ireland > Independent brokers and multi-tied agents in Germany > Independent reinsurance brokers; direct placements MARKET POSITION U.K. > Market leader in the group life market, with 27% share [3] > 21% share of group income protection market [3] > Among the top insurers in payout annuities, with 8% market share [1] ISLE OF MAN > A market-leading offshore life company selling into the U.K. market, with 21% share [1] IRELAND > Market leader in life assurance, with 34% market share [2] > Market leader in asset management, with 38% market share [4] > Market leader in corporate pensions, with 43% market share [4] [1] As at September 30, 2013 [2] As at December 31, 2013 [3] As at December 31, 2012 GERMANY > One of the top two insurers in the independent intermediary unit- linked market [1] > Among the top seven in the overall unit-linked market [1] [4] As at June 30, 2013 REINSURANCE > Among top ten life reinsurers in the U.S. by assumed business [3] HIGHLIGHTS* $188.0 BILLION $9.9 BILLION TOTAL ASSETS UNDER ADMINISTRATION 2013 INSURANCE & ANNUITIES SALES $15.9 BILLION ANNUAL PREMIUMS AND DEPOSITS 1 MILLION IRISH LIFE AND CANADA LIFE CUSTOMERS IN IRELAND * Including Irish Life, which became part of Great-West Lifeco’s group of companies on July 18, 2013 18 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT U NITED STATES Great-West Financial® is a leading provider of employer-sponsored GREAT-WEST FINANCIAL retirement savings plans. It offers fund management, investment and advisory services as well as record-keeping and administrative services for other retirement plan providers. Great-West Financial also offers executive benefits products, individual retirement accounts, life insurance and annuities. It markets its products and services nationwide through its sales force and distribution partners. Great-West Financial® is a registered mark of Great-West Life & Annuity Insurance Company. PRODUCTS & SERVICES > 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 and executive benefits products DISTRIBUTION CHANNELS > Brokers, consultants, advisors and third-party administrators > Financial institutions > Sales and service staff and specialized consultants MARKET POSITION > Great-West Financial serves 5.4 million customers > Nearly 30,000 defined contribution plans > 25% market share of state and local government deferred compensation plans [1] > 23% market share of individual life insurance sold through the retail bank channel [1] > 6% market share of executive benefits markets life insurance purchased by [1] As at December 31, 2013 financial institutions [2] [2] As at September 30, 2013 > Great-West Lifetime Funds are the 14th largest target date fund offering in the United States[1] HIGHLIGHTS US$243 BILLION 2013 ASSETS UNDER ADMINISTRATION 4th 2nd VOTED No. 1 LARGEST DEFINED CONTRIBUTION RECORD KEEPER IN THE U.S. LARGEST UNDERWRITER OF BANK LIFE PREMIUM IN THE U.S. BY 401(K) ADVISORS FOR BEST VALUE AND BEST WHOLESALERS [3] [3] Plan Adviser magazine 2013 survey POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 19 U NITED STATES > EU RO PE > A SIA Putnam Investments is a U.S.-based global asset manager and retirement plan provider, offering investment management services PUTNAM INVESTMENTS across a range of domestic and international asset classes. Putnam, including its subsidiary PanAgora Asset Management, Inc. distributes ser vices largely through intermediaries and its institutional sales force via its offices and strategic alliances in North America, Europe, and Asia. PRODUCTS & SERVICES > Putnam provides global asset management offering mutual funds, institutional portfolios, college savings plans, 401(k)s, IRAs and other retirement plans. > Investment capabilities include U.S. and global fixed income and equities; global asset allocation; and alternatives, including absolute return, risk allocation, low-volatility equity and hedge funds. DISTRIBUTION CHANNELS MARKET POSITION AWARDS > Putnam services global institutional, domestic retail, defined contribution, and registered investment advisor markets. > Putnam has nearly 4.5 million shareholders and retirement plan participants as well as 200 institutional clients around the world. > More than 160,000 advisors distribute Putnam products. > Putnam provides services to approximately 350 defined contribution plans. > Assets under management increased 17% year-over-year in 2013 to US$150 billion. > Putnam was ranked No. 2 out of 64 fund families based on total returns across asset classes in 2013 by Barron’s in its highly respected industry ranking. Putnam also ranked No. 2 out of 55 fund families assessed over five years. > Three Putnam funds — Capital Spectrum Fund, International Capital Opportunities Fund, and International Value Fund — received 2013 Lipper Fund Awards. HIGHLIGHTS US$150 BILLION ASSETS UNDER MANAGEMENT 200+ 100+ 75+ INVESTMENT PROFESSIONALS MUTUAL FUNDS AVAILABLE YEARS OF INVESTMENT EXPERIENCE 20 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT IGM FINANCIAL IGM Financial Inc. is one of Canada’s premier financial services companies with $132 billion in total assets under management. The company serves the financial needs of Canadians through multiple businesses, each operating distinctly within the advice segment of the financial services market. The company is committed to building on its record of delivering long-term growth and value to its clients and shareholders. 2013 Operating earnings available to common shareholders $764 MILLION SUBSIDIARIES 2013 Return on shareholders’ equity [1] 17.3% Total assets under management $132 BILLION 100% INVESTORS GROUP 100% MACKENZIE INVESTMENTS 97.5% INVESTMENT PLANNING COUNSEL [1] Return on shareholders’ equity is calculated using operating earnings. TOTAL ASSETS UNDER MANAGEMENT as at December 31 (in billions of dollars) 121 129 2009 2010 119 2011 121 132 2012 2013 OPERATING EARNINGS For the financial year (in millions of dollars) 619 759 2009 CGAAP 2010 833 2011 746 2012 764 2013 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 21 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 over 4,600 consultants to nearly one million Canadians. PRODUCTS & SERVICES > Integrated financial advice and planning for individual Canadians > Family of exclusive mutual funds, segregated funds and other investment vehicles > Insurance, securities, Solutions Banking™, mortgages and other financial services > Symphony Strategic Investment Planning™ supports consultants in building optimized risk- adjusted portfolios for clients > Enhancements to iProfile™ Managed Asset Program in 2013 provide options for capital gains deferral and regular monthly cash flow DISTRIBUTION CHANNELS MARKET POSITION > Financial products, services and advice offered through an exclusive network of 4,673 consultants > $68.3 billion in assets under management > Significant market position in mutual fund management, with approximately 7% of industry long-term mutual fund assets under management > Among Canada’s leading providers of financial planning services HIGHLIGHTS $6.7 BILLION MUTUAL FUND SALES $68.3 BILLION TOTAL ASSETS UNDER MANAGEMENT 109 OFFICES ACROSS CANADA 4,673 CONSULTANTS 22 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT MACKENZIE INVESTMENTS Mackenzie provides investment management services through multiple product offerings utilizing proprietary investment research and experienced investment professionals. The company distributes its investment services through industry distribution channels to both retail and institutional investors. PRODUCTS & SERVICES > Offers mutual funds, pooled funds, segregated accounts and separate accounts > Significantly revitalized product lineup in 2013 with 27 fund mergers including a number of fund enhancements, changes to fund investment objectives and the launch of a number of new products to serve investor needs > In 2013, launched the Mackenzie Private Wealth Program, designed for households with more than $100,000 to invest > Created Series D of its funds for the discount brokerage channel DISTRIBUTION CHANNELS > Distribution of products through retail, strategic alliances and institutional channels > Investment products offered through 30,000 independent financial advisors, retail brokers, insurance agents, banks, pension consulting firms and financial institutions MARKET POSITION > $65.3 billion in assets under management > Significant market position in mutual fund management, with approximately 4.5% of industry long-term mutual fund assets under management > 43% of Mackenzie fund assets were rated 4 or 5 Star by Morningstar † and 72% were in the first or second quartile relative to their peers over the most recent 10-year period HIGHLIGHTS $6.7 BILLION MUTUAL FUND SALES $65.3 BILLION TOTAL ASSETS UNDER MANAGEMENT 78% OF MACKENZIE FUND ASSETS RATED 3, 4 OR 5 STAR BY MORNINGSTAR POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 23 PARGESA GROUP 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 55.6 per cent equity interest (75.4 per cent of the voting rights) in Pargesa Holding SA, the Pargesa group’s parent company based in Geneva, Switzerland. Pargesa, through its affiliated Belgian holding company, Groupe Bruxelles Lambert, has holdings in major companies based in Europe. PARGESA 50.0%[1] GROUPE BRUXELLES LAMBERT 2013 Operating earnings SF251 MILLION IMERYS 56.2% LAFARGE 21.0% TOTAL 3.6% GDF SUEZ 2.4% SUEZ ENVIRONNEMENT 7.2% PERNOD RICARD 7.5% SGS 15.0% Net asset value SF8.8 BILLION [1] Representing 52% of the voting rights. 24 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT IMERYS Imerys extracts, transforms, and processes a unique range of minerals to provide functionalities that are vital to its customers’ products and production processes. These speciality products have a very wide range of uses and are developing in many growth markets. Value of investment €2,709 million Capital/voting rights 56.2% / 71.4% KEY 2013 FI NAN CIAL DATA Market capitalization Turnover 4,819 3,698 LAFARGE Lafarge is a global leader in cement, aggregates and readymix concrete. The group Value of investment €3,285 million Capital/voting rights 21.0% / 27.2% has two strategic priorities: the growing cement market and innovation, particularly in relation to sustainable construction. KEY 2013 FI NAN CIAL DATA Market capitalization Turnover 15,653 15,198 TOTAL Total is one of the leading international oil and gas groups. The company operates in more than 130 countries and covers every oil industry sector, from upstream to downstream. Total is also a major player in chemicals and is committed to the development of renewable energy. Value of investment €3,818 million Capital/voting rights 3.6% / 3.3% KEY 2013 FI NAN CIAL DATA Market capitalization Turnover 105,878 189,542 GDF SUEZ Created from the merger between Suez and Gaz de France in 2008, GDF Suez covers Value of investment €935 million [1] Capital/voting rights 2.4% / 2.4% the whole energy chain, in electricity, natural gas and services. Its acquisition of International Power in 2011 gives it a leading position in the international energy market. KEY 2013 FI NAN CIAL DATA Market capitalization Turnover 41,247 81,278 [1] Value at €18.32 per share, based on the value of the convertible bond issued in 2013. SUEZ ENVIRONNEMENT Suez Environnement holds a leading position in the global environmental market and Value of investment €401 million [2] Capital/voting rights 7.2% / 7.2% operates in more than 36 countries. The group is active across all water and waste cycles, serving both local authorities and private sector operators. KEY 2013 FI NAN CIAL DATA Market capitalization Turnover 6,646 14,644 [2] Value at €11.45 per share, based on the value of the convertible bond issued in 2013. PERNOD RICARD Since its founding in 1975, Pernod Ricard has achieved significant organic growth and Value of investment €1,647 million Capital/voting rights 7.5% / 6.9% made numerous acquisitions, in particular Seagram in 2001, Allied Domecq in 2005 and Vin&Sprit in 2008, thus becoming the world’s co-leader in the wine and spirits market. SGS Based in Geneva, Switzerland, SGS is the world’s leading inspection, verification, testing and certification company, recognized as the global benchmark for quality and integrity. With more than 80,000 employees, SGS operates a network of more than 1,650 offices and laboratories around the world. KEY 2013 FI NAN CIAL DATA Market capitalization Turnover 22,611 8,575 [3] [3] June 30, 2013 year-end Value of investment €1,962 million Capital/voting rights 15.0% / 15.0% KEY 2013 FI NAN CIAL DATA Market capitalization (SF million) Turnover (SF million) 16,052 5,830 Key 2013 financial data in millions of euros, unless otherwise noted. POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 25 REVIEW OF FINANCIAL PERFORMANCE All tabular amounts are in millions of canadian dollars, unless otherwise noted. MARCH 19, 2014 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 document, other than statements of historical fact, are forward-looking statements based changes in accounting policies and methods used to report financial condition (including uncertainties associated with critical accounting assumptions and on certain assumptions and reflect the Corporation’s current expectations, or estimates), the effect of applying future accounting changes, business competition, with respect to disclosure regarding the Corporation’s public subsidiaries, reflect operational and reputational risks, technological change, changes in government such subsidiaries’ disclosed current expectations. Forward-looking statements regulation and legislation, changes in tax laws, unexpected judicial or regulatory are provided for the purposes of assisting the reader in understanding the proceedings, catastrophic events, the Corporation’s and its subsidiaries’ ability Corporation’s financial performance, financial position and cash flows as at to complete strategic transactions, integrate acquisitions and implement other and for the periods ended on certain dates and to present information about growth strategies, and the Corporation’s and its subsidiaries’ success in anticipating management’s current expectations and plans relating to the future and the reader and managing the foregoing factors. is cautioned that such statements 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 Corporation and its subsidiaries and their businesses, and could cause actual results to differ materially from current expectations of estimated or anticipated events or results. These factors include, but are not limited to: the impact or unanticipated impact of general economic, political and market factors in North America and internationally, interest and foreign exchange rates, global equity and capital markets, management of market liquidity and funding risks, The reader is cautioned to consider these and other factors, uncertainties and potential events carefully and not to put undue reliance on forward-looking statements. Information contained in forward-looking statements is based upon certain material assumptions that were applied in drawing a conclusion or making a forecast or projection, including management’s perceptions of historical trends, current conditions and expected future developments, as well as other considerations that are believed to be appropriate in the circumstances, including that the list of factors in the previous paragraph, 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. Additional information about the risks and uncertainties of the Corporation’s business and material factors or assumptions on which information contained in forward-looking statements is based is provided in its disclosure materials, including its most recent MD& A and its most recent Annual Information Form, filed with the securities 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, 2013 (the 2013 Consolidated Financial Statements or the Financial Statements); International Financial Reporting Standards (IFRS); previous Canadian generally accepted accounting principles (previous Canadian GAAP). 26 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT OVERVIEW Power Financial, a subsidiary of Power Corporation, is a holding company The purchase price of €1.3 billion has all been allocated to assets and liabilities with substantial interests in the financial services sector in Canada, the of Irish Life, primarily based on their fair values at the acquisition date of July 18, United States and Europe, through its controlling interests in Lifeco and 2013. As at December 31, 2013, the valuation of assets acquired and liabilities IGM. Power Financial also holds, together with the Frère Group of Belgium, assumed is substantially complete. The excess of the purchase price over the a controlling interest in Pargesa. fair value of net assets acquired of $378 million has been allocated to goodwill. Lifeco (TSX: GWO) and IGM (TSX: IGM) are public companies listed on the The integration of the business is progressing well and remains on track to Toronto Stock Exchange. Pargesa is a public company listed on the Swiss deliver cost synergies of €40 million per year with a total cost of integration Stock Exchange (SIX: PARG). of €60 million. As at December 31, 2013, Power Financial and IGM held 67.0% and 4.0%, Power Financial Europe B.V., a wholly owned subsidiary of Power Financial, respectively, of Lifeco’s common shares, representing approximately 65.0% and the Frère Group of Belgium each hold a 50% interest in Parjointco, which, of the voting rights attached to all outstanding Lifeco voting shares. As at as at December 31, 2013, held a 55.6% interest in Pargesa, representing 75.4% December 31, 2013, Power Financial and Great-West Life, a subsidiary of Lifeco, of the voting rights of that company. held 58.6% and 3.6%, respectively, of IGM’s common shares. Pargesa’s holdings in major companies based in Europe are held through its On July 18, 2013, Lifeco completed its €1.3 billion acquisition of Irish Life. affiliated Belgian holding company, GBL, which is listed on the Brussels Stock Established in 1939, Irish Life is the largest life and pensions group and Exchange (BEL20: GBLB). As at December 31, 2013, Pargesa held a 50% interest investment manager in Ireland. in GBL, representing 52% of the voting rights. Funding for the transaction included the net proceeds of the issuance by Lifeco As at December 31, 2013, Pargesa’s portfolio was substantially composed of approximately $1.25 billion of subscription receipts completed on March 12, of investments in: Imerys (mineral-based specialties for industry); Lafarge 2013, of which the Corporation subscribed for $550 million. On completion (cement aggregates and concrete); Total (oil, gas and alternative energies); of the acquisition of Irish Life on July 18, 2013, the 48,660,000 subscription GDF Suez (electricity, natural gas, and energy and environmental services); receipts were automatically exchanged on a one-for-one basis for common Suez Environnement (water and waste management services); Pernod Ricard shares of Lifeco. (wines and spirits); and SGS (testing, inspection and certification). On April 18, 2013, Lifeco issued €500 million of 10-year bonds denominated In addition to its strategic participations, which will still form most of the in euros with an annual coupon of 2.50%. The bonds, rated A+ by Standard & portfolio, GBL undertook in 2012 to develop over time: Poor’s Ratings Services, are listed on the Irish Stock Exchange. The issuance of euro-denominated debt results in a natural hedge of a portion of Lifeco’s net investment in euro-denominated foreign operations. [i] An incubator portfolio comprised of interests in a reduced number of listed and unlisted companies. The investments would be smaller in size than the strategic participations; [ii] investments in private equity and other funds where GBL acts as an anchor investor. Additional information on GBL is available on GBL’s website (www.gbl.be). BASIS OF PRESENTATION The 2013 Consolidated Financial Statements of the Corporation have been As described above, the Pargesa portfolio consists primarily of investments in prepared in accordance with IFRS and are presented in Canadian dollars. Imerys, Lafarge, Total, GDF Suez, Suez Environnement, Pernod Ricard and SGS, Lifeco and IGM are controlled by Power Financial and their financial statements are consolidated with those of Power Financial. Consolidated which are all held through GBL. GBL’s financial statements are consolidated with Pargesa’s financial statements. financial statements present, as a single economic entity, the assets, > GBL holds a 56.2% controlling interest in Imerys and therefore consolidates liabilities, revenues, expenses and cash flows of the parent company and the financial statements of Imerys with its own. its operating subsidiaries (consolidation of financial statements consists of adding, on a line-by-line basis, the different components of the financial statements of Power Financial (parent) and Lifeco and IGM (its subsidiaries) and eliminating intercompany balances and transactions). Power Financial’s investment in Pargesa is held through Parjointco. Parjointco’s only investment is its joint controlling interest in Pargesa. The investment in Parjointco is accounted for by Power Financial in accordance with the equity method of accounting as the Corporation has joint control over its relevant activities. The equity method is a method of accounting whereby the investment is initially recognised at cost and adjusted thereafter for the post-acquisition change in the investor’s share of the investee’s net assets (shareholders’ equity). The investor’s profit or loss includes its share of the investee’s profit or loss and the investor’s other comprehensive income includes its share of the investee’s other comprehensive income. > Lafarge, over which GBL has significant influence holding a 21% equity interest, is accounted for by GBL using the equity method and, consequently, the contribution from Lafarge to GBL’s earnings consists of GBL’s share of Lafarge’s net earnings. > Portfolio investments in which GBL holds less than a 20% equity interest consisting of Total, GDF Suez, Suez Environnement, Pernod Ricard and SGS, are classified for accounting purposes as available-for-sale investments. POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 27 Accounting for the Corporation’s holdings is as follows: DEGREE OF CONTROL BASIS OF ACCOUNTING EFFECT ON EARNINGS AND OTHER COMPREHENSIVE INCOME IMPAIRMENT TESTING IMPAIRMENT REVERSAL Subsidiaries > Operating company > Consolidated with > Goodwill and indefinite life > Goodwill impairment cannot subsidiaries > Consolidation non-controlling interest intangible assets are annually tested for impairment be reversed > Intangible asset impairment is reversed if there is evidence of recovery of value Holdings over which the Corporation exercises significant influence or joint control > Equity method of accounting > Earnings and other > Entire investment is tested > Reversed if there is evidence comprehensive income recorded represent the Corporation’s share for impairment the investment has recovered its value Portfolio investments > Available for sale (AFS) > Earnings consist of dividends received > Impairment testing is done at the individual investment level > The investments are marked to market through other comprehensive income > Earnings are reduced by impairment charges, if any > A significant or prolonged decline in the value of the investment results in an impairment charge > Cannot be reversed even if there is a subsequent recovery of value > A subsequent decrease in stock price leads to a further impairment This summary of accounting should be read in conjunction with the following Management uses these financial measures in its presentation and analysis of notes to the Corporation’s 2013 Consolidated Financial Statements: Basis of the financial performance of Power Financial, and believes that they provide presentation and summary of significant accounting policies, Investments, additional meaningful information to readers in their analysis of the results Investments in jointly controlled corporations and associate, Goodwill and of the Corporation. Operating earnings, as defined by the Corporation, intangible assets, and Non-controlling interests. assists the reader in comparing the current period’s results to those of previous periods as items of a non-recurring nature are not included in this NON - IFRS FINANCIAL M EASU RES AN D PRESENTATION S non-IFRS measure. In analyzing the financial results of the Corporation and consistent with the presentation in previous years, net earnings attributable to common shareholders are classified in the section “Results of Power Financial Corporation” as: > operating earnings attributable to common shareholders; and Operating earnings attributable to common shareholders 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 the “Results of Power Financial > other items or non-operating earnings, which include the after-tax Corporation – Earnings Summary – Condensed Supplementary Statements impact of any item that management considers to be of a non-recurring of Earnings” below. nature or that could make the period-over-period comparison of results In this review of financial per formance, a non-consolidated basis of from operations less meaningful, and also include the Corporation’s share presentation is also used by the Corporation to present and explain its of any such item presented in a comparable manner by its subsidiaries results, financial position and cash flows. In this basis of presentation, and Pargesa. Power Financial’s interests in Lifeco and IGM are accounted for using the equity method. This non-consolidated basis, which is a non-IFRS presentation, is useful as it isolates the parent’s corporate activities from those of operating subsidiaries reflecting their respective contributions. RESULTS OF POWER FINANCIAL CORPORATION EARN ING S SU M MARY — CON DEN SED SU PPLEM ENTARY STATEM ENTS OF EARN ING S represent most of the earnings of Power Financial, are accounted for using the equity method. The contribution to net earnings attributable to common The following table shows a reconciliation of non-IFRS financial measures shareholders as presented in Note 34 – Segmented Information to the 2013 used herein for the periods indicated, with the reported results in accordance Consolidated Financial Statements of the Corporation is comprised of with IFRS for net earnings attributable to common shareholders and earnings operating earnings and other items. per share. In this section, the contributions from Lifeco and IGM, which 28 28 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT REVIEW OF FINANCIAL PERFORMANCE NON - CON SOLIDATED BASI S T WELVE MONTHS ENDED DECEMBER 31 Contribution to operating earnings from: Lifeco IGM Pargesa Results from corporate activities Dividends on perpetual preferred shares Operating earnings attributable to common shareholders Other items Lifeco IGM Pargesa Net earnings attributable to common shareholders Earnings per share (attributable to common shareholders) – operating earnings – non-operating earnings – net earnings 2013 1,391 446 76 1,913 (74) (131) 1,708 151 (1) 38 188 1,896 2.40 0.27 2.67 2012 1,329 433 102 1,864 (69) (117) 1,678 (95) 7 28 (60) 1,618 2.37 (0.08) 2.29 OPER ATING E ARNING S AT TRIBUTAB LE TO COMMON SHAREHOLDERS CONTRIBUTION TO OPER ATING E ARNING S FROM LIFECO, IG M AND PARG ESA Operating earnings attributable to common shareholders for the year ended Power Financial’s share of operating earnings from Lifeco, IGM and Pargesa December 31, 2013 were $1,708 million or $2.40 per share, compared with increased by 2.6% for the year ended December 31, 2013, compared with the $1,678 million or $2.37 per share in the corresponding period in 2012. same period in 2012, from $1,864 million to $1,913 million. Included in operating earnings are the Corporation’s share of restructuring Lifeco and acquisition costs associated with the Irish Life acquisition for an amount Lifeco’s contribution to Power Financial’s operating earnings for the year of $68 million in 2013 and a charge of $36 million related to the six-month ended December 31, 2013, was $1,391 million, compared with $1,329 million for equity put options on the S&P 500 purchased by Lifeco and Power Financial the corresponding period in 2012. Details are as follows: (see also the “Risk Factors” section). > Lifeco reported operating earnings attributable to common shareholders > Operating earnings attributable to common shareholders excluding these of $2,052 million or $2.108 per share for the year ended December 31, 2013, costs were $1,812 million or $2.55 per share for the twelve-month period compared with $1,946 million or $2.049 per share in the corresponding ended December 31, 2013. period in 2012, an increase of 2.9% on a per share basis. > In 2013, Irish Life contributed $85 million (excluding restructuring costs), to Lifeco’s earnings. Included in Lifeco’s earnings for 2013 were restructuring and acquisition costs of $97 million after tax associated with the Irish Life acquisition. The following table shows a summary of the results of Lifeco’s operating segments: T WELVE MONTHS ENDED DECEMBER 31 Operating earnings attributable to Lifeco common shareholders Canada United States Europe Lifeco Corporate 2013 1,148 276 701 (73) 2,052 2012 1,038 321 615 (28) 1,946 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 29 29 IGM Financial > IGM reported operating earnings available to common shareholders IGM’s contribution to Power Financial’s operating earnings was $446 million of $764 million or $3.02 per share for the year ended December 31, 2013, for the year ended December 31, 2013, compared with $433 million for the compared with $746 million or $2.92 per share in the same period in 2012, corresponding period in 2012. Details are as follows: an increase of 3.4% on a per share basis. Operating earnings before interest and taxes (a non-IFRS measure) of IGM’s reportable segments are as follows: T WELVE MONTHS ENDED DECEMBER 31 Investors Group Mackenzie Corporate and other 2013 718 251 110 1,079 2012 693 251 112 1,056 > Total assets under management were $131.8 billion as at December 31, 2013, the highest year-end level in the history of IGM, compared with $120.7 billion as at December 31, 2012. The average daily mutual fund assets under management were as follows: QUARTERS (IN BILLIONS OF DOLL ARS) First Second Third Fourth 2013 106.9 108.4 110.2 114.6 2012 103.6 100.9 101.0 102.4 > In the second quarter of 2012, Investors Group, a subsidiary of IGM, > Pargesa’s share of dividends recorded on these investments was announced a number of changes in the pricing of its mutual funds and SF232 million in the twelve-month period ended December 31, 2013, product enhancements designed to expand its services to clients. These compared with SF270 million in the corresponding period in 2012. The changes became fully annualized in the third quarter of 2013. decrease in 2013, is mainly due to the partial disposal of GDF Suez shares Pargesa in the second quarter of 2013 and, to a lesser extent, the disposal of a Pargesa’s contribution to Power Financial’s operating earnings was $76 million 0.3% interest in Total in the fourth quarter. for the twelve-month period ended December 31, 2013, compared with a > Operating earnings for the twelve-month period ended December 31, 2013, contribution of $102 million in the corresponding period in 2012. Details are include Pargesa’s share of a non-cash charge recorded by GBL in the amount as follows: > Pargesa’s operating earnings for the twelve-month period ended December 31, 2013 were SF251 million, compared with SF346 million in the corresponding period in 2012. of SF83 million related to call options embedded in bonds exchangeable in Suez Environnement shares (issued in 2012) and GDF Suez shares (issued in 2013) and on bonds issued by GBL in 2013 convertible into GBL shares. The loss is the result of the rise of the price of the shares underlying the bonds. > The contribution from Imer ys in the twelve-month period ended RESU LTS OF CORPOR ATE ACTIVITIES December 31, 2013 was SF110 million, compared with SF108 million in the corresponding period of 2012. > The contribution from Lafarge in the twelve-month period ended December 31, 2013 was SF72 million, compared with SF93 million in the corresponding period of 2012. > A significant portion of Pargesa’s earnings consists of dividends received from Total (approved in the second, third and fourth quarter), GDF Suez (approved in the second and third quarter), Suez Environnement (approved in the second quarter) and Pernod Ricard (approved in the second and fourth quarter). SGS, in which a 15% interest was acquired in March 2013, did not contribute to the operating earnings of 2013 since its 2013 dividend was paid prior to the acquisition. In accordance with IFRS, the Pargesa group records dividends as earnings in the period they are approved. Results of corporate activities include interest on cash and cash equivalents, operating expenses, financing charges, depreciation and income taxes. Corporate activities represented a net charge of $74 million in the twelve- month period ended December 31, 2013, compared with a net charge of $69 million in the corresponding period in 2012. Results from corporate activities include a charge of $18 million related to the six-month equity put options on the S&P 500 purchased by the Corporation in 2013. (see also the “Risk Factors” section). Results from corporate activities also include an amount of $9 million related to the partial recognition of the benefit of loss carry forwards of the Corporation following the renewal of the tax loss consolidation transactions with IGM. 30 30 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT REVIEW OF FINANCIAL PERFORMANCE OTHER ITEM S T WELVE MONTHS ENDED DECEMBER 31 Lifeco Litigation provision Share of IGM other items IGM Non-cash income tax charge Changes in the status of certain income tax filings Restructuring and other charges Share of Lifeco other items Pargesa Impairment charges on GDF Suez Gain on partial disposal of GDF Suez Gain on partial disposal of Total Gain on partial disposal of Pernod Ricard Gain on disposal of Arkema Other (charge) income 2013 151 − − − (6) 5 (13) 15 38 − − (2) 188 2012 (96) 1 (4) 14 − (3) (48) − − 46 43 (13) (60) Other items in 2013 mainly comprised the Corporation’s share of: Other items in 2012 mainly comprised the Corporation’s share of: > A recovery of $226 million, net of tax, recorded by Lifeco in the fourth > A charge reported by Lifeco relating to litigation provision adjustments quarter relating to a decision of the Court of Appeal for Ontario on of $99 million (of which $3 million was recorded by IGM), net of tax, in the February 3, 2014 in regards to the involvement of the participating accounts fourth quarter. of Lifeco subsidiaries London Life and Great-West Life in the financing of the London Insurance Group Inc. acquisition in 1997. > A non-cash charge recorded by IGM in the second quarter resulting from increases in Ontario corporate income tax rates and their effect on the > After-tax restructuring and other charges recorded by IGM in the fourth deferred income tax liability related to indefinite life intangible assets quarter for an amount of $6 million. > An impairment charge recorded by GBL, in the first quarter, on its investment in GDF Suez for an amount of $13 million. arising from prior business acquisitions, as well as the recording in the fourth quarter of 2012 of a favourable change in income tax provision estimates related to certain tax filings. > A gain recorded by GBL in the second quarter on a partial disposal of its interest in GDF Suez for an amount of $15 million. > GBL’s impairment of its investment in GDF Suez in the fourth quarter, representing an amount of $48 million, net of foreign currency gains > The gain realized by GBL in the fourth quarter on the partial disposal of its interest in Total for an amount of $38 million. recorded by Pargesa and the Corporation. > The gains realized by GBL in the first quarter on the partial disposal of its interest in Pernod Ricard in the amount of $46 million and on the disposal of its interest in Arkema in the amount of $43 million. > Goodwill impairment and restructuring charges recorded by Lafarge in the first and second quarters shown in the table as other charge. NET E ARNING S AT TRIBUTAB LE TO COMMON SHAREHOLDERS Net earnings attributable to common shareholders for the twelve-month period ended December 31, 2013 were $1,896 million or $2.67 per share, compared with $1,618 million or $2.29 per share in the corresponding period in 2012. POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 31 31 CONDENSED SUPPLEMENTARY BALANCE SHEETS CON SOLIDATED BASI S The following table presents the components of the Corporation’s condensed consolidated balance sheets. The Lifeco and IGM columns are their condensed consolidated balance sheets and Power Financial’s column is its non-consolidated balance sheet. ASSETS Cash and cash equivalents Investments Investments in Lifeco and IGM Investment in Parjointco Investments in a jointly controlled corporation and an associate Funds held by ceding insurers Reinsurance assets Intangible assets Goodwill Other assets Interest on account of segregated fund policyholders Total assets LIABILITIES Insurance and investment contract liabilities Obligations to securitization entities Debentures and debt instruments Capital trust debentures Other liabilities Insurance and investment contracts on account of segregated fund policyholders Total liabilities EQUITY Perpetual preferred shares Common shareholders’ equity Non-controlling interests Total equity Total liabilities and equity LIFECO IGM ELIMINATIONS AND RECLASSIFICATIONS DECEMBER 31, 2013 DECEMBER 31, 2012 POWER FINANCIAL CONSOLIDATED BASIS POWER FINANCIAL 925 27 13,285 2,437 – – – – – 120 – 2,791 128,574 350 – 227 10,832 5,070 3,456 5,812 8,014 160,779 1,082 5,920 718 (454) 389 (14,353) 4,344 3,313 134,910 123,603 – 2,437 227 – 2,121 – 10,832 10,599 5,070 5,281 9,105 8,726 2,064 4,933 8,673 7,848 – – – – – 637 (87) – – – – 1,825 2,656 679 – – 160,779 105,432 16,794 325,905 12,880 (13,868) 341,711 268,586 – – 250 – 431 132,063 – 5,740 163 7,161 – 5,572 1,325 – 1,275 – – (40) – (111) 132,063 120,712 5,572 7,275 163 8,756 4,701 5,817 164 8,095 – 160,779 – – 160,779 105,432 681 305,906 8,172 (151) 314,608 244,921 2,755 13,358 – 16,113 2,314 15,323 2,362 19,999 150 4,558 – (2,464) (19,881) 8,628 4,708 (13,717) 2,755 13,358 10,990 27,103 2,255 11,308 10,102 23,665 16,794 325,905 12,880 (13,868) 341,711 268,586 The consolidated balance sheets include the Corporation’s assets and Liabilities increased from $244.9 billion at December 31, 2012 to $314.6 billion at liabilities as well as Lifeco’s and IGM’s. December 31, 2013, mainly due to Lifeco’s acquisition of Irish Life. Total assets of the Corporation increased to $341.7 billion at December 31, 2013, > Insurance and investment contract liabilities increased by $11.4 billion, compared with $268.6 billion at December 31, 2012. primarily due to the $7.0 billion impact of Lifeco’s acquisition of Irish Life. > Lifeco’s acquisition of Irish Life resulted in increases in investments and > Insurance and investment contract liabilities on account of segregated other assets for an amount of $10.2 billion and segregated fund assets for fund policyholders increased by $55.3 billion, primarily due to the an amount of $36.3 billion. > Investments at December 31, 2013 were $134.9 billion, an $11.3 billion $36.3 billion impact of the Irish Life acquisition, market value gains and investment income of $12.9 billion, and the impact of currency movements increase from December 31, 2012, primarily related to Lifeco. See also the of $7.2 billion. discussion in the “Cash Flows” section below. 32 32 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT REVIEW OF FINANCIAL PERFORMANCE NON - CON SOLIDATED BASI S In the non-consolidated basis of presentation, Lifeco and IGM are accounted for by the Corporation using the equity method. This non-consolidated basis of presentation, which is not in accordance with IFRS, enhances the review of financial performance and assists the reader by identifying changes in Power Financial’s non-consolidated balance sheets which includes its investments in Lifeco and IGM at equity. DECEMBER 31 ASSETS Cash and cash equivalents [1] Investments Investments in subsidiaries at equity Investment in Parjointco at equity Other assets Total assets LIABILITIES Debentures Other liabilities Total liabilities EQUITY Perpetual preferred shares Common shareholders’ equity Total equity Total liabilities and equity 2013 2012 925 27 13,285 2,437 120 16,794 250 431 681 2,755 13,358 16,113 16,794 984 – 11,042 2,121 102 14,249 250 436 686 2,255 11,308 13,563 14,249 [1] Non-consolidated basis of presentation – cash equivalents include $454 million ($625 million at December 31, 2012) of fixed income securities with maturities of more than 90 days. In the 2013 Consolidated Financial Statements, this amount is classified in investments. Cash and cash equivalents held by Power Financial amounted to $925 million In managing its cash and cash equivalents, Power Financial may hold cash at December 31, 2013, compared with $984 million at the end of December 2012 balances or invest in short-term paper or equivalents. As well, Power Financial (see the “Cash Flows – Non-consolidated Basis” section below for details). The holds deposits denominated in foreign currencies and can be exposed to amount of quarterly dividends declared by the Corporation but not yet paid fluctuations in exchange rates. To mitigate the effect of such fluctuations, was $282 million at December 31, 2013. Dividends declared by IGM but not yet Power Financial may, from time to time, enter into currency hedging received by the Corporation were $80 million at December 31, 2013. transactions with counterparties having high credit ratings. As at December 31, 2013, approximately 91% of the $925 million of cash and cash equivalents was denominated in Canadian dollars or in foreign currencies with currency hedges in place. The carrying value of Power Financial’s investments in Lifeco, IGM and Parjointco increased to $15,722 million at December 31, 2013, compared with $13,163 million at December 31, 2012, as outlined in the following table: Carrying value, at the beginning of the year Investment in subsidiaries Share of operating earnings Share of other items Share of other comprehensive income (loss) Dividends Other, including effect of change in ownership Carrying value, at December 31, 2013 LIFECO 8,488 545 1,391 151 688 (810) 115 IGM PARJOINTCO TOTAL 2,554 2,121 13,163 − 446 (1) 39 (318) (3) − 76 38 260 (63) 5 545 1,913 188 987 (1,191) 117 10,568 2,717 2,437 15,722 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 33 33 SHAREHOLDERS’ EQ U IT Y > An increase of $270 million mainly related to the Corporation’s share of Perpetual preferred shares On February 28, 2013, the Corporation issued other comprehensive income of Pargesa. 12,000,000 4.80% Non-Cumulative First Preferred Shares, Series S, for gross > A net decrease of $15 million in 2013 related to share-based compensation proceeds of $300 million. of the Corporation and its subsidiaries. On December 11, 2013, the Corporation issued 8,000,000 4.20% Non- > In the twelve-month period ended December 31, 2013, 2,069,600 common Cumulative 5-year Rate Reset First Preferred Shares, Series T, for gross shares (930,400 in the corresponding period of 2012) were issued by the proceeds of $200 million. On January 31, 2014, the Corporation redeemed all of its $175 million 6.00% Non-Cumulative 5-year Rate Reset First Preferred Shares, Series M. Common shareholders’ equity Common shareholders’ equity was Corporation pursuant to the Corporation’s Employee Stock Option Plan for an aggregate consideration of $57 million ($25 million in 2012), including an amount of $12 million ($5 million in 2012) representing the cumulative expenses related to these options. $13,358 million at December 31, 2013, compared with $11,308 million at As a result of the above, the book value per common share of the Corporation December 31, 2012. This $2,050 million increase was primarily due to: was $18.78 at December 31, 2013, compared with $15.95 at the end of 2012. > A $1,003 million increase in retained earnings, reflecting mainly net earnings of $2,027 million, less dividends declared of $1,127 million and other increases of $103 million principally due to a dilution gain related to the decrease in ownership of Lifeco as a result of Lifeco issuing common shares in the third quarter of 2013. OUTSTAN DING N U M B ER OF COM MON SHARES As of the date hereof, there were 7 11,173,680 common shares of the Corporation outstanding, compared with 709,104,080 as at December 31, 2012. The increase in the number of outstanding common shares reflects the exercise of options under the Corporation’s Employee Stock Option Plan. As > An increase in reserves (other comprehensive income and amounts related of the date hereof, options were outstanding to purchase up to an aggregate to share-based compensation) of $990 million, consisting of: of 7,522,386 common shares of the Corporation under the Corporation’s > An increase of $296 million due to actuarial gains related to pension Employee Stock Option Plan. plans of the Corporation and of its subsidiaries. The Corporation filed a short-form base shelf prospectus dated November 23, > Positive foreign currency translation adjustments of $566 million. 2012, pursuant to which, for a period of 25 months thereafter, the Corporation > A decrease of $127 million related to the Corporation and its subsidiaries’ available-for-sale investments and cash flow hedges. may issue up to an aggregate of $1.5 billion of First Preferred Shares, common shares and unsecured 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. CASH FLOWS CON SOLIDATED BASI S (CON DEN SED) T WELVE MONTHS ENDED DECEMBER 31 Cash flow from: Operating activities Financing activities Investing activities Effect of changes in exchange rates on cash and cash equivalents Increase (decrease) in cash and cash equivalents Cash and cash equivalents, at the beginning of the year Cash and cash equivalents, at December 31 2013 5,651 618 (5,428) 190 1,031 3,313 4,344 2012 5,369 (561) (4,872) (8) (72) 3,385 3,313 On a consolidated basis, cash and cash equivalents increased by $1,031 million > Operating activities of IGM which, after payment of commissions, in the twelve-month period ended December 31, 2013, compared with a generated cash flows of $715 million, compared with $710 million in the decrease of $72 million in the corresponding period of 2012. corresponding period of 2012. Operating activities produced a net inflow of $5,651 million in the twelve- Cash flows from financing activities, which include dividends paid on the month period ended December 31, 2013, compared with a net inflow of common and preferred shares of the Corporation, as well as dividends paid $5,369 million in the corresponding period of 2012. by subsidiaries to non-controlling interests, represented a net inflow of Operating activities during the twelve-month period ended December 31, 2013, compared to the same period in 2012, included: $618 million in the twelve-month period ended December 31, 2013, compared with a net outflow of $561 million in the corresponding period of 2012. > Lifeco’s cash flow from operations, which was a net inflow of $5,026 million, compared with a net inflow of $4,722 million in the corresponding period in 2012. Cash provided by operating activities is used by Lifeco primarily to 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. 34 34 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT REVIEW OF FINANCIAL PERFORMANCE Financing activities during the twelve-month period ended December 31, 2013, Cash flows from investing activities resulted in a net outflow of $5,428 million compared to the same period in 2012, included: in the twelve-month period ended December 31, 2013, compared with a net > Lifeco’s cash flow from financing activities, representing a net inflow outflow of $4,872 million in the corresponding period of 2012. of $493 million, compared with a net outflow of $1,037 million in the Investing activities during the twelve-month period ended December 31, 2013, corresponding period of 2012. compared to the same period in 2012, included: > Financing activities at IGM representing a net inflow of $117 million, > Investing activities at Lifeco resulted in a net outflow of $4,813 million, compared with a net inflow of $136 million in the corresponding period compared with a net outflow of $3,838 million in the corresponding period of 2012. of 2012. > Dividends paid on common and preferred shares by the Corporation of > Investing activities at IGM resulted in a net outflow of $808 million, $1,123 million, compared with $1,105 million in the corresponding period compared with a net outflow of $839 million in the corresponding period of 2012. of 2012. > Issuance of common shares of the Corporation for an amount of $45 million > In addition, the Corporation decreased its level of fixed income securities pursuant to the Corporation’s Employee Stock Option Plan, compared with with maturities of more than 90 days, resulting in a net inflow of $171 million, $20 million in the corresponding period of 2012. compared with an increase in the corresponding period of 2012 for a net > Issuance of preferred shares by the Corporation for an amount of $500 million, compared with an issuance of $250 million in the outflow of $195 million. corresponding period of 2012. NON - CON SOLIDATED BASI S T WELVE MONTHS ENDED DECEMBER 31 CASH FLOW FROM OPERATING ACTIVITIES Net earnings before dividends on perpetual preferred shares Earnings from Lifeco, IGM and Parjointco 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 Share issue costs CASH FLOW FROM INVESTING ACTIVITIES Acquisition of Lifeco common shares Purchase of investment Other INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS Cash and cash equivalents, at the beginning of the year Cash and cash equivalents, at December 31 2013 2,027 (910) (11) 1,106 (1,123) 500 45 (14) (592) (545) (26) (2) (573) (59) 984 925 2012 1,735 (624) 8 1,119 (1,105) 250 20 (7) (842) – – – – 277 707 984 Power Financial is a holding company – corporate cash flows from operating Dividends declared by Lifeco and IGM during the twelve-month period ended activities, before payment of dividends on preferred shares and on common December 31, 2013 on their common shares amounted to $1.23 and $2.15 per shares, are principally made up of dividends received from Lifeco, IGM share, respectively, the same as in the corresponding period in 2012. In the and Parjointco and income from investments, less operating expenses, twelve-month period ended December 31, 2013, the Corporation recorded financing charges, and income taxes. The ability of Lifeco and IGM, which dividends from Lifeco and IGM of $810 million ($797 million in 2012) and are also holding companies, to meet their obligations and pay dividends $318 million (the same as in 2012), respectively. 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 ratios be maintained. 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 declares and pays an annual dividend in the second quarter ending June 30. The dividend paid by Pargesa to Parjointco in 2013 amounted to SF2.57 per bearer share, the same as in 2012. The Corporation received dividends from Parjointco of SF59 million in 2013 (SF60 million in 2012). In the twelve-month period ended December 31, 2013, dividends declared on the Corporation’s common shares amounted to $1.40 per share, the same as in the corresponding period of 2012. POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 35 35 SUMMARY OF CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS In the preparation of the financial statements, management of the FAIR VALU E M EASU REM ENT Corporation and of its subsidiaries – Lifeco and IGM – are required to make Financial instrument carrying values necessarily reflect the prevailing market estimates and assumptions that affect the assets, liabilities, net earnings liquidity and the liquidity premiums embedded in the market pricing methods and related disclosures. Significant judgments made by management that the Corporation, Lifeco and IGM rely upon. The following is a description of the Corporation and of its subsidiaries and key sources of estimation of the methodologies used to determine fair value. uncertainty are: to entities to be consolidated, insurance and investment contract liabilities, fair value measurement, investment impairment, goodwill and intangible assets, income taxes, employee future benefits and deferred selling commissions. They are described in the notes to the 2013 Consolidated Financial Statements. The major critical accounting estimates are summarized below. CON SOLIDATION Management of the Corporation consolidates all subsidiaries and entities in which it is determined that the Corporation has control. Control is evaluated on the ability of the Corporation to direct the activities of the subsidiary or other structured entity in order to derive variable returns. Management of the Corporation and each of its subsidiaries apply judgment to determine if it has control of the investee when it has less than a majority of the voting rights. Bonds at fair value through profit or loss and available for sale — Fair values for bonds classified as fair value through profit or loss or available for sale are determined with reference to quoted market bid prices primarily provided by third-party independent pricing sources. The Corporation and its subsidiaries maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Corporation and its subsidiaries obtain quoted prices in active markets, when available, for identical assets at the balance sheet date to measure bonds at fair value in its fair value through profit or loss and available-for-sale portfolios. Where prices are not quoted in a normally active market, fair values are determined by valuation models. The Corporation and its subsidiaries estimate the fair value of bonds not traded in active markets by referring to actively traded securities with similar attributes, dealer quotations, matrix pricing methodology, discounted cash flow analyses and/or internal valuation models. This methodology considers IN SU R ANCE AN D INVESTM ENT CONTR ACT LIAB ILITIES such factors as the issuer’s industry, the security’s rating, term, coupon rate Insurance and investment contract liabilities represent the amounts and position in the capital structure of the issuer, as well as yield curves, credit required, in addition to future premiums and investment income, to provide curves, prepayment rates and other relevant factors. For bonds that are not for future benefit payments, policyholder dividends, commission and policy traded in active markets, valuations are adjusted to reflect illiquidity, and such administrative expenses for all insurance and annuity policies in force adjustments are generally based on available market evidence. In the absence with Lifeco. The Appointed Actuaries of Lifeco’s subsidiary companies are of such evidence, management’s best estimate is used. responsible for determining the amount of the liabilities to make appropriate Shares at fair value through profit or loss and available for sale — Fair values for provisions for Lifeco’s obligations to policyholders. The Appointed Actuaries publicly traded shares are generally determined by the last bid price for the determine the insurance and investment contract liabilities using generally security from the exchange where it is principally traded. Fair values for shares accepted actuarial practices, according to the standards established by the for which there is no active market are determined by discounting expected Canadian Institute of Actuaries. The valuation of insurance contracts uses the future cash flows. The Corporation and its subsidiaries maximize the use Canadian Asset Liability Method (CALM). This method involves the projection of observable inputs and minimize the use of unobservable inputs when of future events in order to determine the amount of assets that must be set measuring fair value. The Corporation and its subsidiaries obtain quoted aside currently to provide for all future obligations and involves a significant prices in active markets, when available, for identical assets at the balance amount of judgment. sheets dates to measure shares at fair value in its fair value through profit or In the computation of insurance contract liabilities, valuation assumptions loss and available-for-sale portfolios. have been made regarding rates of mortality and morbidity, investment Mortgages and other loans, and Bonds classified at fair value through profit or returns, levels of operating expenses, rates of policy termination and rates of loss and, loans and receivables — Fair values for mortgages and other loans utilization of elective policy options or provisions. The valuation assumptions designated at fair value through profit or loss are valued using market interest use best estimates of future experience together with a margin for adverse rates for loans with similar credit risk and maturity. For disclosure purposes deviation. These margins are necessary to provide for possibilities of mis- only, fair values for bonds, and mortgages and other loans, classified as loans estimation and/or future deterioration in the best estimate assumptions and receivables, are determined by discounting expected future cash flows and provide reasonable assurance that insurance contract liabilities using current market rates. Valuation inputs typically include benchmark cover a range of possible outcomes. Margins are reviewed periodically for yields and risk-adjusted spreads based on current lending activities and continued appropriateness. market activity. Additional detail regarding these estimates can be found in Note 13 to the Investment properties — Fair values for investment properties are determined Corporation’s 2013 Consolidated Financial Statements. using independent qualified appraisal services and include adjustments for material changes in property cash flows, capital expenditures or general market conditions in the interim period between appraisals. The determination of the fair value of investment property requires the use of estimates including future cash flows (such as future leasing assumptions, rental rates, capital and operating expenditures) and discount, reversionary and overall capitalization rates applicable to the asset based on current market conditions. Investment properties under construction are valued at fair value if such values can be reliably determined; otherwise, they are recorded at cost. 36 36 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT REVIEW OF FINANCIAL PERFORMANCE INVESTM ENT IM PAIRM ENT INCOM E TA XES Investments are reviewed regularly on an individual basis to determine The income tax expense for the period represents the sum of current income impairment status. The Corporation and its subsidiaries consider various tax and deferred income tax. Income tax is recognized as an expense or factors in the impairment evaluation process, including, but not limited to, income in the statements of earnings except to the extent that it relates to the financial condition of the issuer, specific adverse conditions affecting items that are not recognized in the statements of earnings (whether in other an industry or region, decline in fair value not related to interest rates, comprehensive income or directly in equity), in which case the income tax is bankruptcy or defaults, and delinquency in payments of interest or principal. also recognized in other comprehensive income or directly in equity. Impairment losses on available-for-sale shares are recorded if the loss is significant or prolonged and subsequent losses are recorded in net earnings. 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 Investments are deemed to be impaired when there is no longer reasonable measured at the amount expected to be paid to (recovered from) the taxation assurance of timely collection of the full amount of the principal and interest authorities using the rates that have been enacted or substantively enacted due. The fair value of an investment is not a definitive indicator of impairment, at the balance sheet date. Current tax assets and current income tax liabilities as it may be significantly influenced by other factors, including the remaining are offset, if a legally enforceable right exists to offset the recognized amounts term to maturity and liquidity of the asset. However, market price is taken and the entity intends either to settle on a net basis, or to realize the assets into consideration when evaluating impairment. and settle the liabilities simultaneously. For impaired mortgages and other loans, and bonds classified as loans and A provision for tax uncertainties which meet the probable threshold for receivables, provisions are established or impairments recorded to adjust the recognition is measured based on the probability weighted average approach. 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 net earnings, therefore, a reduction due to impairment of these assets will be recorded in net earnings. As well, when determined to be impaired, contractual interest is no longer accrued and previous interest accruals are reversed. Fair value movement on the assets supporting insurance contract liabilities is a major factor in the movement of insurance contract liabilities. Changes in the fair value of bonds designated or classified as fair value through profit or loss that support insurance contract liabilities are largely offset by corresponding changes in the fair value of liabilities, except when the bond has been deemed impaired. GOODWILL AN D INTANG IB LES IM PAIRM ENT TESTING Goodwill and indefinite life 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, there would be a requirement to reverse the impairment charge or a portion thereof. Goodwill has been allocated to groups of cash generating units (CGU), representing the lowest level in which goodwill is monitored for internal reporting purposes. Goodwill is tested for impairment by comparing the carrying value of the groups of CGU 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 or value in use, which is calculated using the present value of estimated future cash flows expected to be generated. Deferred income tax — Deferred income tax is the tax expected to be payable or recoverable on differences arising between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of taxable income and on unused tax attributes 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 future taxable profits will be available against which deductible temporary differences and unused tax attributes can be utilized. 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 on tax rates and tax laws that have been enacted or substantively enacted at the balance sheet date. Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to net current tax assets against current income tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient future 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 and are recognized to the extent that it has become probable that future taxable profits will allow the deferred tax asset to be recovered. Deferred tax liabilities are recognized for taxable temporary differences arising on investments in the subsidiaries, jointly controlled corporations and associate, except where the group controls the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 37 37 PEN SION PL AN S AN D OTH ER POST- EM PLOYM ENT B EN EFITS If the plan benefits are changed, or a plan is curtailed, any past service costs or curtailment gains or losses are recognized immediately in net earnings. The Corporation and its subsidiaries maintain funded defined benefit pension Current service costs, past service costs and curtailment gains or losses are plans for certain employees and advisors, unfunded supplementary employee included in operating and administrative expenses. retirement plans for certain employees, and unfunded post-employment Remeasurements arising from defined benefit plans represent actuarial gains health, dental and life insurance benefits to eligible employees, advisors and losses and the actual return on plan assets, less interest calculated at the and their dependants. The Corporation’s subsidiaries also maintain defined discount rate. Remeasurements are recognized immediately through other contribution pension plans for eligible employees and advisors. The defined comprehensive income and are not reclassified to net earnings. benefit pension plans provide pensions based on length of service and final average earnings. The cost of the defined benefit plans earned by eligible employees and advisors is actuarially determined using the projected unit credit method prorated The accrued benefit asset (liability) represents the plan surplus (deficit) and is included in other assets or other liabilities. Payments to the defined contribution plans are expensed as incurred. on service based upon management of the Corporation and its subsidiaries’ DEFERRED SELLING COM M I S SION S assumptions about discount rates, compensation increases, retirement ages of employees, mortality and expected health care costs. Any changes in these assumptions will impact the carrying amount of pension obligations. The Corporation and its subsidiaries’ accrued benefit liability in respect of defined benefit plans is calculated separately for each plan by discounting the amount of the benefit that employees have earned in return for their service in current and prior periods and deducting the fair value of any plan assets. The Corporation and its subsidiaries determine the net interest component of the pension expense for the period by applying the discount rate used to measure the accrued benefit liability at the beginning of the annual period to the net accrued benefit liability. The discount rate used to value liabilities is determined using a yield curve of AA-rated corporate debt securities. CHANGES IN ACCOUNTING POLICIES 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, 2013, there were no indications of impairment to deferred selling commissions. PEN SION PL AN S AN D OTH ER POST- EM PLOYM ENT B EN EFITS Further, the revised standard includes changes to how the defined benefit obligation and the fair value of the plan assets and the components of the On January 1, 2013, the Corporation and its subsidiaries adopted revised IAS 19 pension expense are presented and disclosed within the financial statements (IAS 19R), Employee Benefits. In accordance with the required transitional of an entity, including the separation of the total amount of the pension plans provisions, the Corporation and its subsidiaries retrospectively applied the and other post-employment benefits expense between amounts recognized revised standard. The 2012 comparative financial information in the financial in the statements of earnings (service costs and net interest costs) and in the statements and related notes has been restated accordingly. statements of comprehensive income (remeasurements). Disclosures relating The amendments made to IAS 19 include the elimination of the corridor approach for actuarial gains and losses which resulted in those gains and losses being recognized immediately through other comprehensive income. As a result, the net pension asset or liability reflects the funded status of the to retirement benefit plans include discussions concerning the pension plan risk, sensitivity analysis, an explanation of items recognized in the financial statements and descriptions of the amount, timing and uncertainty of the future cash flows. pension plans on the consolidated balance sheets. In addition, all service In accordance with the transitional provisions in IAS 19R, this change has costs, including curtailments and settlements, are recognized immediately been applied retroactively, which resulted in a decrease to opening equity at in net earnings. Additionally, the expected return on plan assets is no longer applied to the fair value of the assets to calculate the benefit cost. Under the revised standard, the same discount rate must be applied to the benefit obligation and the January 1, 2012 of $474 million (decrease of $311 million in shareholders’ equity and $163 million in non-controlling interests), with an additional decrease to equity of $233 million (decrease of $155 million in shareholders’ equity and $78 million in non-controlling interests) at December 31, 2012. plan assets to determine the net interest cost. This discount rate for the net The financial statement items restated due to IAS 19R include other assets, interest cost is determined by reference to market yields at the end of the other liabilities, investments in jointly controlled corporations and associate, reporting period on high quality corporate bonds. retained earnings, reser ves (other comprehensive income) and non- controlling interests disclosed in the financial statements. 38 38 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT REVIEW OF FINANCIAL PERFORMANCE The impact of the change in accounting policy on consolidated net earnings is as follows: YEAR ENDED DECEMBER 31 Net earnings as previously reported Adjustment to net earnings Operating and administrative expenses Share of earnings of investment in jointly controlled corporation Income tax Net earnings restated 2012 2,940 (12) (4) 4 (12) 2,928 Due to the change in consolidated net earnings in 2012, basic and diluted earnings per share for the year ended December 31, 2012 decreased by $0.01. IFRS 10 — CONSOLIDATED FINANCIAL STATEMENTS On January 1, 2013, IFRS 11 — JOINT ARRANGEMENTS On January 1, 2013, the Corporation and the Corporation and its subsidiaries adopted IFRS 10, Consolidated Financial its subsidiaries adopted the guidance in IFRS 11, Joint Arrangements (IFRS 11), Statements (IFRS 10). The Corporation and its subsidiaries have evaluated which separates jointly controlled entities between joint operations and whether or not to consolidate an entity based on a revised definition of control. joint ventures. The standard eliminates the option of using proportionate The standard defines control as dependent on the power of the investor to consolidation in accounting for the interests in joint ventures with requiring direct the relevant activities of the investee, the ability of the investor to derive entities to use the equity method in accounting for interests in joint ventures. variable benefits from its holdings in the investee, and a direct link between the The Corporation concluded that Parjointco constitutes a joint venture as power to direct activities and receive benefits. the contractual arrangement provides the parties to the joint arrangement The Corporation and its subsidiaries assessed the impact of the adoption of IFRS 10 on all its holdings and other investees, resulting in the following adjustments: Insurance and inves tment contrac ts on account of segregated fund policyholders — Lifeco assessed the revised definition of control for the segregated funds for the risk of policyholders and concluded that the revised definition of control was not significantly impacted. Lifeco will continue to present the segregated funds for the risk of policyholders as equal and offsetting amounts with assets and liabilities within the balance sheets and has expanded disclosure on the nature of these entities and the related risks. In addition, in circumstances where the segregated fund is invested in structured entities and is deemed to control this entity, Lifeco has presented the non-controlling ownership interest within the segregated funds for the risk of policyholders as equal and offsetting amounts with assets and liabilities. This change did not impact the net earnings and equity of the Corporation, however it resulted in an increase to segregated funds for the risk of policyholders as equal and offsetting amounts on the balance sheets with assets and liabilities of $484 million at December 31, 2012 and $403 million at January 1, 2012. The application of IFRS 10 for segregated funds for the risk of policyholders may continue to evolve as European insurers are required to adopt IFRS 10 on January 1, 2014. Lifeco will continue to monitor these and other IFRS 10 developments. with a right to the net assets instead of the individual assets and obligations. Consequently, the Corporation will continue to record its investment in this jointly controlled corporation using the equity method of accounting. The adoption of this standard had no impact on the financial statements of the Corporation. IFRS 12 — DISCLOSURE OF INTERESTS IN OTHER ENTITIES On January 1, 2013, the Corporation and its subsidiaries adopted the guidance of IFRS 12, Disclosure of Interests in Other Entities. The standard requires enhanced disclosure, including how control was determined and any restrictions that might exist on consolidated assets and liabilities presented from subsidiaries, joint arrangements, associates, and structured entities. The adoption of this standard increased the disclosure concerning the subsidiaries, joint arrangements and investments in associate by the Corporation but had no impact on the financial results of the Corporation. IFRS 13 — FAIR VALUE MEASUREMENT On January 1, 2013, the Corporation and its subsidiaries adopted IFRS 13, Fair Value Measurement. The standard consolidates the fair value measurement and disclosure guidance into one standard. Fair value is defined as the price that would be received on the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. The standard had no significant impact on the measurement of the Corporation’s assets and liabilities but does require additional disclosure related to fair value measurement (see Note 28 to the Corporation’s 2013 Consolidated Financial Statements). The standard has been applied on a See Note 12 to the Corporation’s 2013 Consolidated Financial Statements for prospective basis. additional information on the presentation and disclosure of these structures. Capital trust securities — Canada Life Capital Trust and Great-West Life Capital Trust (the capital trusts) were consolidated by Lifeco under IAS 27, Consolidated and Separate Financial Statements. The capital trusts will no longer be consolidated in the Corporation’s financial statements as Lifeco’s investment in the capital trusts does not have exposure to variable returns and therefore does not meet the revised definition of control in IFRS 10. IAS 1 — PRESENTATION OF FINANCIAL STATEMENTS On January 1, 2013, the Corporation and its subsidiaries adopted the guidance of the amended IAS 1, Presentation of Financial Statements. Under the amended standard, other comprehensive income is classified by nature and grouped according to items that will be reclassified subsequently to net earnings (when specific conditions are met) and those that will not be reclassified. This revised standard relates only to presentation and has not impacted the financial The change in consolidation did not impact the net earnings and equity of the results of the Corporation. The amendments have been applied retroactively. Corporation, however the deconsolidation resulted in an increase to bonds of $45 million at December 31, 2012 and $282 million at January 1, 2012, both with corresponding increases to the capital trust debentures on the balance sheets. IFRS 7 — FINANCIAL INSTRUMENTS: DISCLOSURE On January 1, 2013, the Corporation and its subsidiaries adopted the guidance in the amendments to IFRS 7, Financial Instruments: Disclosure, which introduces financial instrument Other — Also as a result of the adoption of IFRS 10, Lifeco reclassified on the disclosures related to rights of offset and related arrangements under master balance sheets $47 million between shares and investment properties at netting agreements. This revised standard relates only to disclosure and has December 31, 2012 and $48 million at January 1, 2012. The Corporation also not impacted the financial results of the Corporation (see Note 27 to the reclassified $41 million of bonds, and debentures and debt instruments at Corporation’s 2013 Consolidated Financial Statements). December 31, 2012 and $39 million at January 1, 2012. POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 39 39 FUTURE ACCOUNTING CHANGES The Corporation and its subsidiaries continuously monitor the potential On October 25, 2013, Lifeco submitted a comment letter responding to the changes proposed by the International Accounting Standards Board (IASB) IASB exposure draft raising concerns that users of the financial statements and analyze the effect that changes in the standards may have on their will not obtain the faithful representation of the financial results of an insurer. consolidated financial statements when they become effective. The exposure draft is expected to produce more volatile financial results IAS 32 — FINANCIAL INSTRUMENTS PRESENTATION Effective January 1, 2014, the Corporation and its subsidiaries will adopt the guidance in the amendments to IAS 32, Financial Instruments: Presentation. The amended standard clarifies the requirements for offsetting financial assets and financial liabilities. The Corporation has evaluated the impact of this standard and has determined that it will not impact the presentation of its financial statements. IFRS 4 — INSURANCE CONTRAC TS In June 2013, the IASB issued a revised IFRS 4, Insurance Contracts exposure draft proposing changes to the accounting standard for insurance contracts. The revised proposals aim to that, in Lifeco’s opinion, do not reflect how insurance contracts truly affect an entity’s financial position, financial performance and cash flows. The Accounting Standards Board’s (AcSB) November 1, 2013 response to the IASB exposure draft included proposed amendments to reduce the volatility of the financial results of an insurer. The IASB is currently deliberating comments received on the exposure draft. On January 6, 2014, Lifeco submitted a comment letter responding to the AcSB’s Exposure Draft ED/2013/7 on Insurance Contracts which posed the question “Is the Draft Standard appropriate for Canadian entities?” address measurement, presentation and transitional issues identified in Lifeco continues to actively monitor developments in this area and that it will the initial exposure draft issued in July 2010 through consultation with the continue to measure insurance contract liabilities under current accounting insurance industry and financial statement users. The revised proposals and actuarial policies, including CALM, until a new IFRS for insurance contract would expand upon the building block measurement model requiring an measurement is issued and effective. 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. IFRS 9 — FINANCIAL INSTRUMENTS The IASB issued IFRS 9, Financial Instruments in 2010 to replace IAS 39, Financial Instruments: Recognition and Measurement. The IASB intends to make further changes in financial The proposed standard differs significantly from Lifeco’s current accounting instruments accounting, and has separated its project to amend IFRS 9 into and actuarial practices under CALM. Current accounting practices closely three phases: classification and measurement, impairment methodology link the accounting valuations of insurance liabilities and the specific assets and hedge accounting. used to support those liabilities, thereby minimizing accounting mismatches when liabilities and assets are well-matched economically. The IASB proposals would measure most insurance contract liabilities based on current interest rates, and, under March 2013 proposed amendments to IFRS 9, Financial Instruments, investment assets in certain debt securities would also be carried at fair value through other comprehensive income (FVOCI). As a result, changes in the carrying value of both insurance liabilities and investment assets as a result of interest rate changes would be reflected in other comprehensive income rather than in profit or loss. While this proposal would exclude interest rate-related volatility from profit or loss, certain other assets used to support insurance liabilities do not qualify for FVOCI treatment, such as loans and receivables, which would be measured at amortized cost, and other assets such as equity investments, which would be measured at fair value through profit or loss. The IASB’s revised proposals will also affect the calculation of insurance contract liabilities, as well as change the presentation of insurance contract revenue being recognized during the period and disclosure within the financial statements. > The IASB released a proposal to amend the classification and measurement provisions of IFRS 9 with an additional limited amendment to the standard introducing a new category for classification of certain financial assets of FVOCI. The IASB intends to release a final IFRS on this phase in the first half of 2014. > The IASB released a revised exposure draft in March 2013 on the expected loss impairment method to be used for financial assets. The IASB intends to release a final IFRS on this phase in the first half of 2014. > The IASB has finalized deliberations on the criteria for hedge accounting and measuring effectiveness and released the final hedge accounting phase in November 2013. The Corporation is evaluating the impact this standard will have on the presentation of its financial statements. The full impact of IFRS 9 on the Corporation and its subsidiaries will be evaluated after the remaining stages of the IASB’s project to replace IAS 39. In July 2013, the IASB tentatively decided to defer the mandatory effective date of IFRS 9, which will not be set until the finalization of the impairment methodology and classification and measurement requirements phases. The Corporation and its subsidiaries continue to actively monitor this standard. In the case of Lifeco, this is done in combination with the monitoring of developments to IFRS 4. 40 40 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT REVIEW OF FINANCIAL PERFORMANCE RISK FACTORS There are certain risks inherent in an investment in the securities of the can be no assurance that debt or equity financing will be available, or, Corporation and in the activities of the Corporation, including the following together with internally generated funds, will be sufficient to meet or satisfy and other risks discussed elsewhere in this document, which investors should Power Financial’s objectives or requirements or, if the foregoing are available carefully consider before investing in securities of the Corporation. This to Power Financial, that they will be on terms acceptable to Power Financial. description of risks does not include all possible risks, and there may be other The inability of Power Financial to access sufficient capital on acceptable risks of which the Corporation is not currently aware. terms could have a material adverse effect on Power Financial’s business, Power Financial is a holding company that holds substantial interests in the financial services sector through its controlling interest in each of Lifeco and prospects, dividend paying capability and financial condition, and further enhancement opportunities or acquisitions. IGM. As a result, investors in Power Financial are subject to the risks affecting The market price for Power Financial’s securities may be volatile and its subsidiaries, including those that Power Financial has as the principal subject to fluctuations in response to numerous factors, many of which shareholder of each of Lifeco and IGM. Pargesa, a holding company, is also are beyond Power Financial’s control. Economic conditions may adversely subject to risk due to the nature of its activities and also those of its direct affect Power Financial and its subsidiaries, including fluctuations in foreign subsidiary GBL and indirect subsidiary Imerys. These risks relate to credit, exchange, inflation and interest rates, as well as monetary policies, business liquidity and market risk as described in Pargesa’s consolidated financial investment and the health of capital markets in Canada, the United States, statements for the year ended December 31, 2013. Europe and Asia. In recent years, financial markets have experienced 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 subsidiaries of Power Financial and on their ability to pay dividends to Power Financial. The payment of interest 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. These factors may cause decreases in asset values that are deemed to be significant or prolonged, which may result in impairment charges. 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. and dividends by certain of these principal subsidiaries to Power Financial is The Corporation from time to time uses derivative financial instruments also subject to restrictions set forth in insurance, securities and corporate for purposes of risk management. On October 16, 2013, the Corporation laws and regulations which require that solvency and capital standards be purchased six-month equity put options on the S&P 500 with a notional maintained by such companies. If required, the ability of Power Financial to arrange additional financing in the future will depend in part upon prevailing market conditions as well as the business performance of Power Financial and its subsidiaries. There amount of $3.4 billion for consideration of $21 million as a macro capital hedge against a severe decline in equity markets as a result of political uncertainty regarding the status of the borrowing authority of the United States government (See also the “Derivative Financial Instruments” section below). OFF-BALANCE SHEET ARRANGEMENTS GUAR ANTEES LET TERS OF CREDIT In the normal course of their operations, the Corporation and its subsidiaries In the normal course of Lifeco’s reinsurance business, its subsidiaries provide may enter into certain agreements, the nature of which precludes the letters of credit to other parties or beneficiaries. A beneficiary will typically possibility of making a reasonable estimate of the maximum potential hold a letter of credit as collateral in order to secure statutory credit for amount the Corporation or subsidiary could be required to pay third parties, insurance and investment contract liabilities ceded to or amounts due as some of these agreements do not specify a maximum amount and the from Lifeco’s subsidiaries. A letter of credit may be drawn upon demand. If amounts are dependent on the outcome of future contingent events, the an amount is drawn on a letter of credit by a beneficiary, the bank issuing nature and likelihood of which cannot be determined. the letter of credit will make a payment to the beneficiary for the amount drawn, and Lifeco’s subsidiaries will become obligated to repay this amount to the bank. Lifeco has disclosed that, through certain of its operating subsidiaries, it has provided letters of credit to both external and internal parties, which are described in Note 32 to the Corporation’s 2013 Consolidated Financial Statements. POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 41 41 CONTINGENT LIABILITIES The Corporation and its subsidiaries are from time to time subject to legal the Corporation. However, based on information presently known, it is not actions, including arbitrations and class actions, arising in the normal course expected that any of the existing legal actions, either individually or in the of business. It is inherently difficult to predict the outcome of any of these aggregate, will have a material adverse effect on the consolidated financial proceedings with certainty, and it is possible that an adverse resolution position of the Corporation. could have a material adverse effect on the consolidated financial position of COMMITMENTS AND CONTRACTUAL OBLIGATIONS PAYMENTS DUE BY 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 7,275 187 5,572 708 197 466 LESS THAN 1 YEAR 658 171 890 155 61 466 1–5 YEARS 966 11 4,649 428 103 – MORE THAN 5 YEARS 5,651 5 33 125 33 – 14,405 2,401 6,157 5,847 [1] Please refer to Note 15 to the Corporation’s 2013 Consolidated Financial Statements for further information. [2] Includes office space and 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 2013 Consolidated Financial Statements. TRANSACTIONS WITH RELATED PARTIES In the normal course of business, Great-West Life enters into various On January 7, 2014, the Corporation renewed its tax loss consolidation transactions with related companies which include providing insurance transactions with IGM. The Corporation acquired $1.67 billion of 4.50% benefits and sub-advisor y ser vices to other companies within the secured debentures of IGM. As sole consideration for the debentures, a wholly Power Financial Corporation group of companies. In all cases, transactions owned subsidiary of Power Financial issued $1.67 billion of 4.51% preferred are at market terms and conditions. shares to IGM. The Corporation has legally enforceable rights to settle these Lifeco provides reinsurance, asset management and administrative services financial instruments on a net basis and the Corporation intends to exercise for employee benefit plans relating to pension and other post-employment these rights. benefits for employees of Power Financial. IGM also enters into transactions with subsidiaries of Lifeco. These transactions are in the normal course of operations and include (i) providing certain administrative services, (ii) distributing insurance products and (iii) the sale of residential mortgages to Great-West Life and London Life for $204 million in 2013 ($232 million in 2012). 42 42 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT REVIEW OF FINANCIAL PERFORMANCE FINANCIAL INSTRUMENTS FAIR VALU E OF FINANCIAL IN STRU M ENTS payable, repurchase agreements, dividends payable, interest payable, income The following table presents the carrying amounts and fair value of the tax payable and certain other financial liabilities. Fair value represents the Corporation’s financial assets and financial liabilities. The table distinguishes amount that would be exchanged in an arm’s-length transaction between between those financial instruments recorded at fair value and those recorded willing parties and is best evidenced by a quoted market price, if one exists. at amortized cost. The table also excludes fair value information for financial Fair values represent management’s estimates and are generally calculated assets and financial liabilities not measured at fair value if the carrying amount using market information and at a specific point in time and may not is a reasonable approximation of fair value. These items include cash and reflect future fair values. The calculations are subjective in nature, involve cash equivalents, dividends, interest and accounts receivable, income tax uncertainties and matters of significant judgment (please refer to Note 28 receivable, loans to policyholders, certain other financial assets, accounts to the Corporation’s 2013 Consolidated Financial Statements). AS AT DECEMBER 31 FINANCIAL ASSETS Financial assets recorded at fair value Bonds Fair value through profit or loss Available for sale Mortgages and other loans Fair value through profit or loss Shares Fair value through profit or loss Available for sale Investment properties Derivative instruments Other assets Financial assets recorded at amortized cost Bonds Loans and receivables Mortgages and other loans Loans and receivables Shares Available for sale Total financial assets FINANCIAL LIABILITIES Financial liabilities recorded at fair value Investment contract liabilities Derivative instruments Other liabilities Financial liabilities recorded at amortized cost Obligation to securitization entities Debentures and debt instruments Capital trust debentures Deposits and certificates Total financial liabilities CARRYING VALUE 2013 FAIR VALUE CARRYING VALUE 2012 FAIR VALUE 70,104 8,370 70,104 8,370 65,050 7,407 65,050 7,407 324 324 249 249 7,297 117 4,288 654 396 7,297 117 4,288 654 396 5,949 138 3,572 1,060 285 5,949 138 3,572 1,060 285 91,550 91,550 83,710 83,710 11,855 12,672 10,934 12,438 24,591 25,212 22,548 23,859 632 632 674 674 37,078 38,516 34,156 36,971 128,628 130,066 117,866 120,681 (889) (779) (20) (889) (779) (20) (739) (413) (141) (739) (413) (141) (1,688) (1,688) (1,293) (1,293) (5,572) (7,275) (163) (187) (5,671) (8,066) (205) (188) (4,701) (5,817) (164) (163) (4,787) (6,779) (216) (165) (13,197) (14,130) (10,845) (11,947) (14,885) (15,818) (12,138) (13,240) POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 43 43 DERIVATIVE FINANCIAL IN STRU M ENTS There were no major changes to the Corporation’s and its subsidiaries’ policies In the course of their activities, the Corporation and its subsidiaries use and procedures with respect to the use of derivative instruments in the derivative financial instruments. When using such derivatives, they only act twelve-month period ended December 31, 2013. There has been an increase 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 respective companies. The Corporation and its subsidiaries have each established operating policies and processes relating to the use of derivative financial instruments, which in particular aim at: > prohibiting the use of derivative instruments for speculative purposes; > documenting transactions and ensuring their consistency with risk management policies; in the notional amount outstanding ($28,559 million at December 31, 2013, compared with $17,178 million at December 31, 2012) and a decrease in the exposure to credit risk ($654 million at December 31, 2013, compared with $1,060 million at December 31, 2012) that represents the market value of those instruments, which are in a gain position. See Note 27 to the Corporation’s 2013 Consolidated Financial Statements for more information on the type of derivative financial instruments used by the Corporation and its subsidiaries. On October 16, 2013, Lifeco purchased six-month equity put options on the S&P 500 with a notional amount of $6.8 billion for consideration of $41 million > demonstrating the effectiveness of the hedging relationships; and as a macro capital hedge against a severe decline in equity markets as a result > monitoring the hedging relationship. The Corporation and its subsidiaries have policies, guidelines or procedures relating to the identification, measurement, monitoring, mitigating and controlling of risks associated with financial instruments. The key risks related to financial instruments are credit risk, liquidity risk and market risk (currency, interest rate and equity price risk). DISCLOSURE CONTROLS AND PROCEDURES of political uncertainty regarding the status of the borrowing authority of the United States government. On October 16, 2013, the Corporation also purchased similar six-month equity put options on the S&P 500 with a notional amount of $3.4 billion for consideration of $21 million. Based on their evaluations as of December 31, 2013, and subject to the limitation described under the “Lifeco’s Limitation on Disclosure Controls and Procedures & Internal Control over Financial Reporting” section below, the Chief Executive Officer and Chief Financial Officer have concluded that the Corporation’s disclosure controls and procedures were effective as at December 31, 2013. INTERNAL CONTROL OVER FINANCIAL REPORTING The Corporation’s internal control over financial reporting is designed based on the Internal Control – Integrated Framework (COSO Framework) to provide reasonable assurance regarding the reliability of financial published in 1992 by The Committee of Sponsoring Organizations of the reporting and the preparation of financial statements for external purposes Treadway Commission. Based on such evaluation and subject to the in accordance with IFRS. The Corporation’s management is responsible limitation described under the “Lifeco’s Limitation on Disclosure Controls for establishing and maintaining effective internal control over financial and Procedures & Internal Control over Financial Reporting” section below, reporting. All internal control systems have inherent limitations and may the Chief Executive Officer and the Chief Financial Officer have concluded become ineffective because of changes in conditions. Therefore, even those that the Corporation’s internal control over financial reporting was effective systems determined to be effective can provide only reasonable assurance as at December 31, 2013. with respect to financial statement preparation and presentation. In 2013, there have been no changes in the Corporation’s internal control over The Corporation’s management, under the supervision of the Chief Executive financial reporting that have materially affected, or are reasonably likely to Officer and the Chief Financial Officer, has evaluated the effectiveness of the materially affect, the Corporation’s internal control over financial reporting. Corporation’s internal control over financial reporting as at December 31, 2013, LIFECO’S LIMITATION ON DISCLOSURE CONTROLS AND PROCEDURES & INTERNAL CONTROL OVER FINANCIAL REPORTING Lifeco’s management, as permitted by securities legislation, for the period Since the date of acquisition to December 31, 2013, Irish Life had revenue ended December 31, 2013, has limited the scope of its design of Lifeco’s of $526 million and net earnings of $85 million (excluding $11 million disclosure controls and procedures and Lifeco’s internal control over financial of restructuring costs incurred by Irish Life). At December 31, 2013 Irish reporting to exclude controls, policies and procedures of Irish Life, which Life’s total assets were $48.4 billion, including investments on account of Lifeco acquired on July 18, 2013. segregated fund policyholders of $38.2 billion. Total liabilities for Irish Life were $46.3 billion, including $38.2 billion of investment and insurance contracts on account of segregated fund policyholders. 44 44 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT REVIEW OF FINANCIAL PERFORMANCE RECENT DEVELOPMENTS On February 3, 2014, the Court of Appeal for Ontario released a decision in ordered amount of $285 million to $52 million ($27 million in respect of London regard to the involvement of the participating accounts of Lifeco subsidiaries Life and $25 million in respect of Great-West Life). During the subsequent event London Life and Great-West Life in the financing of the acquisition of London period, in response to the Court of Appeal’s decision, Lifeco recorded, in the Insurance Group Inc. in 1997. This decision overturned the Ontario Superior fourth quarter of 2013, the recovery which positively impacted net earnings Court’s January 24, 2013 decision regarding the amounts to be reallocated to attributable to common shareholders of Lifeco by $226 million, after tax. the participating account surplus. The Court of Appeal reduced the previously Power Financial’s share of this amount was $156 million. SELECTED ANNUAL INFORMATION FOR THE YEARS ENDED DECEMBER 31 Total revenue [2] Operating earnings attributable to common shareholders [3, 4] per share – basic Net earnings attributable to common shareholders [3] per share – basic per share – diluted Earnings from continuing operations attributable to common shareholders per share – basic per share – diluted Consolidated assets [2, 3] Total financial liabilities [2, 3] Debentures and debt instruments Shareholders’ equity Book value per share Number of common shares outstanding [millions] Dividends per share [declared] Common shares First preferred shares Series A Series D Series E Series F Series H Series I Series K Series L Series M [5] Series O Series P Series R [6] Series S [7] Series T [8] 2013 28,830 1,708 2.40 1,896 2.67 2.63 1,896 2.67 2.63 341,711 14,885 7,275 16,113 18.78 711.2 1.4000 0.5250 1.3750 1.3125 1.4750 1.4375 1.5000 1.2375 1.2750 1.5000 1.4500 1.1000 1.3750 1.1006 2012 32,934 1,678 2.37 1,618 2.29 2.27 1,618 2.29 2.27 268,586 12,138 5,817 13,563 15.95 709.1 1.4000 0.5250 1.3750 1.3125 1.4750 1.4375 1.5000 1.2375 1.2750 1.5000 1.4500 1.1000 1.2837 2011 [1] 32,433 1,729 2.44 1,722 2.43 2.41 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 [1] The 2011 figures have not been adjusted to reflect current period reclassifications and new and revised IFRS adopted on January 1, 2013. The 2011 figures also include revenues from discontinued operations. [2] During the year, the Corporation reclassified comparative figures for presentation adjustments. [3] The 2012 figures, where impacted, have been restated for the retroactive impact of new and revised IFRS during 2013, most notably IAS 19R, Employee Benefits and IFRS 10, Consolidated Financial Statements.The 2011 figures also include earnings from discontinued operations of $38 million ($0.05 per share). [4] Operating earnings and operating earnings per share are non-IFRS financial measures. [5] Redeemed on January 31, 2014. [6] Issued in February 2012. [7] Issued in February 2013. The first payment of dividend was made on April 30, 2013 in the amount of $0.2006 per share. Regular annual dividend is $1.2000 per share. [8] Issued in December 2013. The first payment of dividend will be made on April 30, 2014 in the amount of $0.4027 per share. Regular annual dividend is $1.0500 per share. POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 45 45 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS [IN MILLIONS OF CANADIAN DOLL ARS] [RESTATED – NOTE 3] DECEMBER 31, 2013 DECEMBER 31, 2012 JANUARY 1, 2012 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] Investments in jointly controlled corporations and associate [Note 8] Owner-occupied properties and capital assets [Note 9] Derivative financial instruments [Note 27] Other assets [Note 10] Deferred tax assets [Note 18] Intangible assets [Note 11] Goodwill [Note 11] Investments on account of segregated fund policyholders [Note 12] Total assets LIABILITIES Insurance contract liabilities [Note 13] Investment contract liabilities [Note 13] Obligation to securitization entities [Note 14] Debentures and debt instruments [Note 15] Capital trust debentures [Note 16] Derivative financial instruments [Note 27] Other liabilities [Note 17] Deferred tax liabilities [Note 18] Insurance and investment contracts on account of segregated fund policyholders [Note 12] Total liabilities EQUITY Stated capital [Note 19] Perpetual preferred shares Common shares Retained earnings Reserves Total shareholders’ equity Non-controlling interests [Note 21] Total equity Total liabilities and equity Approved by the Board of Directors Signed, Raymond Royer Director 46 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 4,344 3,313 90,329 24,915 8,046 4,288 7,332 134,910 10,832 5,070 2,664 925 654 5,907 1,240 5,281 9,105 160,779 341,711 83,391 22,797 6,761 3,572 7,082 123,603 10,599 2,064 2,121 791 1,060 4,774 1,223 4,933 8,673 105,432 268,586 3,385 79,002 21,518 6,360 3,249 7,162 117,291 9,978 2,061 2,205 738 1,056 4,281 1,230 5,023 8,786 96,985 253,019 131,174 119,973 114,785 739 4,701 5,817 164 413 6,664 1,018 105,432 244,921 2,255 664 11,201 (557) 13,563 10,102 23,665 782 3,827 5,849 815 427 6,088 1,120 96,985 230,678 2,005 639 10,804 (238) 13,210 9,131 22,341 268,586 253,019 889 5,572 7,275 163 779 6,898 1,079 160,779 314,608 2,755 721 12,204 433 16,113 10,990 27,103 341,711 Signed, R. Jeffrey Orr Director CONSOLIDATED STATEMENTS OF EARNINGS FOR THE YEARS ENDED DECEMBER 31 [IN MILLIONS OF CANADIAN DOLL ARS, EXCEPT PER SHARE AMOUNTS] 2013 2012 [RESTATED – NOTE 3] REVENUES Premium income Gross premiums written Ceded premiums Total net premiums Net investment income [Note 6] Regular net investment income Change in fair value through profit and loss 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 24] Financing charges [Note 25] Total expenses Share of earnings of investments in jointly controlled corporations and associate [Note 8] Earnings before income taxes Income taxes [Note 18] Net earnings Attributable to Non-controlling interests [Note 21] Perpetual preferred shareholders Common shareholders Earnings per common share [Note 30] Net earnings attributable to common shareholders – Basic – Diluted 23,441 (3,205) 20,236 5,635 (2,974) 2,661 5,933 28,830 18,464 (1,744) 16,720 1,371 (280) 17,811 2,590 4,474 400 25,275 3,555 134 3,689 678 3,011 984 131 1,896 3,011 2.67 2.63 22,276 (3,019) 19,257 5,700 2,675 8,375 5,302 32,934 17,854 (1,457) 16,397 1,437 5,041 22,875 2,487 3,806 409 29,577 3,357 130 3,487 559 2,928 1,193 117 1,618 2,928 2.29 2.27 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 47 2013 3,011 2012 [RESTATED – NOTE 3] 2,928 (156) 35 (70) 15 (176) (85) 33 2 (1) (51) 858 (52) 806 251 830 633 (174) 23 482 1,312 4,323 1,298 131 2,894 4,323 85 (25) (126) 31 (35) 14 (5) 2 (1) 10 (78) – (78) (100) (203) (297) 83 (7) (221) (424) 2,504 1,087 117 1,300 2,504 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31 [IN MILLIONS OF CANADIAN DOLL ARS] Net earnings Other comprehensive income (loss) Items that may be reclassified subsequently to net earnings 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 Unrealized gains (losses) on translation arising during the year Unrealized gains (losses) on euro debt designated as hedge of net assets of foreign operations Share of other comprehensive income (losses) of jointly controlled corporations and associate Total – items that may be reclassified Items that will not be reclassified subsequently to net earnings Actuarial gains (losses) on defined benefit pension plans Income tax (expense) benefit Share of other comprehensive income (losses) of jointly controlled corporations and associate Total – items that will not be reclassified Other comprehensive income (loss) Total comprehensive income Attributable to Non-controlling interests Perpetual preferred shareholders Common shareholders 48 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED DECEMBER 31, 2013 [IN MILLIONS OF CANADIAN DOLL ARS] Balance, beginning of year As previously reported Changes in accounting policy [Note 3] As restated Net earnings Other comprehensive income Total comprehensive income Issue of perpetual preferred shares Dividends to shareholders Common shares Perpetual preferred shares Dividends to non-controlling interests Share-based compensation Stock options exercised Effects of changes in ownership, capital and other Balance, end of year STATED CAPITAL RESERVES PERPETUAL PREFERRED SHARES COMMON SHARES RETAINED EARNINGS SHARE-BASED COMPENSATION OTHER COMPREHENSIVE INCOME [NOTE 29] NON- CONTROLLING INTERESTS TOTAL TOTAL EQUIT Y 2,255 – 2,255 – – – 500 – – – – – – 2,755 664 – 664 – – – – – – – – 57 – 721 11,148 53 11,201 2,027 – 2,027 – (996) (131) – – – 103 12,204 110 – 110 – – – – – – – 11 (26) – 95 (148) (519) (667) – 998 998 – – – – – – 7 338 (38) (519) (557) – 998 998 – – – – 11 (26) 7 433 10,343 24,372 (241) (707) 10,102 23,665 984 314 1,298 – – – (685) 4 (6) 3,011 1,312 4,323 500 (996) (131) (685) 15 25 277 387 10,990 27,103 FOR THE YEAR ENDED DECEMBER 31, 2012 (RESTATED – NOTE 3) [IN MILLIONS OF CANADIAN DOLL ARS] PERPETUAL PREFERRED SHARES COMMON SHARES RETAINED EARNINGS SHARE-BASED COMPENSATION OTHER COMPREHENSIVE INCOME [NOTE 29] NON- CONTROLLING INTERESTS TOTAL TOTAL EQUIT Y STATED CAPITAL RESERVES Balance, beginning of year As previously reported Changes in accounting policy [Note 3] As restated Net earnings Other comprehensive income Total comprehensive income Issue of perpetual preferred shares Dividends to shareholders Common shares Perpetual preferred shares Dividends to non-controlling interests Share-based compensation Stock options exercised Effects of changes in ownership, capital and other Balance, end of year 2,005 – 2,005 – – – 250 – – – – – – 2,255 639 – 639 – – – – – – – – 25 – 664 10,743 61 10,804 1,735 – 1,735 – (992) (117) – – – (229) 11,201 111 – 111 – – – – – – – 9 (10) – 110 23 (372) (349) – (318) (318) – – – – – – – 134 (372) (238) – (318) (318) – – – – 9 (10) 9,294 (163) 9,131 1,193 (106) 1,087 – – – (659) 4 (3) 22,815 (474) 22,341 2,928 (424) 2,504 250 (992) (117) (659) 13 12 – 542 313 (667) (557) 10,102 23,665 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 49 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31 [IN MILLIONS OF CANADIAN DOLL ARS] OPERATING ACTIVITIES Earnings before income taxes 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 reinsurance assets Change in fair value through profit or loss Other FINANCING ACTIVITIES Dividends paid By subsidiaries to non-controlling interests Perpetual preferred shares Common shares Issue of common shares by the Corporation [Note 19] Issue of perpetual preferred shares by the Corporation [Note 19] Issue of common shares by subsidiaries Issue of preferred shares by subsidiaries Repurchase of common shares by subsidiaries Repurchase of preferred shares by subsidiaries Changes in debt instruments Issue of euro-denominated debt [Note 4] Change in obligations related to assets sold under repurchase agreements Change in obligations to securitization entities Redemption of capital trust debentures Other INVESTMENT ACTIVITIES Bond sales and maturities Mortgage loan repayments Sale of shares Change in loans to policyholders Change in repurchase agreements Acquisition of Irish Life Group Limited, net of cash and cash equivalents acquired [Note 4] Investment in bonds Investment in mortgage loans Investment in shares Investment in investment properties and other Effect of changes in exchange rates on cash and cash equivalents Increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year NET CASH FROM OPERATING ACTIVITIES INCLUDES Interest and dividends received Interest paid 50 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 2013 3,689 (426) (567) 269 (99) 321 2,974 (510) 5,651 (685) (128) (995) (1,808) 45 500 742 – (122) (230) 183 659 (225) 873 – 1 618 28,776 1,910 2,158 70 – (1,234) (31,252) (3,541) (2,048) (267) (5,428) 190 1,031 3,313 4,344 4,965 490 2012 [RESTATED – NOTE 3] 3,487 (414) 5,034 196 203 42 (2,675) (504) 5,369 (659) (114) (991) (1,764) 20 250 44 650 (215) – (1) – (2) 874 (409) (8) (561) 24,516 2,071 2,152 (57) (23) – (27,716) (3,394) (2,162) (259) (4,872) (8) (72) 3,385 3,313 5,062 492 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ALL TABUL AR AMOUNTS ARE IN MILLIONS OF CANADIAN DOLL ARS, UNLESS OTHERWISE NOTED. NOTE 1 CORPORATE INFORMATION Power Financial Corporation (Power Financial or the Corporation) is a specialties for industry; cement aggregates concrete; oil, gas and alternative publicly listed company (TSX: PWF) incorporated and domiciled in Canada. energies; electricity, natural gas, and energy and environmental services; The registered address of the Corporation is 751 Victoria Square, Montréal, water and waste management services; wines and spirits; and testing, Québec, Canada, H2Y 2J3. inspection and certification. Power Financial is a diversified international management and holding The Consolidated Financial Statements (f inancial statements) of company that holds interests, directly or indirectly, in companies in the Power Financial for the year ended December 31, 2013 were approved by financial services industry in Canada, the United States and Europe and, the Board of Directors on March 19, 2014. The Corporation is controlled by through its indirect investment in Pargesa, a holding company with diversified 171263 Canada Inc., which is wholly owned by Power Corporation of Canada. interests in Europe-based companies active in various sectors: minerals-based NOTE 2 BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The financial statements of Power Financial at December 31, 2013 have accounted for using the equity method. Under the equity method, the share been prepared in accordance with International Financial Reporting of net earnings, other comprehensive income and the changes in equity of the Standards (IFRS). BASI S OF PRESENTATION 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 are entities the Corporation controls which means that the Corporation has power over the entity, it is exposed, or has rights, to variable returns from its involvement and has the ability to affect those returns through its use of power over the entity. Subsidiaries of the Corporation are 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 Corporation will reassess whether or not it controls an entity if facts and circumstances indicate there are changes to one or more of the elements of control listed above. The principal subsidiaries of the Corporation, whose accounts are included on a consolidated basis, are: jointly controlled corporations and associate are recognized in the statements of earnings, statements of comprehensive income and statements of changes in equity, respectively. The Corporation holds a 50% (2012 – 50%) interest in Parjointco N.V., a jointly controlled corporation that is considered to be a joint venture. Parjointco holds a 55.6% (2012 – 55.6%) equity interest in Pargesa Holding SA. Accordingly, the Corporation accounts for its investment in Parjointco using the equity method. The following abbreviations are used throughout this report: Great-West Life & Annuity Insurance Company (Great-West Financial or Great-West Life & Annuity); Great-West Lifeco Inc. (Lifeco); IGM Financial Inc. (IGM); Investors Group Inc. (Investors Group); Irish Life Group Limited (Irish Life); London Life Insurance Company (London Life); Mackenzie Financial Corporation (Mackenzie); Pargesa Holding SA (Pargesa); Parjointco N.V. (Parjointco); Putnam Investments, LLC (Putnam); The Canada Life Assurance Company (Canada Life); The Great-West Life Assurance Company (Great-West Life); > Great-West Lifeco Inc., a public company (direct interest of 67.0% (2012 – International Financial Reporting Standards (IFRS). 68.2%)), whose major operating subsidiary companies are The Great-West Life Assurance Company, Great-West Life & Annuity Insurance Company, London Life Insurance Company, The Canada Life Assurance Company, Irish USE OF SIG N IFICANT J U DG M ENTS , ESTIMATES AN D AS SU M PTION S Life Group Limited and Putnam Investments, LLC. In the preparation of the financial statements, management of the > IGM Financial Inc., a public company (direct interest of 58.6% (2012 – 58.7%)), whose major operating subsidiary companies are Investors Group Inc. and Mackenzie Financial Corporation. > The Great-West Life Assurance Company holds 3.6% (2012 – 3.7%) of the common shares of IGM Financial Inc., and IGM Financial Inc. holds 4.0% (2012 – 4.0%) of the common shares of Great-West Lifeco Inc. These financial statements include the results of Great-West Lifeco Inc. and IGM Financial Inc. on a consolidated basis; the amounts shown in the consolidated balance sheets, consolidated statements of earnings, consolidated statements of comprehensive income, consolidated statements of changes in equity and consolidated statements of cash flows are from the publicly disclosed consolidated financial statements of Great-West Lifeco Inc. Corporation and its subsidiaries are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, net earnings and related disclosures. Significant judgments have been made and key sources of estimation uncertainty have been made in certain areas and, are discussed throughout the notes in these financial statements, including: > The actuarial assumptions made by Lifeco, such as mortality and morbidity of policyholders, used in the valuation of insurance and investment contract liabilities under the Canadian Asset Liability Method (Note 13). > In the determination of the fair value of financial instruments, management of the Corporation and its subsidiaries exercise judgment in the fair value inputs, particularly those items categorized within Level 3 of the fair value hierarchy (Note 28). and IGM Financial Inc., both as at and for the year ended December 31, 2013, > Management consolidates all subsidiaries and entities which it is and the comparative year. The notes to Power Financial’s financial statements determined that the Corporation controls. Control is evaluated according are prepared using the notes to the financial statements of Great-West to the ability of the Corporation to direct the activities of the subsidiary or Lifeco Inc. and IGM Financial Inc. Jointly controlled corporations are entities in which unanimous consent is required relating to decisions about the relevant activities. Associate is an entity in which the Corporation exercises significant influence over the entity’s operating and financial policies, without exercising control or joint control. Investments in jointly controlled corporations and associate are other structured entities in order to derive variable returns. Management applies judgment to determine if it has control of the investee when it has less than a majority of the voting rights. POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 51 NOTE 2 BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) > The carrying value of goodwill and intangible assets is based upon the use Investment property income includes rents earned from tenants under lease of forecasts and future results upon initial recognition. Management of the agreements and property tax and operating cost recoveries. Rental income Corporation and its subsidiaries evaluate the synergies and future benefit leases with contractual rent increases and rent-free periods are recognized for recognition of goodwill and intangible assets (Note 11). on a straight-line basis over the term of the lease. > Cash generating units for goodwill have been determined by management Fee income primarily includes fees earned from the management by Lifeco of the Corporation and its subsidiaries as the lowest level in which goodwill of segregated fund assets, proprietary mutual fund assets, fees earned is monitored for internal reporting purposes (Note 11). on administrative services only Group health contracts and fees earned > The actuarial assumptions used in determining the expense for pension plans and other post-employment benefits. Management of the from management services. Fee income is recognized when the service is performed, the amount is collectible and can be reasonably estimated. Corporation and its subsidiaries review the previous experience of their Lifeco has sub-advisor arrangements where Lifeco retains the primary plan members in evaluating the assumptions used in determining the obligation with the client. As a result, fee income earned is reported on a gross expense for the current year (Note 26). basis, with the corresponding sub-advisor expense recorded in operating and > The Corporation and its subsidiaries operate within various tax jurisdictions where significant judgments and estimates are required when interpreting the relevant tax laws, regulations and legislation in the determination of the Corporation’s and its subsidiaries tax provisions and the carrying amounts of its tax assets and liabilities (Note 18). > The determination by IGM of whether financial assets are derecognized is based on the extent to which the risk and rewards of ownership are transferred (Note 14). administrative expenses. IG M FINANCIAL 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 > Legal and other provisions are recognized resulting from a past event which, recognized on an accrual basis. These management, administration and in the judgment of management of the Corporation and its subsidiaries, distribution fees are included in fee income in the statements of earnings. has resulted in a probable outflow of economic resources which would be passed onto a third party to settle the obligation. Management of the CASH AN D CASH EQ U IVALENTS Corporation and its subsidiaries evaluate the possible outcomes and risks Cash and cash equivalents include cash, current operating accounts, in determining the best estimate of the provision at the balance sheet overnight bank and term deposits with original maturities of three months date (Note 31). or less, and fixed income securities with an original term to maturity of three > Lifeco uses judgments, estimates and independent, qualified appraisal services to adjust for material changes in property cash flows, capital expenditures or general market conditions in determining the fair value of investment properties (Note 6). > The estimated useful lives of deferred selling commissions made by IGM (Note 11). months or less. INVESTM ENTS Investments include bonds, mortgages and other loans, shares, investment properties, and loans to policyholders of Lifeco. Investments are classified as either fair value through profit or loss, available for sale, held to maturity, loans and receivables, based on management’s intention relating to the purpose > Judgments are used by Lifeco in determining whether deferred acquisition and nature for which the instruments were acquired or the characteristics costs and deferred income reserves can be recognized on the consolidated of the investments. The Corporation and its subsidiaries currently have not balance sheets. Deferred acquisition costs are recognized if Lifeco’s classified any investments as held to maturity. management determines the costs are incremental and related to the issuance of the investment contract. Deferred income reserves are amortized on a straight-line basis over the term of the policy. 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 The results reflect judgments of management of the Corporation and its income securities are included in bonds on the Consolidated Balance Sheets subsidiaries regarding the impact of prevailing global credit, equity and (balance sheets). Fair value through profit or loss investments are recognized foreign exchange market conditions. REVEN U E RECOG N ITION at fair value on the balance sheets with realized and unrealized gains and losses reported in the statements of earnings. Available-for-sale investments are recognized at fair value on the balance sheets with unrealized gains Interest income is accounted for on an accrual basis using the effective interest and losses recorded in other comprehensive income. Gains and losses are method for bonds, mortgages and loans. Dividend income is recognized when reclassified from other comprehensive income and recorded in the statements the right to receive payment is established. This is the dividend date for listed of earnings when the available-for-sale investment is sold or impaired. Interest stocks and usually the notification date or date when the shareholders have income earned on both fair value through profit or loss and available-for-sale approved the dividend for private equity instruments. Interest income and bonds is recorded as net investment income in the statements of earnings. dividend income are recorded in net investment income in the Consolidated Statements of Earnings (statements of earnings). LIFECO Premiums for all types of insurance contracts and contracts with limited mortality or morbidity risk are generally recognized as revenue when due and collection is reasonably assured. Investments in mortgages and other loans, and bonds not normally actively traded on a public market are classified as loans and receivables and are carried at amortized cost net of any allowance for credit losses. Interest income earned and realized gains and losses on the sale of investments classified as loans and receivables are recorded in net investment income in the statements of earnings. 52 52 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Investment properties are real estate held to earn rental income or for capital Mortgages and other loans, and Bonds classified at fair value through profit or appreciation. Investment properties are initially measured at cost and loss and loans and receivables Fair values for mortgages and other loans subsequently carried at fair value on the balance sheets. All changes in fair designated at fair value through profit or loss are valued using market interest value are recorded as net investment income in the statements of earnings. rates for loans with similar credit risk and maturity. For disclosure purposes Fair values for investment properties are determined using independent, only, fair values for bonds, and mortgages and other loans, classified as loans qualified appraisal services. Properties held to earn rental income or for and receivables, are determined by discounting expected future cash flows capital appreciation that have an insignificant portion that is owner occupied using current market rates. Valuation inputs typically include benchmark or where there is no intent to occupy on a long-term basis are classified yields and risk-adjusted spreads based on current lending activities and as investment properties. Properties that do not meet these criteria are market activity. classified as owner-occupied properties. Property that is leased that would otherwise be classified as investment property if owned is also included with investment properties. Investment properties Fair values for investment properties are determined using independent qualified appraisal services and include adjustments for material changes in property cash flows, capital expenditures or Loans to policyholders by Lifeco and its subsidiaries are shown at their unpaid general market conditions in the interim period between appraisals. The principal balance and are fully secured by the cash surrender values of the determination of the fair value of investment property requires the use of policies. The carrying value of loans to policyholders approximates fair value. estimates including future cash flows (such as future leasing assumptions, 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 and its subsidiaries rely upon. The following is a description of the methodologies used to determine rental rates, capital and operating expenditures) and discount, reversionary and overall capitalization rates applicable to the asset based on current market conditions. Investment properties under construction are valued at fair value if such values can be reliably determined; otherwise, they are fair value. recorded at cost. Bonds at fair value through profit or loss and available for sale Fair values for bonds classified as fair value through profit or loss or available for sale are determined with reference to quoted market bid prices primarily provided by third-party independent pricing sources. 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 sheet date to measure bonds at fair value in its fair value through profit or loss and available-for-sale Impairment Investments are reviewed regularly on an individual basis to determine impairment status. The Corporation and its subsidiaries consider 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. Impairment losses on available-for-sale shares are recorded if the loss is significant or prolonged and subsequent losses are recorded in portfolios. Where prices are not quoted in a normally active market, fair values net earnings. are determined by valuation models. Investments are deemed to be impaired when there is no longer reasonable The Corporation and its subsidiaries estimate the fair value of bonds not traded in active markets by referring to actively traded securities with similar attributes, dealer quotations, matrix pricing methodology, discounted cash flow analyses and/or internal valuation models. This methodology considers such factors as the issuer’s industry, the security’s rating, term, coupon rate assurance of timely collection of the full amount of the principal and interest due. The fair 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 is taken into consideration when evaluating impairment. and position in the capital structure of the issuer, as well as yield curves, credit For impaired mortgages and other loans, and bonds classified as loans and curves, prepayment rates and other relevant factors. For bonds that are not receivables, provisions are established or impairments recorded to adjust traded in active markets, valuations are adjusted to reflect illiquidity, and such the carrying value to the net realizable amount. Wherever possible, the fair adjustments are generally based on available market evidence. In the absence value of collateral underlying the loans or observable market price is used to of such evidence, management’s best estimate is used. establish net realizable value. For impaired available-for-sale bonds, recorded 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 and its subsidiaries maximize the use of observable inputs and minimize 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 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 net earnings, therefore, a reduction due to impairment of these assets will be recorded in net earnings. As well, when determined to be impaired, contractual interest is no longer accrued and previous interest accruals to measure shares at fair value in its fair value through profit or loss and are reversed. available-for-sale portfolios. Fair value movement on the assets supporting insurance contract liabilities is a major factor in the movement of insurance contract liabilities. Changes in the fair value of bonds designated or classified as fair value through profit or loss that support insurance contract liabilities are largely offset by corresponding changes in the fair value of liabilities, except when the bond has been deemed impaired. POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 53 53 NOTE 2 BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) TR AN SACTION COSTS Transaction costs are expensed as incurred for financial instruments classified B USIN ES S COM B INATION S , GOODWILL AN D INTANG IB LE AS SETS or designated as fair value through profit or loss. Transaction costs for Business combinations are accounted for using the acquisition method. financial assets classified as available for sale or loans and receivables are Goodwill represents the excess of purchase consideration over the fair value added to the value of the instrument at acquisition, and taken into net of net assets acquired. Following initial recognition, goodwill is measured at earnings using the effective interest method for those allocated to loans and cost less any accumulated impairment losses. receivables. 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. FU N DS H ELD BY CEDING IN SU RERS / FU N DS H ELD U N DER REIN SU R ANCE CONTR ACTS 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. REIN SU R ANCE CONTR ACTS 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 for Lifeco insurance risks are unable to meet their obligations, Lifeco remains liable to its policyholders for the por tion reinsured. Intangible assets comprise finite life and indefinite life intangible assets. Finite life intangible assets include the value of software acquired or internally developed, some customer contracts, distribution channels, distribution contracts, deferred selling commissions, technology 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. 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 client redeems units in mutual funds that are subject to a deferred sales charge, a redemption fee is paid by the client and is recorded as revenue by IGM. Any unamortized deferred selling commission asset recognized on the initial sale of these mutual fund units is recorded as a disposal. 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 Consequently, allowances are made for reinsurance contracts which are relation to its carrying value. 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. Lifeco considers various factors in the impairment evaluation process, including, but not limited to, collectability of amounts due under the terms Indefinite life intangible assets include brands, trademarks and trade names, some customer contracts, the shareholders’ portion of acquired future participating account profits 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. The identification of indefinite life intangible assets is made by reference to relevant factors such as product life cycles, potential obsolescence, industry of the contract. The carrying amount of a reinsurance asset is adjusted stability and competitive position. through an allowance account with any impairment loss being recorded in Impairment testing Goodwill and indefinite life intangible assets are tested 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. Premiums and claims ceded for reinsurance are deducted from premiums earned and insurance and investment contract benefits. Assets and liabilities related to reinsurance are reported on a gross basis in the balance sheets. The amount of liabilities ceded to reinsurers is estimated in a manner consistent with the claim liability associated with reinsured risks. 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. Goodwill has been allocated to groups of cash generating units (CGU), representing the lowest level in which goodwill is monitored for internal reporting purposes. Goodwill is tested for impairment by comparing the carrying value of the groups of CGU to the recoverable amount to which the OWN ER- OCCU PIED PROPERTIES AN D CAPITAL AS SETS goodwill has been allocated. Intangible assets are tested for impairment by Capital assets and property held for own use are carried at cost less comparing the asset’s carrying amount to its recoverable amount. accumulated depreciation and impairments. Depreciation is charged to write off the cost of assets, using the straight-line method, over their estimated useful lives, which vary from 3 to 50 years. > Building, owner-occupied properties > Equipment, furniture and fixtures > Other capital assets 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 10–50 years the present value of estimated future cash flows expected to be generated. 3–17 years 3–10 years Depreciation methods, useful lives and residual values are reviewed at least annually and adjusted if necessary. Capital assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. 54 54 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) SEG REGATED FU N DS DERECOG N ITION Segregated fund assets and liabilities arise from contracts where all financial IGM enters into transactions where it transfers financial assets recognized risks associated with the related assets are borne by policyholders and on its balance sheets. The determination of whether the financial assets are presented separately in the balance sheets at fair value. Investment are derecognized is based on the extent to which the risks and rewards of income and changes in fair value of the segregated fund assets are offset by ownership are transferred. corresponding changes in the segregated fund liabilities. IN SU R ANCE AN D INVESTM ENT CONTR ACT LIAB ILITIES Contract classification Lifeco’s products are classified at contract inception as insurance contracts 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 is unknown. 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. If all or substantially all risks and rewards are retained, the financial assets are not derecognized and the transactions are accounted for as secured financing transactions. OTH ER FINANCIAL LIAB ILITIES When significant insurance risk exists, the contract is accounted for as an insurance contract in accordance with IFRS 4, Insurance Contracts (IFRS 4). Refer to Note 13 for a discussion of insurance risk. Accounts payable, current income taxes, and deferred income reserves, are measured at amortized cost. Deferred income reserves are amortized on a straight-line basis to recognize the initial policy fees over the policy term, not In the absence of significant insurance risk, the contract is classified as an to exceed 20 years. investment 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 Debentures and debt instruments, and capital trust debentures 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. These liabilities are derecognized when the obligation is cancelled or redeemed. participating features. Investment contracts may be reclassified as insurance contracts after REPU RCHASE AG REEM ENTS inception if insurance risk becomes significant. A contract that is classified Lifeco enters into repurchase agreements with third-party broker-dealers in as an insurance contract at contract inception remains as such until all rights which Lifeco sells securities and agrees to repurchase substantially similar and obligations under the contract are extinguished or expire. 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 23 for a discussion on risk management. securities at a specified date and price. As substantially all of the risks and rewards of ownership of assets are retained, Lifeco does not derecognize the assets. Such agreements are accounted for as investment financings. PEN SION PL AN S AN D OTH ER POST- EM PLOYM ENT B EN EFITS Measurement Insurance contract liabilities represent the amounts The Corporation and its subsidiaries maintain funded defined benefit pension required, in addition to future premiums and investment income, to provide plans for certain employees and advisors, unfunded supplementary employee for future benefit payments, policyholder dividends, commission and policy retirement plans for certain employees, and unfunded post-employment administrative expenses for all insurance and annuity policies in force health, dental and life insurance benefits to eligible employees, advisors with Lifeco. The Appointed Actuaries of Lifeco’s subsidiary companies are and their dependants. The Corporation’s subsidiaries also maintain defined responsible for determining the amount of the liabilities to make appropriate contribution pension plans for eligible employees and advisors. provisions for Lifeco’s obligations to policyholders. The Appointed Actuaries determine the liabilities for insurance and investment contracts 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. Insurance contract liabilities are computed with the result that benefits and expenses are matched with premium income. Under fair value accounting, a movement in the fair value of the supporting assets is a major factor in the movement of insurance contract liabilities. Changes in the fair value of assets are largely offset by corresponding changes in the fair value of liabilities. The defined benefit pension plans provide pensions based on length of service and final average earnings. The cost of the defined benefit plans earned by eligible employees and advisors is actuarially determined using the projected unit credit method prorated on service, based upon management of the Corporation and its subsidiaries’ assumptions about discount rates, compensation increases, retirement ages of employees, mortality and expected health care costs. Any changes in these assumptions will impact the carrying amount of pension obligations. The Corporation and its subsidiaries’ accrued benefit liability in respect of defined benefit plans is calculated separately for each plan by discounting the amount of the benefit that employees have earned in return for their service in current and prior periods and deducting the fair value of any plan assets. The Corporation and its subsidiaries determine the net interest component Investment contract liabilities are measured at fair value through profit and of the pension expense for the period by applying the discount rate used to loss, except for certain annuity products measured at amortized cost. measure the accrued benefit liability at the beginning of the annual period to the net accrued benefit liability. The discount rate used to value liabilities is determined using a yield curve of AA corporate debt securities. POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 55 55 NOTE 2 BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) If the plan benefits are changed, or a plan is curtailed, any past service costs Fair value hedges For fair value hedges, changes in fair value of both the or curtailment gains or losses are recognized immediately in net earnings. hedging instrument and the hedged item are recorded in net investment Current service costs, past service costs and curtailment gains or losses are income and consequently any ineffective portion of the hedge is recorded included in operating and administrative expenses. immediately in net investment income. Remeasurements arising from defined benefit plans represent actuarial gains Cash flow hedges For cash flow hedges, the effective portion of the changes and losses and the actual return on plan assets, less interest calculated at the in fair value of the hedging instrument is recorded in the same manner as the discount rate. Remeasurements are recognized immediately through other hedged item in either net investment income or other comprehensive income, comprehensive income and are not reclassified to net earnings. while the ineffective portion is recognized immediately in net investment The accrued benefit asset (liability) represents the plan surplus (deficit) and is included in other assets or other liabilities. Payments to the defined contribution plans are expensed as incurred. DERIVATIVE FINANCIAL IN STRU M ENTS income. Gains and losses on cash flow hedges that accumulate in other comprehensive income are recorded in net investment income in the same period the hedged item affects net earnings. Gains and losses on cash flow hedges are immediately reclassified from other comprehensive income to net investment income if and when it is probable that a forecasted transaction The Corporation and its subsidiaries use derivative products as risk is no longer expected to occur. management instruments to hedge or manage asset, liability and capital Net investment hedges For net investment hedges the effective portion positions, including revenues. The Corporation and its subsidiaries’ policy of changes in the fair value of the hedging instrument is recorded in guidelines prohibit the use of derivative instruments for speculative other comprehensive income while the ineffective portion is recognized 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 and realized gains and losses are recorded in net investment income on the statements of earnings. For derivatives designated as hedging instruments, unrealized and realized gains and losses are recognized according to the nature of the hedged item. Derivatives are valued using market transactions and other market evidence whenever possible, including market-based inputs to models, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. When models are used, the selection of a particular model immediately in net investment income. Hedge accounting is discontinued when the hedging no longer qualifies for hedge accounting. EM B EDDED DERIVATIVES An embedded derivative is a component of a host contract that modifies the cash flows of the host contract in a manner similar to a derivative, according to a specified interest rate, financial instrument price, foreign exchange rate, underlying index or other variable. Embedded derivatives are treated as separate contracts and are recorded at fair value 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 the statement of earnings. Embedded derivatives that meet the definition of an insurance contract are accounted for and measured as an insurance contract. to value a derivative depends on the contractual terms of, and specific risks EQ U IT Y inherent in the instrument, as well as the availability of pricing information Financial instruments issued by Power Financial are classified as stated capital in the market. The Corporation and its subsidiaries generally use similar if they represent a residual interest in the assets of the Corporation. Preferred models to value similar instruments. Valuation models require a variety of shares are classified as equity if they are non-redeemable, or retractable only inputs, including contractual terms, market prices and rates, yield curves, at the Corporation’s option and any dividends are discretionary. Costs that are credit curves, measures of volatility, prepayment rates and correlations of directly attributable to the issue of share capital are recognized as a deduction such inputs. from retained earnings, net of income tax. To qualify for hedge accounting, the relationship between the hedged Reser ves are composed of share-based compensation and other item and the hedging instrument must meet several strict conditions on comprehensive income. Share-based compensation reserves represent the documentation, probability of occurrence, hedge effectiveness and reliability vesting of share options less share options exercised. Other comprehensive of measurement. If these conditions are not met, then the relationship income represents the total of the unrealized foreign exchange gains (losses) does not qualify for hedge accounting treatment and both the hedged item on translation of foreign operations, the unrealized gains (losses) on available- and the hedging instrument are reported independently, as if there was no for-sale assets, the unrealized gains (losses) on cash flow hedges, and the hedging relationship. share of other comprehensive income of jointly controlled corporations Where a hedging relationship exists, the Corporation and its subsidiaries and associate. document all relationships between hedging instruments and hedged items, Non-controlling interest represents the proportion of equity that is as well as its risk management objectives and strategy for undertaking various attributable to minority shareholders. hedge transactions. This process includes linking derivatives that are used in hedging transactions to specific assets and liabilities on the balance sheets or to specific firm commitments or forecasted transactions. The Corporation and its subsidiaries also assess, both at the hedge’s inception and on an ongoing basis, whether derivatives that are used in hedging transactions are effective in offsetting changes in fair values or cash flows of hedged items. Hedge effectiveness is reviewed quarterly through correlation testing. 56 56 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) SHARE- BASED PAYM ENTS INCOM E TA XES The fair value-based method of accounting is used for the valuation of The income tax expense for the period represents the sum of current income compensation expense for options granted to employees. Compensation tax and deferred income tax. Income tax is recognized as an expense or expense is recognized as an increase to operating and administrative expenses income in the statements of earnings, except to the extent that it relates in the statements of earnings over the period that the stock options vest, with to items that are not recognized in the statements of earnings (whether in a corresponding increase in share-based compensation reserves. When the other comprehensive income or directly in equity), in which case the income stock options are exercised, the proceeds, together with the amount recorded tax is also recognized in other comprehensive income or directly in equity. in share-based compensation reserves, are added to the stated capital of the entity issuing the corresponding shares. 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 The Corporation and its subsidiaries recognize a liability for cash-settled measured at the amount expected to be paid to (recovered from) the taxation awards, including those granted under Performance Share Unit plans and authorities using the rates that have been enacted or substantively enacted the Deferred Share Unit plans. Compensation expense is recognized as at the balance sheet date. Current tax assets and current income tax liabilities an increase to operating and administrative expenses in the statement of are offset, if a legally enforceable right exists to offset the recognized amounts earnings, net of related hedges, and a liability is recognized on the balance and the entity intends either to settle on a net basis, or to realize the assets sheets over the period, if any. The liability is remeasured at fair value at each and settle the liabilities simultaneously. reporting period with the change in the liability recorded in operating and administrative expenses. FOREIG N CU RRENCY TR AN SL ATION The Corporation and its subsidiaries operate with multiple functional currencies. The Corporation’s financial statements are prepared in Canadian dollars, which is the functional and presentation currency of the Corporation. Assets and liabilities denominated in foreign currencies are translated into each entity’s functional currency at exchange rates prevailing at the balance sheet dates for monetary items and at exchange rates prevailing at the transaction date for non-monetary items. Revenues and expenses denominated in foreign currencies are translated into each entity’s functional currency at an average of daily rates. Realized and unrealized exchange gains and losses are included in net investment income and are not material to the financial statements of the Corporation. Translation of net investment in foreign operations For the purpose of presenting financial statements, assets and liabilities are translated into Canadian dollars at the rate of exchange prevailing at the balance sheet dates and all revenues and expenses are translated at an average of daily rates. Unrealized foreign currency translation gains and losses on the Corporation’s net investment in its foreign operations and jointly controlled corporations and associate are presented as a component of other comprehensive income. Unrealized foreign currency translation gains and losses are recognized in earnings when there has been a disposal of a foreign operation or a jointly controlled corporation. POLICYHOLDER B EN EFITS A provision for tax uncertainties which meet the probable threshold for recognition is measured based on the probability weighted average approach. Deferred income tax Deferred income tax is the tax expected to be payable or recoverable on differences arising between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of taxable income and on unused tax attributes 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 future taxable profits will be available against which deductible temporary differences and unused tax attributes can be utilized. 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 on tax rates and tax laws that have been enacted or substantively enacted at the balance sheet date. Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to net current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient future taxable profits 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 and are recognized to the extent that it has become probable that future taxable profits will allow the deferred tax asset to be recovered. Deferred tax liabilities are recognized for taxable temporary differences Policyholder benefits include benefits and claims on life insurance contracts, arising on investments in the subsidiaries, jointly controlled corporations maturity payments, annuity payments and surrenders. Gross benefits and and associate, except where the group controls the timing of the reversal of claims for life insurance contracts include the cost of all claims arising during the temporary differences and it is probable that the temporary differences the year and settlement of claims. Death claims and surrenders are recorded will not reverse in the foreseeable future. on the basis of notifications received. Maturities and annuity payments are recorded when due. POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 57 57 NOTE 2 BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) LEASES for offsetting financial assets and financial liabilities. The Corporation has Leases that do not transfer substantially all the risks and rewards of ownership evaluated the impact of this standard and has determined that it will not are classified as operating leases. Payments made under operating leases, impact the presentation of its financial statements. where the Corporation and its subsidiaries are the lessee, are charged to net IFRS 9 – Financial Instruments The IASB issued IFRS 9, Financial Instruments earnings over the period of use. in 2010 to replace IAS 39, Financial Instruments: Recognition and Measurement. Where the Corporation and its subsidiaries are the lessor under an operating The IASB intends to make further changes in financial instruments accounting, lease for its investment property, the assets subject to the lease arrangement and has separated its project to amend IFRS 9 into three phases: classification are presented within the balance sheets. Income from these leases is and measurement, impairment methodology and hedge accounting. recognized in the statements of earnings on a straight-line basis over the > The IASB released a proposal to amend the classification and measurement lease term. EARN ING S PER COM MON SHARE Basic earnings per common share is determined by dividing net earnings available to common shareholders by the weighted average number of common shares outstanding for the year. Diluted earnings per common share is determined using the same method as basic earnings per common share, except that the weighted average number of common shares outstanding includes the potential dilutive effect of outstanding stock options granted by the Corporation and its subsidiaries, as determined by the treasury stock method. FUTU RE ACCOU NTING CHANG ES The Corporation and its subsidiaries continuously monitor the potential changes proposed by the International Accounting Standards Board (IASB) and analyze the effect that changes in the standards may have on their consolidated financial statements when they become effective. provisions of IFRS 9 with an additional limited amendment to the standard introducing a new category for classification of certain financial assets of fair value through other comprehensive income. The IASB intends to release a final IFRS on this phase in the first half of 2014. > The IASB released a revised exposure draft in March 2013 on the expected loss impairment method to be used for financial assets. The IASB intends to release a final IFRS on this phase in the first half of 2014. > The IASB has finalized deliberations on the criteria for hedge accounting and measuring effectiveness and released the final hedge accounting phase in November 2013. The Corporation is evaluating the impact this standard will have on the presentation of its financial statements. The full impact of IFRS 9 on the Corporation and its subsidiaries will be evaluated after the remaining stages of the IASB’s project to replace IAS 39. In July 2013, the IASB tentatively decided to defer the mandatory effective date of IFRS 9, which will not be set until the finalization of the impairment methodology and classification and measurement requirements phases. The IAS 32 – Financial Instruments: Presentation Effective January 1, 2014, the Corporation and its subsidiaries continue to actively monitor this standard. Corporation will adopt the guidance in the amendments to IAS 32, Financial In the case of Lifeco, this is done in combination with the monitoring of Instruments: Presentation. The amended standard clarifies the requirements developments to IFRS 4. NOTE 3 CHANGES IN ACCOUNTING POLICIES PEN SION PL AN S AN D OTH ER POST- EM PLOYM ENT B EN EFITS Further, the revised standard includes changes to how the defined benefit obligation and the fair value of the plan assets and the components of the On January 1, 2013, the Corporation adopted revised IAS 19 (IAS 19R), Employee pension expense are presented and disclosed within the financial statements Benef its. In accordance with the required transitional provisions, the of an entity, including the separation of the total amount of the pension plans Corporation and its subsidiaries retrospectively applied the revised standard. and other post-employment benefits expense between amounts recognized The 2012 comparative financial information in the financial statements and in the statements of earnings (service costs and net interest costs) and in the related notes has been restated accordingly. statements of comprehensive income (remeasurements). Disclosures relating The amendments made to IAS 19 include the elimination of the corridor approach for actuarial gains and losses which resulted in those gains and losses being recognized immediately through other comprehensive income. As a result, the net pension asset or liability reflects the funded status of the to retirement benefit plans include discussions concerning the pension plan risk, sensitivity analysis, an explanation of items recognized in the financial statements and descriptions of the amount, timing and uncertainty of the future cash flows. pension plans on the balance sheets. In addition, all service costs, including In accordance with the transitional provisions in IAS 19R, this change has curtailments and settlements, are recognized immediately in net earnings. been applied retroactively, which resulted in a decrease to opening equity at Additionally, the expected return on plan assets is no longer applied to the fair value of the assets to calculate the benefit cost. Under the revised standard, the same discount rate must be applied to the benefit obligation and the plan assets to determine the net interest cost. This discount rate for the net January 1, 2012 of $474 million (decrease of $311 million in shareholders’ equity and $163 million in non-controlling interests), with an additional decrease to equity of $233 million (decrease of $155 million in shareholders’ equity and $78 million in non-controlling interests) at December 31, 2012. interest cost is determined by reference to market yields at the end of the The financial statement items restated due to IAS 19R include other assets, reporting period on high quality corporate bonds. other liabilities, investments in jointly controlled corporations and associate, retained earnings, reser ves (other comprehensive income) and non- controlling interests disclosed in the financial statements. 58 58 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 CHANGES IN ACCOUNTING POLICIES (CONTINUED) The impact of this change in accounting policy on total comprehensive income is as follows: DECEMBER 31 Total comprehensive income as previously reported Adjustment to net earnings Operating and administrative expenses Share of earnings of investments in jointly controlled corporations and associate Income taxes Adjustment to other comprehensive income Actuarial gains (losses) on defined benefit pension plans Income taxes Share of other comprehensive income of investments in jointly controlled corporations and associate Restated total comprehensive income The impact of this change in accounting policy on the balance sheets is as follows: ASSETS Investments in jointly controlled corporations and associate Other assets Deferred tax assets Total assets LIABILITIES Other liabilities Deferred tax liabilities Total liabilities EQUITY Retained earnings Reserves (other comprehensive income) Total shareholders’ equity Non-controlling interests Total equity Total liabilities and equity 2012 2,737 (12) (4) 4 (12) (297) 83 (7) (221) 2,504 DECEMBER 31, 2012 JANUARY 1, 2012 (28) (285) 53 (260) 642 (195) 447 53 (519) (466) (241) (707) (260) (17) (257) 23 (251) 361 (138) 223 61 (372) (311) (163) (474) (251) Due to the change in consolidated net earnings in 2012, basic and diluted earnings per share for the year ended December 31, 2012 decreased by $0.01. IFRS 10 – CONSOLIDATED FINANCIAL STATEMENTS On January 1, 2013, In addition, in circumstances where the segregated fund is invested in the Corporation adopted IFRS 10, Consolidated Financial Statements (IFRS 10). structured entities and is deemed to control this entity, Lifeco has presented The Corporation has evaluated whether or not to consolidate an entity based the non-controlling ownership interest within the segregated funds for on a revised definition of control. The standard defines control as dependent the risk of policyholders as equal and offsetting amounts with assets and on the power of the investor to direct the relevant activities of the investee, liabilities. This change did not impact the net earnings and equity of the the ability of the investor to derive variable benefits from its holdings in Corporation, however it resulted in an increase to segregated funds for the the investee, and a direct link between the power to direct activities and risk of policyholders as equal and offsetting amounts on the balance sheets receive benefits. with assets and liabilities of $484 million at December 31, 2012 and $403 million The Corporation assessed the impact of the adoption of IFRS 10 on all its at January 1, 2012. holdings and other investees, resulting in the following adjustments: The application of IFRS 10 for segregated funds for the risk of policyholders Insurance and investment contracts on account of segregated fund policyholders Lifeco assessed the revised definition of control for the segregated funds for the risk of policyholders and concluded that the revised may continue to evolve as European insurers are required to adopt IFRS 10 on January 1, 2014. Lifeco will continue to monitor these and other IFRS 10 developments. definition of control was not significantly impacted. Lifeco will continue See Note 12 for additional information on the presentation and disclosure of to present the segregated funds for the risk of policyholders as equal and these structures. offsetting amounts with assets and liabilities within the balance sheets and has expanded disclosure on the nature of these entities and the related risks. POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 59 59 NOTE 3 CHANGES IN ACCOUNTING POLICIES (CONTINUED) Capital trust securities Canada Life Capital Trust and Great-West Life and structured entities. The adoption of this standard increased the disclosure Capital Trust (the capital trusts) were consolidated by Lifeco under IAS 27, concerning the subsidiaries, joint arrangements and investments in Consolidated and Separate Financial Statements. The capital trusts will no associate by the Corporation but had no impact on the financial results of longer be consolidated in the Corporation’s financial statements as Lifeco’s the Corporation. investment in the capital trusts does not have exposure to variable returns and therefore does not meet the revised definition of control in IFRS 10. The change in consolidation did not impact the net earnings and equity of the Corporation, however the deconsolidation resulted in an increase to bonds of $45 million at December 31, 2012 and $282 million at January 1, 2012, both with corresponding increases to the capital trust debentures on the balance sheets. IFRS 13 – FAIR VALUE MEASUREMENT On January 1, 2013, the Corporation adopted IFRS 13, Fair Value Measurement. The standard consolidates the fair value measurement and disclosure guidance into one standard. Fair value is defined as the price that would be received on the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. The standard had no significant impact on the measurement of the Corporation’s Other Also as a result of the adoption of IFRS 10, Lifeco reclassified on the assets and liabilities but does require additional disclosure related to fair balance sheets $47 million between shares and investment properties at value measurement (see Note 28). The standard has been applied on a December 31, 2012 and $48 million at January 1, 2012. The Corporation also prospective basis. reclassified $41 million of bonds, and debentures and debt instruments at December 31, 2012 and $39 million at January 1, 2012. IAS 1 – PRESENTATION OF FINANCIAL STATEMENTS On January 1, 2013, the Corporation adopted the guidance of the amended IAS 1, Presentation of IFRS 11 – JOINT ARRANGEMENTS On January 1, 2013, the Corporation Financial Statements. Under the amended standard, other comprehensive adopted the guidance in IFRS 11, Joint Arrangements (IFRS 11), which separates income is classified by nature and grouped according to items that will be jointly controlled entities between joint operations and joint ventures. The reclassified subsequently to net earnings (when specific conditions are met) standard eliminates the option of using proportionate consolidation in and those that will not be reclassified. This revised standard relates only to accounting for interests in joint ventures and requires entities to use the presentation and has not impacted the financial results of the Corporation. equity method of accounting for interests in joint ventures. The Corporation The amendments have been applied retroactively. concluded that Parjointco constitutes a joint venture as the contractual arrangement provides the parties to the joint arrangement with right to the net assets instead of the individual assets and obligations. Consequently, the Corporation will continue to record its investment in this jointly controlled corporation using the equity method of accounting. The adoption of this standard had no impact on the financial statements of the Corporation. IFRS 12 – DISCLOSURE OF INTERESTS IN OTHER ENTITIES On January 1, 2013, the Corporation adopted the guidance of IFRS 12, Disclosure of Interests in Other Entities. The standard requires enhanced disclosure, including how control was determined and any restrictions that might exist on consolidated assets and liabilities presented by subsidiaries, joint arrangements, associates, IFRS 7 – FINANCIAL INSTRUMENTS: DISCLOSURE On January 1, 2013, the Corporation adopted the guidance in the amendments to IFRS 7, Financial Instruments: Disclosure which introduces financial instrument disclosures related to rights of offset and related arrangements under master netting agreements. This revised standard relates only to disclosure and has not impacted the financial results of the Corporation (see Note 27). OTHER COMPARATIVE FIGURES During the year, the Corporation and its subsidiaries reclassified other comparative figures for presentation adjustments (Notes 6, 10, 13, 17 and 24). The reclassifications had no impact on the equity or net earnings. NOTE 4 IRISH LIFE GROUP LIMITED ACQUISITION On July 18, 2013, Lifeco, through its wholly owned subsidiary Canada Life $50 million. With the closing of the acquisition of Irish Life by Lifeco on July 18, Limited, completed the acquisition of all of the shares of Irish Life. 2013, the subscription receipts were exchanged on a one-for-one basis for The life and pension operations of Lifeco’s Irish subsidiary, Canada Life (Ireland), are being combined with the operations of Irish Life, retaining the Irish Life brand name. Irish Life has a strong brand with a broad product offering, and a wide, multi-channel distribution network, similar to Lifeco’s operations in Canada. This in-market acquisition is expected to transform Lifeco’s business in Ireland into a market leader in the life insurance, pension and investment management sectors. Irish Life employs a similar and consistent strategy to Lifeco in that it aims to maximize shareholder returns in a low risk and capital-efficient manner. Funding for the transaction included the net proceeds of the February 19, 2013 issuance by Lifeco of approximately $1.25 billion subscription receipts, completed on March 12, 2013. That offering comprised a $650 million bought deal public offering as well as concurrent private placements of subscription receipts by Power Financial of $550 million and by IGM of 48,660,000 common shares of Lifeco, of which 21,410,000 and 1,950,000 were issued to Power Financial and IGM, respectively. The balance of the funding for the transaction came from a euro-denominated debt issuance and internal cash resources. On April 18, 2013 Lifeco issued €500 million of 10-year bonds denominated in euros with an annual coupon of 2.50%. The bonds, rated A+ by Standard & Poor’s Ratings Services, are listed on the Irish Stock Exchange. The euro- denominated debt has been designated as a hedge against a portion of Lifeco’s net investment in euro-denominated foreign operations with changes in foreign exchange on the debt instrument recorded in other comprehensive income. Lifeco has also entered into foreign exchange forward contracts to fix the euro to the British pound rate on approximately €300 million of the net investment in Irish Life, which has been designated as a hedge. 60 60 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 IRISH LIFE GROUP LIMITED ACQUISITION (CONTINUED) The amounts assigned by Lifeco to the assets acquired, goodwill, and liabilities assumed on July 18, 2013, reported as at December 31, 2013, are below: Acquisition consideration ASSETS ACQUIRED Cash and cash equivalents Invested assets Reinsurance assets Intangible assets Other assets Investments on account of segregated fund policyholders Total assets acquired LIABILITIES ASSUMED Insurance contract liabilities Investment contract liabilities Subordinated debentures and debt instruments Other liabilities Insurance and investment contract liabilities on account of segregated fund policyholders Total liabilities assumed Net value of assets acquired Goodwill 1,788 554 4,883 2,963 247 508 36,348 45,503 6,160 194 443 948 36,348 44,093 1,410 378 During the fourth quarter of 2013, Lifeco substantially completed its during the measurement period. Adjustments were made to the provisional comprehensive evaluation of the fair value of the net assets acquired from amounts disclosed in the September 30, 2013 unaudited interim condensed Irish Life and the purchase price allocation. As a result, initial goodwill of consolidated financial statements for the recognition and measurement $554 million, recognized upon the acquisition of Irish Life on July 18, 2013 of intangible assets, contingent liabilities and other provisions, changes in the Irish Group Limited Acquisition note to the September 30, 2013 in actuarial assumptions used in determining the fair value for insurance unaudited interim condensed consolidated financial statements, has been contract liabilities, and the related deferred taxes. adjusted in the fourth quarter of 2013, as a result of valuations received The following provides the change in the carrying value of the goodwill on the acquisition of Irish Life to December 31, 2013: Initial Irish Life goodwill, July 18, 2013, previously reported Recognition and measurement of intangible assets Adjustment to contingent liabilities and other provisions Adjustment to insurance contract liabilities Deferred tax liability on adjustments to purchase price allocation Adjusted balance, July 18, 2013 554 (247) 30 15 26 378 The goodwill represents the excess of the purchase price over the fair value From date of acquisition to December 31, 2013, Irish Life contributed of the net assets, representing the synergies or future economic benefits $526 million in revenue and $85 million in net earnings (excludes after-tax arising from other assets acquired that are not individually identified and restructuring expenses incurred by Irish Life). These amounts are included in separately recognized in the acquisition of Irish Life. Goodwill is not deductible the statements of earnings and comprehensive income for the twelve months for tax purposes. ended December 31, 2013. Lifeco will finalize the purchase accounting for the Irish Life acquisition in During the twelve months ended December 31, 2013, Lifeco incurred the first six months of 2014. Balance sheet items that are incomplete are restructuring and acquisition expenses related to Irish Life of $94 million insurance contract liabilities. Lifeco is completing experience studies on (Note 24). certain insurance contract liabilities. As a result, the excess of the purchase price over the fair value of the net assets acquired representing goodwill could be adjusted for these insurance contract liabilities retrospectively during future reporting periods in the first six months of 2014. The audited financial Supplemental pro-forma revenue and net earnings for the combined entity, as though the acquisition date for this business combination had been as of the beginning of the annual reporting period, has not been included as it is impracticable, since Irish Life had a different financial reporting basis statements at December 31, 2013 reflect Lifeco management’s best estimate than Lifeco. of the purchase price allocation. Lifeco has recognized $48 million of contingent liabilities for Irish Life within other liabilities. The potential outcome of these matters is not yet determinable. POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 61 61 NOTE 5 CASH AND CASH EQUIVALENTS Cash Cash equivalents Cash and cash equivalents DECEMBER 31, 2013 DECEMBER 31, 2012 JANUARY 1, 2012 1,930 2,414 4,344 1,152 2,161 3,313 912 2,473 3,385 At December 31, 2013, cash amounting to $112 million was restricted for use by the subsidiaries ($34 million at December 31, 2012 and $41 million at January 1, 2012). NOTE 6 INVESTMENTS CARRYING VALU ES AN D FAIR VALU ES Carrying values and estimated fair values of investments are as follows: DECEMBER 31, 2013 DECEMBER 31, 2012 JANUARY 1, 2012 CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE Bonds Designated as fair value through profit or loss[1] 68,051 68,051 62,937 62,937 60,087 60,087 Classified as fair value through profit or loss[1] Available for sale Loans and receivables Mortgages and other loans Loans and receivables 2,053 8,370 11,855 90,329 2,053 8,370 12,672 91,146 2,113 7,407 10,934 83,391 2,113 7,407 12,438 84,895 1,853 7,318 9,744 79,002 1,853 7,318 10,785 80,043 24,591 25,212 22,548 23,859 21,226 22,514 Designated as fair value through profit or loss[1] 324 324 249 249 292 292 Shares Designated as fair value through profit or loss[1] Available for sale Investment properties Loans to policyholders 24,915 25,536 22,797 24,108 21,518 22,806 7,297 749 8,046 4,288 7,332 7,297 749 8,046 4,288 7,332 5,949 812 6,761 3,572 7,082 5,949 812 6,761 3,572 7,082 5,454 906 6,360 3,249 7,162 5,454 906 6,360 3,249 7,162 134,910 136,348 123,603 126,418 117,291 119,620 [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. 62 62 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 INVESTMENTS (CONTINUED) BON DS AN D MORTGAG ES Carrying value of bonds and mortgages due over the current and non-current term is as follows: DECEMBER 31, 2013 Bonds Mortgage loans DECEMBER 31, 2012 Bonds Mortgage loans JANUARY 1, 2012 Bonds Mortgage loans 1 YEAR OR LESS 1-5 YEARS OVER 5 YEARS TOTAL TERM TO MATURIT Y CARRYING VALUE 9,571 2,465 12,036 17,774 11,472 29,246 62,616 10,635 73,251 89,961 24,572 114,533 CARRYING VALUE 1 YEAR OR LESS 1-5 YEARS OVER 5 YEARS TOTAL TERM TO MATURIT Y 8,351 2,057 10,408 16,899 10,069 26,968 57,789 10,401 68,190 1 YEAR OR LESS 1-5 YEARS OVER 5 YEARS TERM TO MATURIT Y 7,627 2,042 9,669 17,450 8,916 26,366 53,649 10,249 63,898 83,039 22,527 105,566 CARRYING VALUE TOTAL 78,726 21,207 99,933 The table shown above excludes the carrying value of impaired bonds and mortgages, as the ultimate timing of collectability is uncertain. IM PAIRED INVESTM ENTS , ALLOWANCE FOR CREDIT LOS SES , INVESTM ENTS WITH RESTRUCTU RED TERM S Carrying amount of impaired investments is as follows: Impaired amounts by type Fair value through profit or loss Available for sale Loans and receivables Total DECEMBER 31, 2013 DECEMBER 31, 2012 JANUARY 1, 2012 384 19 34 437 365 27 41 433 290 51 36 377 The allowance for credit losses and changes in the allowance for credit losses related to investments classified as loans and receivables are as follows: DECEMBER 31 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 2013 2012 22 2 – 2 26 37 (9) (5) (1) 22 The allowance for credit losses is supplemented by the provision for future credit losses included in insurance contract liabilities. POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 63 63 NOTE 6 INVESTMENTS (CONTINUED) N ET INVESTM ENT INCOM E YEAR ENDED DECEMBER 31, 2013 Regular net investment income: Investment income earned MORTGAGE AND OTHER LOANS BONDS SHARES INVESTMENT PROPERTIES OTHER TOTAL 3,733 927 242 276 461 5,639 Net realized gains (losses) (available for sale) Net realized gains (losses) (other classifications) Net recovery (provision) for credit losses (loans and receivables) Other income (expenses) 64 30 – – – 55 (2) (3) 8 – – – 3,827 977 250 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 YEAR ENDED DECEMBER 31, 2012 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 (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 (68) (3,783) (3,851) (24) BONDS 3,687 124 10 1 – 3,822 22 2,181 2,203 6,025 – – – (68) 208 – 152 152 360 – – – (88) 373 72 85 (2) (159) 5,635 – (63) (138) (138) 235 (2,911) (2,974) 2,661 3 – 3 2 858 860 980 1,110 MORTGAGE AND OTHER LOANS SHARES INVESTMENT PROPERTIES OTHER TOTAL 230 255 532 946 – 46 8 (12) 988 5 – 5 993 4 – – – 234 – 389 389 623 – – – (63) 192 – 104 104 296 – 1 – (69) 464 5,650 128 57 9 (144) 5,700 2 29 (28) (26) 438 2,646 2,675 8,375 During the year, Lifeco reclassified certain regular net investment income to fair value through profit or loss for presentation adjustments. Investment income earned comprises income from investments that are: distributions. Investment properties income includes rental income earned i) classified as available for sale, loans and receivables; and ii) classified or on investment properties, ground rent income earned on leased and sub- designated as fair value through profit or loss. Investment income from leased land, fee recoveries, lease cancellation income, and interest and other bonds and mortgages and other loans includes interest income and premium investment income earned on investment properties. and discount amortization. Income from shares includes dividends and 64 64 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 INVESTMENTS (CONTINUED) INVESTM ENT PROPERTIES The carrying value of investment properties and changes in the carrying value of investment properties are as follows: DECEMBER 31 Balance, beginning of year Acquisition of Irish Life Additions Change in fair value through profit or loss Disposals Foreign exchange rate changes Balance, end of year 2013 3,572 248 182 152 (82) 216 4,288 2012 3,249 – 166 104 – 53 3,572 TR AN SFERRED FINANCIAL AS SETS fluctuates. Included in the collateral deposited with Lifeco’s lending agent Lifeco engages in securities lending to generate additional income. Lifeco’s is cash collateral of $20 million as at December 31, 2013 ($141 million as at securities custodians are used as lending agents. Collateral, which exceeds December 31, 2012). In addition, the securities lending agent indemnifies Lifeco the market value of the loaned securities, is deposited by the borrower against borrower risk, meaning that the lending agent agrees contractually to with Lifeco’s lending agent and maintained by the lending agent until the replace securities not returned due to a borrower default. As at December 31, underlying security has been returned. The market value of the loaned 2013, Lifeco had loaned securities with a market value of $5,204 million securities is monitored on a daily basis by the lending agent, who obtains ($5,930 million as at December 31, 2012). or refunds additional collateral as the fair value of the loaned securities NOTE 7 FUNDS HELD BY CEDING INSURERS Included in funds held by ceding insurers of $10,832 million at December 31, 2013 the agreement, CLIRE is required to put amounts on deposit with Standard ($10,599 million at December 31, 2012 and $9,978 million at January 1, 2012) is Life and CLIRE has assumed the credit risk on the portfolio of assets included an agreement with Standard Life Assurance Limited (Standard Life). During in the amounts on deposit. These amounts on deposit are included in funds 2008, Canada Life International Re Limited (CLIRE), Lifeco’s indirect wholly held by ceding insurers on the balance sheets. Income and expenses arising owned Irish reinsurance subsidiary, signed an agreement with Standard Life, from the agreement are included in net investment income on the statements a U.K.-based provider of life, pension and investment products, to assume of earnings. by way of indemnity reinsurance a large block of payout annuities. Under At December 31, 2013 CLIRE had amounts on deposit of $9,848 million ($9,951 million at December 31, 2012 and $9,411 million at January 1, 2012). The details of the funds on deposit and related credit risk on the funds are as follows: CARRYING VALU ES AN D ESTIMATED FAIR VALU ES Cash and cash equivalents Bonds Other assets Supporting: Reinsurance liabilities Surplus DECEMBER 31, 2013 DECEMBER 31, 2012 JANUARY 1, 2012 CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE CARRYING VALUE 70 9,619 159 9,848 9,402 446 9,848 70 9,619 159 9,848 9,402 446 9,848 120 9,655 176 9,951 9,406 545 9,951 120 9,655 176 9,951 9,406 545 9,951 49 9,182 180 9,411 9,082 329 9,411 FAIR VALUE 49 9,182 180 9,411 9,082 329 9,411 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 65 65 NOTE 7 FUNDS HELD BY CEDING INSURERS (CONTINUED) CARRYING VALU E OF BON DS BY I S SU ER AN D IN DUSTRY SECTOR The following table provides details of the carrying value of bonds included in the funds on deposit by issuer and industry sector: DECEMBER 31, 2013 DECEMBER 31, 2012 JANUARY 1 , 2012 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 bonds AS SET Q UALIT Y 75 17 22 2,097 508 185 249 91 1,944 1,033 70 138 704 108 354 540 196 1,190 98 9,619 71 16 16 2,455 443 172 258 87 2,070 1,007 58 224 617 31 320 475 145 1,119 71 9,655 – 88 – 3,074 369 128 242 73 1,807 747 21 239 404 26 220 381 117 1,135 111 9,182 The following table provides details of the carrying value of the bond portfolio by credit rating: BOND PORTFOLIO BY CREDIT RATING DECEMBER 31, 2013 DECEMBER 31, 2012 JANUARY 1,2012 AAA AA A BBB BB and lower Total bonds 2,669 2,382 3,666 546 356 9,619 3,103 2,183 3,539 507 323 9,655 3,520 1,819 3,116 468 259 9,182 66 66 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 INVESTMENTS IN JOINTLY CONTROLLED CORPORATIONS AND ASSOCIATE Investments in jointly controlled corporations and associate are composed Investments in jointly controlled corporations and associate also include principally of the Corporation’s 50% interest in Parjointco. As at December 31, Lifeco’s 30.4% investment, held through Irish Life, in Allianz Ireland, an unlisted 2013, Parjointco held a 55.6% equity interest in Pargesa (55.6% as at December 31, general insurance company operating in Ireland. 2012), representing 75.4% of the voting rights. Carrying value of the investments in jointly controlled corporations and associate is as follows: DECEMBER 31 Carrying value, beginning of year Acquisition of Irish Life Share of earnings Share of other comprehensive income (loss) Dividends Other Carrying value, end of year 2013 2,121 207 134 274 (78) 6 2,664 2012 2,205 – 130 (107) (65) (42) 2,121 The net asset value of the Corporation’s indirect interest in Pargesa is approximately $2,927 million as at December 31, 2013. The carrying value of the investment in Pargesa is $2,437 million, or $1,902 million excluding the unrealized net gains of its underlying investments. Pargesa’s financial information as at and for the year ended December 31, 2013 can be obtained in its publicly available information. 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 Acquisition of Irish Life Additions Disposal/retirements Change in foreign exchange rates Cost, end of year Accumulated amortization, beginning of year Amortization Impairment Disposal/retirements Change in foreign exchange rates Accumulated amortization, end of year Carrying value, end of year OWNER- OCCUPIED PROPERTIES CAPITAL ASSETS 2013 TOTAL OWNER- OCCUPIED PROPERTIES CAPITAL ASSETS 607 907 1,514 577 49 23 – 14 693 (43) (9) – – – (52) 641 30 85 (66) 12 79 108 (66) 26 968 1,661 (680) (53) (2) 54 (3) (684) 284 (723) (62) (2) 54 (3) (736) 925 – 33 – (3) 607 (36) (7) – – – (43) 564 846 – 93 (32) – 907 (649) (52) – 24 (3) (680) 227 2012 TOTAL 1,423 – 126 (32) (3) 1,514 (685) (59) – 24 (3) (723) 791 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, 2013 DECEMBER 31, 2012 JANUARY 1, 2012 613 188 124 925 589 172 30 791 536 175 27 738 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 67 67 NOTE 10 OTHER ASSETS Premiums in course of collection, accounts receivable and interest receivable Deferred acquisition costs Pension benefits [Note 26] Income taxes receivable Trading account assets Prepaid expenses Other DECEMBER 31, 2013 DECEMBER 31, 2012 JANUARY 1, 2012 3,435 687 408 199 376 115 687 5,907 2,955 541 202 204 144 120 608 4,774 2,661 529 199 209 141 129 413 4,281 Total other assets of $4,772 million as at December 31, 2013 are to be realized within 12 months. 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: 2013 2012 COST ACCUMUL ATED IMPAIRMENT CARRYING VALUE COST ACCUMUL ATED IMPAIRMENT CARRYING VALUE 9,563 (890) 378 17 100 – – – (63) – 8,673 378 17 37 – 9,703 (917) 8,786 – – (31) (109) – – 27 – – – (4) (109) 8,673 10,058 (953) 9,105 9,563 (890) DECEMBER 31, 2013 DECEMBER 31, 2012 JANUARY 1, 2012 1,142 3,028 1,970 1 131 1,443 1,250 140 9,105 1,142 3,028 1,563 1 123 1,443 1,250 123 8,673 1,142 3,028 1,563 1 127 1,500 1,302 123 8,786 DECEMBER 31 Balance, beginning of year Acquisition of Irish Life [Note 4] Additions Change in foreign exchange rates Other Balance, end of year ALLOCATION TO CASH G EN ER ATING U N ITS Goodwill has been assigned to cash generating units as follows: LIFECO Canada Group Individual insurance / wealth management Europe Insurance and annuities Reinsurance United States Financial services IGM Investors Group Mackenzie Other and corporate 68 68 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 11 GOODWILL AND INTANGIBLE ASSETS (CONTINUED) INTANG IB LE AS SETS The carrying value of the intangible assets and changes in the carrying value of the intangible assets are as follows: IN DEFIN ITE LIFE INTANG IB LE AS SETS DECEMBER 31, 2013 Cost, beginning of year Acquisition of Irish Life [Note 4] Additions Change in foreign exchange rates Cost, end of year Accumulated impairment, beginning of year Impairment Change in foreign exchange rates and other Accumulated impairment, end of year Carrying value, end of year DECEMBER 31, 2012 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 JANUARY 1, 2012 Cost Accumulated impairment Carrying value SHAREHOLDERS’ PORTION OF ACQUIRED FUTURE PARTICIPATING ACCOUNT PROFITS CUSTOMER CONTRAC T- REL ATED 2,264 354 – – 134 2,398 (802) – (56) (858) CUSTOMER CONTRAC T- REL ATED 2,321 (57) 2,264 (825) 23 (802) – – – – – – – 354 – 354 – – – BRANDS, TRADEMARKS AND TRADE NAMES MUTUAL FUND MANAGEMENT CONTRAC TS TOTAL 1,002 131 – 45 740 4,360 – 1 – 131 1 179 354 1,178 741 4,671 (91) (34) (7) (132) 1,046 – – – – (893) (34) (63) (990) 741 3,681 1,540 354 SHAREHOLDERS’ PORTION OF ACQUIRED FUTURE PARTICIPATING ACCOUNT PROFITS BRANDS, TRADEMARKS AND TRADE NAMES MUTUAL FUND MANAGEMENT CONTRAC TS TOTAL 4,426 (66) 4,360 (919) 26 (893) 740 – 740 – – – 1,011 (9) 1,002 (94) 3 (91) 911 1,462 354 740 3,467 SHAREHOLDERS’ PORTION OF ACQUIRED FUTURE PARTICIPATING ACCOUNT PROFITS BRANDS, TRADEMARKS AND TRADE NAMES MUTUAL FUND MANAGEMENT CONTRAC TS 354 – 354 1,011 (94) 917 740 – 740 CUSTOMER CONTRAC T- REL ATED 2,321 (825) 1,496 TOTAL 4,426 (919) 3,507 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 69 69 NOTE 11 GOODWILL AND INTANGIBLE ASSETS (CONTINUED) FIN ITE LIFE INTANG IB LE AS SETS DECEMBER 31, 2013 Cost, beginning of year Acquisition of Irish Life [Note 4] 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 DECEMBER 31, 2012 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 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 SOFT WARE DEFERRED SELLING COMMISSIONS TOTAL 564 116 – – 27 – 707 (235) (39) – – (6) – (280) 427 103 110 25 – – – 7 – 110 (34) (3) – – (1) – (38) 72 – 2 (1) – – 111 (41) (8) – – – – (49) 62 – – – 2 – 27 (25) – – – (2) – (27) – 655 – 115 (1) 16 13 798 (352) (82) (3) (1) (9) – (447) 351 1,448 2,905 – 237 (84) – (222) 1,379 (752) (210) – 49 – 222 (691) 688 116 354 (86) 52 (209) 3,132 (1,439) (342) (3) 48 (18) 222 (1,532) 1,600 CUSTOMER CONTRAC T- REL ATED DISTRIBUTION CHANNELS DISTRIBUTION CONTRAC TS TECHNOLOGY AND PROPERT Y LEASES SOFT WARE DEFERRED SELLING COMMISSIONS TOTAL 571 100 107 – – (7) – 564 (204) (31) – – (235) 329 – – 3 – 103 (29) (5) – – (34) 69 3 – – – 110 (33) (8) – – (41) 69 25 – – – – 25 (22) (3) – – (25) – 545 105 (19) (3) 27 655 (295) (72) 15 – (352) 303 1,551 2,899 212 (103) – (212) 320 (122) (7) (185) 1,448 2,905 (800) (223) 59 212 (752) 696 (1,383) (342) 74 212 (1,439) 1,466 TOTAL 2,899 (1,383) 1,516 JANUARY 1, 2012 Cost Accumulated impairment Carrying value, end of year CUSTOMER CONTRAC T- REL ATED DISTRIBUTION CHANNELS DISTRIBUTION CONTRAC TS TECHNOLOGY AND PROPERT Y LEASES SOFT WARE DEFERRED SELLING COMMISSIONS 571 (204) 367 100 (29) 71 107 (33) 74 25 (22) 3 545 (295) 250 1,551 (800) 751 70 70 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 11 GOODWILL AND INTANGIBLE ASSETS (CONTINUED) The Corporation and its subsidiaries conducted their annual impairment Fair value is determined using a combination of commonly accepted valuation testings of goodwill and intangible assets which resulted in impairment methodologies, namely comparable trading and transaction multiples charges of $37 million. Lifeco recognized a $34 million intangible asset and discounted cash flow analysis. Comparable trading and transaction impairment which reflects discontinued use of the Canada Life brand in multiples methodologies calculate value by applying multiples observed in Ireland as a result of the Irish Life acquisition. This impairment charge has the market against historical and projected results approved by management. been recorded in restructuring and acquisition expenses (Note 24). Also, Lifeco Value-in-use is calculated by discounting cash flow projections approved recognized an impairment charge of $3 million on software assets. by management or board of directors covering an initial forecast period of RECOVER AB LE AMOU NT three to five years. Value beyond the initial period is derived by applying a terminal value multiple to the final year of the initial projection period. For a For the purposes of annual impairment testing, goodwill has been allocated significant portion of the goodwill and intangible assets, the terminal value to the cash generating units which are the units expected to benefit from the multiple is a function of the discount rate (which ranges from 10% to 12.5%) synergies of the business combinations. and the terminal growth rate (which ranges from 1.5% to 3.0%). The discount Any potential impairment of goodwill or intangible assets is identified by rate is reflective of the country- and product-specific cash flow risks and the comparing the recoverable amount to its carrying value. The recoverable terminal growth rate is estimated as the long-term average growth rate of amount is determined as the higher of fair value less cost to sell or value-in-use. sales, including inflation in the markets in which the Corporation and its subsidiaries operate. NOTE 12 SEGREGATED FUNDS AND OTHER STRUCTURED ENTITIES Lifeco offers segregated fund products in Canada, the U.S. and Europe that SEG REGATED FU N DS AN D GUAR ANTEE EXPOSU RE are referred to as segregated funds, separate accounts and unit-linked funds Lifeco offers retail segregated fund products, variable annuity products and in the respective markets. These funds are contracts issued by insurers unitized with profits products that provide for certain guarantees that are to segregated fund policyholders where the benefit is directly linked to tied to the fair values of the investment funds. While these products are the performance of the investments, the risks or rewards of the fair value similar to mutual funds, there is a key difference from mutual funds as the movements and net investment income is realized by the segregated fund segregated funds have certain guarantee features that protect the segregated policyholders. The segregated fund policyholders are required to select the fund policyholder from market declines in the underlying investments. These segregated funds that hold a range of underlying investments. While Lifeco guarantees are Lifeco’s primary exposure on these funds. Lifeco accounts for has legal title to the investments, there is a contractual obligation to pass these guarantees within insurance and investment contract liabilities in the along the investment results to the segregated fund policyholders and Lifeco financial statements. In addition to Lifeco’s exposure on the guarantees, the segregates these investments from those of the corporation itself. fees earned by Lifeco on these products are impacted by the market value In Canada and the U.S., the segregated fund and separate account assets of these funds. are legally separated from the general assets of Lifeco under the terms of In Canada, Lifeco offers retail segregated fund products through Great-West the policyholder agreement and cannot be used to settle obligations of Life, London Life and Canada Life. These products provide guaranteed Lifeco. In Europe, the assets of the funds are functionally and constructively minimum death benefits and guaranteed minimum accumulation on segregated from those of Lifeco. As a result of the legal and constructive maturity benefits. arrangements of these funds, their assets and liabilities are presented within the balance sheets as line items titled investments on account of segregated fund policyholders and with an equal and offsetting liability titled insurance and investment contracts on account of segregated fund policyholders. In circumstances where the segregated funds are invested in structured entities and are deemed to control the entity, Lifeco has presented the non- controlling ownership interest within the segregated funds for the risk of policyholders as equal and offsetting amounts in the assets and liabilities. The amounts presented within are $772 million at December 31, 2013 ($484 million at December 31, 2012 and $403 million at January 1, 2012). Within the statement of earnings, all segregated fund policyholders’ income, including fair value changes and net investment income, is credited to the segregated fund policyholders and reflected in the assets and liabilities on account of segregated fund policyholders within the balance sheets. As these amounts do not directly impact the revenues and expenses of Lifeco, these amounts are not included separately in the statements of earnings. In the U.S., Lifeco offers variable annuities with guaranteed minimum death benefits through Great-West Financial. Most are a return of premium on death with the guarantee expiring at age 70. In Europe, Lifeco offers unitized with profits products, which are similar to segregated fund products, but with pooling of policyholders’ funds and minimum credited interest rates. Lifeco also offers guaranteed minimum withdrawal benefits products in Canada, the U.S. and Europe. These guaranteed minimum withdrawal benefits products offer levels of death and maturity guarantees. At December 31, 2013, the amount of guaranteed minimum withdrawal benefits products in force in Canada, the U.S., Ireland and Germany was $2,674 million ($2,110 million at December 31, 2012 and $1,256 million at January 1, 2012). POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 71 71 NOTE 12 SEGREGATED FUNDS AND OTHER STRUCTURED ENTITIES (CONTINUED) Lifeco’s exposure to these guarantees is set out as follows: DECEMBER 31, 2013 Canada United States Europe Total DECEMBER 31, 2012 Canada United States Europe Total JANUARY 1, 2012 Canada United States Europe Total FAIR VALUE INCOME MATURIT Y DEATH TOTAL [1] INVESTMENT DEFICIENCY BY BENEFIT T YPE 26,779 8,853 8,683 44,315 – – 260 260 32 – 16 48 101 42 74 217 101 42 334 477 FAIR VALUE INCOME MATURIT Y DEATH TOTAL [1] INVESTMENT DEFICIENCY BY BENEFIT T YPE 24,192 7,272 3,665 35,129 – – 552 552 29 – 40 69 181 59 71 311 181 59 624 864 FAIR VALUE INCOME MATURIT Y DEATH TOTAL [1] INVESTMENT DEFICIENCY BY BENEFIT T YPE 22,837 7,041 3,232 33,110 – 1 641 642 39 – 124 163 301 79 174 554 301 80 817 1,198 [1] A policy can only receive a payout for 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, 2013, December 31, 2012 and January 1, 2012. The investment deficiency measures the point-in-time exposure to a trigger For further details on Lifeco’s risk and guarantee exposure and the event (i.e. income election, maturity, or death) assuming it occurred on management of these risks, refer to “Risk Management and Control Practices” December 31, 2013. The actual cost to Lifeco will depend on the trigger event in the Lifeco section of the Corporation’s annual Management’s Discussion having occurred and the fair values at that time. The actual claims before tax and Analysis. associated with these guarantees were approximately $24 million for the year ended December 31, 2013, with the majority arising in the Europe segment. INVESTM ENTS ON ACCOU NT OF SEG REGATED FU N D POLICYHOLDERS Cash and cash equivalents Bonds Mortgage loans Shares and units in unit trusts Mutual funds Investment properties Accrued income Other liabilities/assets Non-controlling mutual fund interest DECEMBER 31, 2013 DECEMBER 31, 2012 JANUARY 1, 2012 11,374 34,405 2,427 62,882 41,555 8,284 160,927 380 (1,300) 772 160,779 4,837 24,070 2,303 35,154 34,100 6,149 106,613 239 (1,904) 484 105,432 5,334 21,594 2,303 32,651 31,234 5,457 98,573 287 (2,278) 403 96,985 72 72 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 12 SEGREGATED FUNDS AND OTHER STRUCTURED ENTITIES (CONTINUED) IN SU R ANCE AN D INVESTM ENT CONTR ACTS ON ACCOU NT OF SEG REGATED FU N D POLICYHOLDERS YEAR ENDED DECEMBER 31 Balance, beginning of year Additions (deductions): Policyholder deposits Net investment income Net realized capital gains on investments Net unrealized capital gains on investments Unrealized gains (losses) due to changes in foreign exchange rates Policyholder withdrawals Acquisition of Irish Life [Note 4] Net transfer from General Fund Non-controlling mutual fund interest Balance, end of year INVESTM ENT INCOM E ON ACCOU NT OF SEG REGATED FU N D POLICYHOLDERS YEAR ENDED DECEMBER 31 Net investment income Net realized capital gains on investments Net unrealized capital gains on investments Unrealized gains (losses) due to changes in foreign exchange rates Total Change in insurance and investment contract liabilities on account of segregated fund policyholders Net 2013 105,432 15,861 1,565 3,419 7,879 7,226 (17,141) 36,348 67 123 55,347 160,779 2013 1,565 3,419 7,879 7,226 20,089 20,089 – 2012 96,985 13,819 1,189 1,094 4,316 (213) (11,831) – (8) 81 8,447 105,432 2012 1,189 1,094 4,316 (213) 6,386 6,386 – INVESTM ENTS ON ACCOU NT OF SEG REGATED FU N D POLICYHOLDERS (by fair value hierarchy level) DECEMBER 31, 2013 LEVEL 1 LEVEL 2 LEVEL 3 TOTAL Investments on account of segregated fund policyholders [1] 106,144 46,515 9,298 161,957 [1] Excludes other liabilities, net of other assets, of $1,178 million. During 2013 certain foreign equity holdings valued at $1,780 million have been Level 2 assets include those assets where fair value is not available from transferred from Level 2 to Level 1, based on Lifeco’s ability to utilize observable, normal market pricing sources and where Lifeco does not have visibility quoted prices in active markets. through to the underlying assets. The following presents additional information about Lifeco’s investments on account of segregated fund policyholders for which Lifeco has utilized Level 3 inputs to determine fair value for the year ended December 31, 2013: DECEMBER 31 Balance, beginning of year Total gains included in segregated fund investment income Acquisition of Irish Life Purchases Sales Transfers into Level 3 Transfers out of Level 3 Balance, end of year 2013 6,287 694 2,326 428 (440) 4 (1) 9,298 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 73 73 NOTE 12 SEGREGATED FUNDS AND OTHER STRUCTURED ENTITIES (CONTINUED) Transfers into Level 3 are due primarily to decreased observability of inputs Factors that could cause assets under management and fees to decrease in valuation methodologies. Transfers out of Level 3 are due primarily to include declines in equity markets, changes in fixed income markets, increased observability of inputs in valuation methodologies as evidenced changes in interest rates and defaults, redemptions and other withdrawals, by corroboration of market prices with multiple pricing vendors. political and other economic risks, changing investment trends and relative In addition to the segregated funds, Lifeco has interests in a number of structured unconsolidated entities including mutual funds, open-ended investment companies, and unit trusts. These entities are created as investment performance. The risk is that fees may vary but expenses and recovery of initial expenses are relatively fixed, and market conditions may cause a shift in asset mix potentially resulting in a change in revenue. investment strategies for its unit holders based on the directives of each Fee and other income received by Lifeco resulting from Lifeco’s interests in individual fund. these structured entities was $3,068 million. Some of these funds are managed by related parties of Lifeco and Lifeco Included within other assets (see Note 10) is $306 million of investments by receives management fees related to these services. Management fees can Lifeco in bonds and stocks of Putnam-sponsored funds and $70 million of be variable due to the performance of factors – such as markets or industries – investments in stocks of sponsored unit trusts in Europe. in which the fund invests. Fee income derived in connection with the management of investment funds generally increases or decreases in direct relationship with changes of assets under management, which is affected by prevailing market conditions, and the inflow and outflow of client assets. During 2013, Lifeco has not provided any additional significant financial or other support to the structured entities. NOTE 13 INSURANCE AND INVESTMENT CONTRACT LIABILITIES IN SU R ANCE AN D INVESTM ENT CONTR ACT LIAB ILITIES DECEMBER 31, 2013 Insurance contract liabilities Investment contract liabilities DECEMBER 31, 2012 Insurance contract liabilities Investment contract liabilities JANUARY 1, 2012 Insurance contract liabilities Investment contract liabilities GROSS LIABILIT Y 131,174 889 132,063 GROSS LIABILIT Y 119,973 739 120,712 GROSS LIABILIT Y 114,785 782 115,567 REINSURANCE ASSETS 5,070 – 5,070 REINSURANCE ASSETS 2,064 – 2,064 REINSURANCE ASSETS 2,061 – 2,061 NET 126,104 889 126,993 NET 117,909 739 118,648 NET 112,724 782 113,506 74 74 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 13 INSURANCE AND INVESTMENT CONTRACT LIABILITIES (CONTINUED) COM POSITION OF IN SU R ANCE AN D INVESTM ENT CONTR ACT LIAB ILITIES AN D REL ATED SU PPORTING AS SETS The composition of insurance and investment contract liabilities of Lifeco is as follows: Participating Canada United States Europe Non-participating Canada United States Europe DECEMBER 31, 2013 DECEMBER 31, 2012 JANUARY 1, 2012 GROSS LIABILIT Y REINSURANCE ASSETS NET GROSS LIABILIT Y REINSURANCE ASSETS NET GROSS LIABILIT Y REINSURANCE ASSETS NET 29,107 9,337 1,247 25,898 19,038 47,436 132,063 (132) 29,239 27,851 11 – 521 238 4,432 5,070 9,326 1,247 25,377 18,800 43,004 8,942 1,241 27,283 17,356 38,039 126,993 120,712 (88) 14 – 746 241 1,151 2,064 27,939 26,470 (50) 26,520 8,928 1,241 26,537 17,115 36,888 8,639 1,230 27,099 16,657 35,472 18 – 919 276 898 8,621 1,230 26,180 16,381 34,574 118,648 115,567 2,061 113,506 The composition of the assets supporting liabilities and equity of Lifeco is as follows: DECEMBER 31, 2013 Participating liabilities Canada United States Europe Non-participating liabilities Canada United States Europe Other, including segregated funds Total equity Total carrying value Fair value DECEMBER 31, 2012 Participating liabilities Canada United States Europe Non-participating liabilities Canada United States Europe Other, including segregated funds Total equity Total carrying value Fair value – 143 1,796 – 225 96 1,371 8,554 – 115 1,565 – 127 – 1,023 7,051 BONDS MORTGAGE LOANS SHARES INVESTMENT PROPERTIES OTHER TOTAL 11,907 4,583 852 16,157 15,508 27,273 9,239 4,395 7,701 141 39 3,769 2,911 3,290 641 571 89,914 19,063 4,923 1,157 3,419 4,613 178 4,173 619 – 35 3 – 29,107 9,337 1,247 25,898 19,038 47,436 2,460 14,188 87 546 163,780 173,843 13,116 19,999 4,288 204,086 325,905 90,731 19,517 8,720 4,288 204,086 327,342 BONDS MORTGAGE LOANS SHARES INVESTMENT PROPERTIES OTHER TOTAL 6,903 4,221 12,818 4,307 874 17,519 14,280 22,420 6,507 3,856 188 40 4,428 2,464 2,827 493 532 82,581 17,875 932 – 66 3 – 2,977 4,447 146 3,768 612 2,173 10,492 27,851 8,942 1,241 27,283 17,356 38,039 4 394 109,123 116,127 11,206 17,011 3,572 142,771 253,850 84,085 19,067 7,089 3,572 142,771 256,584 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 75 75 NOTE 13 INSURANCE AND INVESTMENT CONTRACT LIABILITIES (CONTINUED) JANUARY 1, 2012 Participating liabilities Canada United States Europe Non-participating liabilities Canada United States Europe Other, including segregated funds Total equity Total carrying value Fair value BONDS MORTGAGE LOANS SHARES INVESTMENT PROPERTIES OTHER TOTAL 11,862 6,686 3,864 507 4,059 855 16,674 13,523 20,449 6,563 4,370 152 56 4,738 2,369 2,506 484 441 78,355 17,432 – 128 1,329 – 119 – 1,216 6,656 3,551 4,428 121 4,338 765 – 70 20 – 26,470 8,639 1,230 27,099 16,657 35,472 2,092 10,306 6 554 100,869 107,922 9,131 15,712 3,249 133,509 239,201 79,396 18,662 6,724 3,249 133,509 241,540 Cash flows of assets supporting insurance and investment contract liabilities Changes in the fair values of assets backing capital and surplus, less related are matched within reasonable limits. Changes in the fair values of these income taxes, would result in a corresponding change in surplus over time in assets are essentially offset by changes in the fair value of insurance and accordance with investment accounting policies. investment contract liabilities. CHANG E IN IN SU R ANCE CONTR ACT LIAB ILITIES The change in insurance contract liabilities during the year was the result of the following business activities and changes in actuarial estimates: DECEMBER 31, 2013 Balance, beginning of year Acquisition of Irish Life Impact of new business Normal change in force Management action and changes in assumptions Business movement from/to external parties Impact of foreign exchange rate changes PARTICIPATING NON-PARTICIPATING GROSS LIABILIT Y REINSURANCE ASSETS NET GROSS LIABILIT Y REINSURANCE ASSETS NET TOTAL NET 38,003 (74) 38,077 – 16 1,049 (129) – 724 – – (13) (36) – 2 – 16 1,062 (93) – 722 81,970 6,160 5,251 (5,898) (407) (455) 4,890 91,511 2,138 2,963 (135) 417 (323) (234) 365 79,832 117,909 3,197 5,386 3,197 5,402 (6,315) (5,253) (84) (221) 4,525 (177) (221) 5,247 5,191 86,320 126,104 Balance, end of year 39,663 (121) 39,784 DECEMBER 31, 2012 Balance, beginning of year Impact of new business Normal change in force Management action and changes in assumptions Business movement from/to external parties Impact of foreign exchange rate changes Impact of Crown Life amalgamation PARTICIPATING NON-PARTICIPATING GROSS LIABILIT Y REINSURANCE ASSETS NET GROSS LIABILIT Y REINSURANCE ASSETS NET TOTAL NET 36,303 (32) 36,335 72 1,621 (260) – (262) 529 – (6) (34) – (2) – 72 1,627 (226) – (260) 529 78,482 4,656 (519) (380) (48) 308 (529) 2,093 76,389 112,724 326 35 (306) (7) (3) – 4,330 (554) (74) (41) 311 (529) 4,402 1,073 (300) (41) 51 – Balance, end of year 38,003 (74) 38,077 81,970 2,138 79,832 117,909 76 76 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 13 INSURANCE AND INVESTMENT CONTRACT LIABILITIES (CONTINUED) Under fair value accounting, movement in the fair value of the supporting increased provisions for policyholder behaviour ($20 million increase), updated assets is a major factor in the movement of insurance contract liabilities. life mortality assumptions ($4 million increase) and updated morbidity Changes in the fair value of assets are largely offset by corresponding changes assumptions ($1 million increase). in the fair value of liabilities. The change in the value of the insurance contract liabilities associated with the change in the value of the supporting assets is included in the normal change in force above. In 2012, the major contributors to the increase in net insurance contract liabilities were the impact of new business ($4,402 million increase) and the normal change in the in-force business ($1,073 million increase) primarily due In 2013, the major contributors to the increase in net insurance contract to the change in fair value. liabilities were the impact of new business ($5,402 million increase), the impact of foreign exchange rate changes ($5,247 million increase) and the Irish Life acquisition ($3,197 million increase). This was partially offset by the normal change in the in-force business ($5,253 million decrease) which was partly due to the change in fair value. Net non-participating insurance contract liabilities decreased by $84 million in 2013 due to management actions and assumption changes including a $123 million decrease in Canada, a $41 million increase in Europe and a $2 million decrease in the United States. Net non-participating insurance contract liabilities decreased by $74 million in 2012 due to management actions and assumption changes, including a $138 million decrease in Canada, a $97 million increase in Europe and a $33 million decrease in the United States. The decrease in Canada was primarily due to updated life insurance mortality ($79 million decrease), updated expenses and taxes ($75 million decrease), modelling refinements across the Canadian segment ($71 million decrease), updated longevity assumptions ($21 million decrease) and updated morbidity assumptions ($9 million decrease), partially offset by provisions for asset and The decrease in Canada was primarily due to updated mortality assumptions mismatch risk ($66 million increase) and increased provisions for policyholder ($95 million decrease), updated morbidity assumptions ($70 million decrease), behaviour in Individual Insurance ($41 million increase). modelling refinements across the Canadian segment ($15 million decrease), decreased provisions for interest and mismatch risk ($5 million decrease) and updated expenses and taxes ($3 million decrease), partially offset by increased provisions for policyholder behaviour ($63 million increase) and updated longevity assumptions ($3 million increase). The increase in Europe was primarily due to updated longevity improvement assumptions ($348 million increase), increased provisions for policyholder behaviour in reinsurance ($109 million increase), increased provisions for expenses and taxes ($36 million increase), modelling refinements ($32 million increase), increased provisions for asset and mismatch risk ($15 million The increase in Europe was primarily due to increased provisions for increase) and updated morbidity assumptions ($3 million increase), partially policyholder behaviour ($55 million increase), increased provisions for offset by updated base longevity assumptions ($358 million decrease) and expenses and taxes ($30 million increase), updated morbidity assumptions updated life insurance mortality ($85 million decrease). ($27 million increase) and updates to other provisions ($4 million increase), partially offset by updates to the life mortality assumptions ($40 million decrease), decreased provisions for interest and mismatch risk ($25 million decrease) and modelling refinements ($11 million decrease). The decrease in the United States was primarily due to updated life mortality ($33 million decrease), updated longevity assumptions ($3 million decrease), decreased provisions for policyholder behaviour ($3 million decrease) and updated expenses and taxes ($1 million decrease), partially offset by provisions The decrease in the United States was primarily due to updated life mortality for asset and mismatch risk ($7 million increase). assumptions ($12 million decrease), partially offset by updated expenses and taxes ($9 million increase), and updated longevity assumptions ($1 million increase). Net participating insurance contract liabilities decreased by $226 million in 2012 due to management actions and assumption changes. The decrease was primarily due to decreases in the provision for future policyholder Net participating insurance contract liabilities decreased by $93 million dividends ($2,078 million decrease), improved Individual Life mortality in 2013 due to management actions and assumption changes. The decrease ($124 million decrease), updated expenses and taxes ($92 million decrease) was primarily due to decreases from higher investment returns ($631 million and modelling refinements in Canada ($10 million decrease), partially offset decrease), modelling refinements in Canada ($109 million decrease) and by lower investment returns ($2,056 million increase), increased provisions updated expenses and taxes ($88 million decrease), partially offset by for policyholder behaviour ($19 million increase) and updated morbidity increased provisions for future policyholder dividends ($710 million increase), assumptions ($3 million increase). CHANG E IN INVESTM ENT CONTR ACT LIAB ILITIES M EASU RED AT FAIR VALU E DECEMBER 31 Balance, beginning of year Acquisition of Irish Life [Note 4] Normal change in in-force business Investment experience Impact of foreign exchange rate changes Balance, end of year 2013 739 194 (97) 19 34 889 2012 782 – (87) 51 (7) 739 The carrying value of investment contract liabilities approximates their fair value. No investment contract liabilities have been reinsured. POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 77 77 NOTE 13 INSURANCE AND INVESTMENT CONTRACT LIABILITIES (CONTINUED) PREM I U M INCOM E DECEMBER 31 Direct premiums Assumed reinsurance premiums Total POLICYHOLDER B EN EFITS DECEMBER 31 Direct Assumed reinsurance Total 2013 18,772 4,669 23,441 2013 13,516 4,948 18,464 2012 [1] 17,379 4,897 22,276 2012 [1] 14,589 3,265 17,854 [1] Lifeco reclassified certain comparative figures to conform to the presentation adopted in the current period. This resulted in an increase in assumed reinsurance premiums of $437 million, a decrease to reinsurance fee income of $13 million, offset primarily by an increase in assumed reinsurance policyholder benefits. There was no impact on equity, net earnings or cash flows of the Corporation. ACTUARIAL AS SU M PTION S Property and casualty reinsurance Insurance contract liabilities for In the computation of insurance contract liabilities, valuation assumptions property and casualty reinsurance written by London Reinsurance Group Inc. have been made regarding rates of mortality/morbidity, investment (LRG), a subsidiary of London Life, are determined using accepted actuarial returns, levels of operating expenses, rates of policy termination and practices for property and casualty insurers in Canada. The insurance rates of utilization of elective policy options or provisions. The valuation contract liabilities have been established using cash flow valuation assumptions use best estimates of future experience together with techniques, including discounting. The insurance contract liabilities are a margin for adverse deviation. These margins are necessary to provide based on cession statements provided by ceding companies. In certain for possibilities of misestimation and/or future deterioration in the best instances, LRG management adjusts cession statement amounts to reflect estimate assumptions and provide reasonable assurance that insurance management’s interpretation of the treaty. Differences will be resolved via contract liabilities cover a range of possible outcomes. Margins are reviewed audits and other loss mitigation activities. In addition, insurance contract periodically for continued appropriateness. The methods for arriving at these valuation assumptions are outlined below: Mortality A life insurance mortality study is carried out annually for each major block of insurance business. The results of each study are used to update Lifeco’s experience valuation mortality tables for that business. When there is insufficient data, use is made of the latest industry experience to derive an appropriate valuation mortality assumption. The actuarial standards were amended to remove the requirement that, for life insurance, any reduction in liabilities due to mortality improvement assumptions be offset by an equal amount of provision for adverse deviation. Appropriate provisions have been made for future mortality deterioration on term insurance. Annuitant mortality is also studied regularly and the results are used to modify established industr y experience annuitant mortality tables. Mortality improvement has been projected to occur throughout future years for annuitants. 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. liabilities also include an amount for incurred but not reported losses which may differ significantly from the ultimate loss development. The estimates and underlying methodology are continually reviewed and updated, and adjustments to estimates are reflected in earnings. LRG analyzes the emergence of claims experience against expected assumptions for each reinsurance contract separately and at the portfolio level. If necessary, a more in-depth analysis is undertaken of the cedant experience. Investment returns The assets which correspond to the different liability categories are segmented. For each segment, projected cash flows from the current assets and liabilities are used in the Canadian Asset Liability Method to determine 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 23). Expenses Contractual policy expenses (e.g., sales commissions) and tax expenses are reflected on a best estimate basis. Expense studies for indirect operating expenses are updated regularly to determine an appropriate estimate of future operating expenses for the liability type being valued. Improvements in unit operating expenses are not projected. An inflation assumption is incorporated in the estimate of future operating expenses consistent with the interest rate scenarios projected under the Canadian Asset Liability Method as inflation is assumed to be correlated with new money interest rates. 78 78 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 13 INSURANCE AND INVESTMENT CONTRACT LIABILITIES (CONTINUED) Policy termination Studies to determine rates of policy termination are are determined consistent with policyholders’ reasonable expectations, such updated regularly to form the basis of this estimate. Industry data is also expectations being influenced by the participating policyholder dividend available and is useful where Lifeco has no experience with specific types of policies and/or policyholder communications, marketing material and past policies or its exposure is limited. Lifeco has significant exposures in respect practice. It is Lifeco’s expectation that changes will occur in policyholder of the T-100 and Level Cost of Insurance Universal Life products in Canada and dividend scales or adjustable benefits for participating or adjustable business policy renewal rates at the end of term for renewable term policies in Canada respectively, corresponding to changes in the best estimate assumptions, and Reinsurance. Industry experience has guided Lifeco’s assumptions for resulting in an immaterial net change in insurance contract liabilities. Where these products as Lifeco’s own experience is very limited. underlying guarantees may limit the ability to pass all of this experience 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 resets (segregated fund maturity guarantees). The assumed rates of utilization are based on Lifeco or industry experience when it exists and, when not, on judgment considering incentives to utilize the option. Generally, whenever it is clearly in the best interests of an informed policyholder to utilize an option, then it is assumed to be elected. 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 in response to the relevant experience. The dividend and policy adjustments back to the policyholder, the impact of this non-adjustability impacting shareholder earnings is reflected in the impact of changes in best estimate assumptions above. RI SK MANAG 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. Lifeco’s objective is to mitigate its exposure to risk arising from these contracts through product design, product and geographical diversification, the implementation of its underwriting strategy guidelines, and through the use of reinsurance arrangements. The following table provides information about Lifeco’s insurance contract liabilities’ sensitivities to Lifeco 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. DECEMBER 31 Mortality (increase) Annuitant mortality (decrease) Morbidity (adverse change) Investment returns Parallel shift in yield curve [1] Increase Decrease Change in range of interest rates [1] Increase Decrease Change in equity markets Increase Decrease Change in best estimate returns for equities Increase Decrease Expenses (increase) Policy termination (adverse change) 2013 2012 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% 1% 1% 10% 10% 1% 1% 5% 10% (217) (272) (208) – – 12 (322) 34 (150) 353 (392) (76) (466) (146) (183) (140) – – 8 (217) 23 (101) 237 (264) (51) (313) 2% 2% 5% 1% 1% 1% 1% 10% 10% 1% 1% 5% 10% (208) (274) (188) n/a n/a n/a n/a 18 (96) 342 (376) (56) (473) (147) (194) (133) n/a n/a n/a n/a 13 (68) 242 (266) (40) (334) [1] Due to a change in interest provision methodology in 2013, 2012 sensitivities are not comparable to 2013. Please refer to Note 23. POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 79 79 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, 2013 DECEMBER 31, 2012 JANUARY 1, 2012 GROSS LIABILIT Y REINSURANCE ASSETS NET GROSS LIABILIT Y REINSURANCE ASSETS NET GROSS LIABILIT Y REINSURANCE ASSETS Canada United States Europe 55,005 28,375 48,683 132,063 389 249 4,432 5,070 54,616 28,126 44,251 55,134 26,298 39,280 126,993 120,712 658 255 1,151 2,064 54,476 26,043 38,129 53,569 25,296 36,702 869 294 898 118,648 115,567 2,061 113,506 NET 52,700 25,002 35,804 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 are to minimize its exposure to significant losses from reinsurer insolvencies. reflected in the valuation with these costs and recoveries being appropriately Certain of the reinsurance contracts are on a funds withheld basis where 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 OBLIGATION TO SECURITIZATION ENTITIES IGM securitizes residential mortgages through the Canada Mortgage and principal. A component of this swap, related to the obligation to pay CMB Housing Corporation (CMHC)-sponsored National Housing Act Mortgage- coupons and receive investment returns on repaid mortgage principal, Backed Securities (NHA MBS) Program and Canada Mortgage Bond (CMB) is recorded as a derivative and had a negative fair value of $16 million at Program and through Canadian bank-sponsored asset-backed commercial December 31, 2013 (a negative fair value of $56 million in 2012). paper (ABCP) programs. These transactions do not meet the requirements for derecognition as IGM retains prepayment risk and certain elements of credit risk. Accordingly, IGM has retained these mortgages on its balance sheets and has recorded an offsetting liability for the net proceeds received as obligations to securitization entities which is carried at amortized cost. 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 program. As part of the ABCP transactions, IGM has provided cash reserves IGM earns interest on the mortgages and pays interest on the obligations for credit enhancement which are carried at cost. Credit risk is limited to to securitization entities. As part of the CMB transactions, IGM enters these cash reserves and future net interest income as the ABCP Trusts have no into a swap transaction whereby IGM pays coupons on CMBs and receives recourse to IGM’s other assets for failure to make payments when due. Credit investment returns on the NHA MBS and the reinvestment of repaid mortgage risk is further limited to the extent these mortgages are insured. DECEMBER 31 Carrying value NHA MBS and CMB Programs Bank-sponsored ABCP Total Fair value 2013 SECURITIZED MORTGAGES OBLIGATIONS TO SECURITIZATION ENTITIES NET SECURITIZED MORTGAGES OBLIGATIONS TO SECURITIZATION ENTITIES 3,803 1,689 5,492 3,843 1,729 5,572 5,659 5,671 (40) (40) (80) (12) 3,285 1,354 4,639 3,312 1,389 4,701 4,757 4,787 2012 NET (27) (35) (62) (30) The carrying value of obligations to securitization entities, which is recorded net of issue costs, includes principal payments received on securitized mortgages that are not due to be settled until after the reporting period. Issue costs are amortized over the life of the obligation on an effective interest rate basis. 80 80 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 15 DEBENTURES AND DEBT INSTRUMENTS DEBT INSTRUMENTS GREAT-WEST LIFECO INC. Commercial paper and other short-term debt instruments with interest rates from 0.24% to 0.33% (0.27% to 0.35% in 2012) Revolving credit facility with interest equal to LIBOR rate plus 0.75% or U.S. prime rate loan (US$450 million) Mortgage payable with interest rate of 4% changing to 5% on February 1, 2014, matures April 30, 2014 Term note due October 18, 2015, bearing an interest rate of LIBOR rate plus 0.75%, (US$304 million) unsecured Revolving credit facility with interest equal to LIBOR rate plus 1% or U.S. prime rate loan (US$200 million) Notes payable with interest rate of 8.0% due May 6, 2014, unsecured TOTAL DEBT INSTRUMENTS DEBENTURES POWER FINANCIAL CORPORATION DECEMBER 31, 2013 DECEMBER 31, 2012 JANUARY 1, 2012 CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE 105 477 75 322 – 1 105 477 75 322 – 1 980 980 97 – – 301 198 2 598 97 100 100 – – 301 198 2 598 – – 304 204 3 611 – – 308 204 3 615 6.90% debentures, due March 11, 2033, unsecured 250 304 250 324 250 295 GREAT-WEST LIFECO INC. 5.25% subordinated debentures, including associated fixed floating swap (€200 million) 6.14% debentures due March 21, 2018, unsecured 4.65% debentures due August 13, 2020, unsecured 2.50% debentures due April 18, 2023, (€500 million) 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, (US$175 million) unsecured 5.998% debentures due November 16, 2039, unsecured Subordinated debentures due May 16, 2046, bearing an interest rate of 7.153% until May 16, 2016 and, thereafter, a rate of 2.538% plus the 3-month LIBOR rate, (US$300 million) unsecured Subordinated debentures due June 21, 2067, bearing an interest rate of 5.691% until June 21, 2017 and, thereafter, at 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 June 26, 2018 and, thereafter, at a rate equal to the Canadian 90-day bankers’ acceptance rate plus 3.78%, unsecured IGM FINANCIAL INC. 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 Debentures held by Lifeco as investments TOTAL DEBENTURES 317 199 498 729 100 192 391 182 342 321 227 539 713 117 246 493 184 405 – 199 498 – 100 191 397 170 342 – 234 557 – 117 256 512 176 431 – 199 497 – 100 190 397 175 343 – 229 522 – 115 237 472 170 383 317 328 296 307 310 298 996 1,097 995 1,097 994 1,028 497 150 375 125 150 175 150 200 583 172 450 146 189 213 185 223 497 150 375 125 150 175 150 200 592 176 466 151 194 220 190 232 497 150 375 125 150 175 150 200 550 175 457 148 189 213 185 220 (40) 6,295 7,275 (49) 7,086 8,066 (41) 5,219 5,817 (51) 6,181 6,779 (39) 5,238 5,849 (47) 5,839 6,454 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 81 81 NOTE 15 DEBENTURES AND DEBT INSTRUMENTS (CONTINUED) The principal payments on debentures and debt instruments in each of the next five years is as follows: 2014 2015 2016 2017 2018 Thereafter 658 322 – 294 350 5,651 NOTE 16 CAPITAL TRUST DEBENTURES DECEMBER 31, 2013 DECEMBER 31, 2012 JANUARY 1, 2012 CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE CANADA LIFE CAPITAL TRUST 7.529% capital trust debentures due June 30, 2052, unsecured 150 205 150 216 6.679% capital trust debentures due June 30, 2052, unsecured GREAT-WEST LIFE CAPITAL TRUST 5.995% capital trust debentures due December 31, 2052, unsecured Acquisition-related fair value adjustment – – 150 13 163 – – 205 – 205 – – 150 14 164 – – 216 – 216 150 300 350 800 15 815 197 307 363 867 – 867 Canada Life Capital Trust (CLCT) redeemed all of its outstanding $300 million CLCT, a trust established by Canada Life, had issued $150 million of Canada principal amount Canada Life Capital Securities – Series A (CLiCS – Series A) Life Capital Securities – Series B (CLiCS – Series B), the proceeds of which on June 29, 2012 at par. were used by CLCT to purchase Canada Life senior debentures in the amount Great-West Life Capital Trust redeemed all of its outstanding $350 million of $150 million. principal amount Great-West Life Capital Trust Securities – Series A on Distributions and interest on the capital trust securities are classified as December 31, 2012 at par. financing charges on the statements of earnings (see Note 25). Subject to regulatory approval, CLCT may redeem the CLiCS – Series B, in whole or in part, at any time. NOTE 17 OTHER LIABILITIES Bank overdraft Accounts payable Dividends and interest payable Income taxes payable Repurchase agreements Deferred income reserves Deposits and certificates Funds held under reinsurance contracts Pension and other post-employment benefits [Note 26] Other DECEMBER 31, 2013 DECEMBER 31, 2012 JANUARY 1, 2012 380 1,935 362 1,014 – 451 187 270 1,194 1,105 6,898 448 1,556 358 684 225 427 163 335 1,563 905 6,664 437 1,651 362 541 250 406 151 169 1,232 889 6,088 Total other liabilities of $4,763 million as at December 31, 2013 are expected to be settled within 12 months. 82 82 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 17 OTHER LIABILITIES (CONTINUED) DEFERRED INCOM E RESERVES Changes in deferred income reserves of Lifeco are as follows: DECEMBER 31 Balance, beginning of year Additions Amortization Foreign exchange Disposals Balance, end of year NOTE 18 INCOME TAXES EFFECTIVE INCOM E TA X R ATE The Corporation’s effective income tax rate is derived as follows: YEARS ENDED DECEMBER 31 Combined statutory 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 associate, and in jointly controlled corporations Impact of rate changes on deferred income taxes Tax loss consolidation transaction Other Effective income tax rate INCOM E TA XES The components of income tax expense recognized in the statements of earnings are: YEARS ENDED DECEMBER 31 Current taxes In respect of the current year Other Deferred taxes Origination and reversal of temporary differences Effect of change in tax rates Recognition of previously unrecognized tax losses and deductible temporary differences Other 2013 427 70 (39) 38 (45) 451 2013 % 26.5 (4.4) (2.0) (1.0) (0.4) (0.2) (0.1) 18.4 2012 406 103 (42) 8 (48) 427 2012 % 26.5 (5.4) (2.0) (1.0) (0.1) – (2.0) 16.0 2013 2012 775 (11) 764 (18) (13) (6) (49) (86) 678 623 (20) 603 (32) (4) (22) 14 (44) 559 2012 EQUITY – (20) (20) The following table shows aggregate current and deferred taxes relating to items not recognized in the statements of earnings: DECEMBER 31 Current taxes Deferred taxes 2013 OTHER COMPREHENSIVE INCOME OTHER COMPREHENSIVE INCOME EQUITY (14) 106 92 – 2 2 3 (86) (83) POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 83 83 NOTE 18 INCOME TAXES (CONTINUED) DEFERRED TA XES Deferred taxes are attributable to the following items: DECEMBER 31 Loss carry forwards Investments Insurance and investment contract liabilities Deferred selling commissions Intangible assets Other Presented on the balance sheets as follows: Deferred tax assets Deferred tax liabilities 2013 1,360 (541) (518) (184) (52) 96 161 1,240 (1,079) 161 2012 1,184 (839) (272) (186) 77 241 205 1,223 (1,018) 205 A deferred tax asset is recognized for deductible temporary differences and One of Lifeco’s subsidiaries has had a history of recent losses. The subsidiary unused tax attributes only to the extent that realization of the related income has a net deferred tax asset balance of $1,184 million (US$1,117 million) as at tax benefit through future taxable profits is probable. December 31, 2013 composed principally of net operating losses and future Recognition is based on the fact that it is probable that the entity will have taxable profits and/or tax planning opportunities available to allow the deferred tax asset to be utilized. Changes in circumstances in future periods may adversely impact the assessment of the recoverability. The uncertainty of the recoverability is taken into account in establishing the deferred tax assets. The annual financial planning process provides a significant basis for deductions related to goodwill which has been previously impaired for book accounting purposes. Management of Lifeco has concluded that it is probable that the subsidiary and other historically profitable subsidiaries with which it files or intends to file a consolidated United States income tax return will generate sufficient taxable income against which the unused United States losses and deductions will be utilized. the measurement of deferred tax assets. As at December 31, 2013, the Corporation and its subsidiaries have non-capital Management of the Corporation and of its subsidiaries assess the recoverability of the deferred tax asset carrying values based on future years’ taxable income projections and believes the carrying values of the deferred tax assets as of December 31, 2013 are recoverable. At December 31, 2013, Lifeco had tax loss carry forwards totalling $4,185 million ($3,600 million in 2012). Of this amount, $3,925 million expires between 2014 and 2033, while $260 million has no expiry date. Lifeco will realize this benefit in future years through a reduction in current income taxes payable. losses of $213 million ($288 million in 2012) available to reduce future taxable income for which the benefits have not been recognized. These losses expire from 2026 to 2033. In addition, the Corporation and its subsidiaries have capital loss carry forwards of $133 million ($94 million in 2012) that can be used indefinitely to offset future capital gains for which the benefits have not been recognized. A deferred tax liability has not been recognized in respect of the temporary differences associated with investments in subsidiaries, branches, associate, and jointly controlled corporations as the Corporation and its subsidiaries are able to control the timing of the reversal of the temporary differences, and it is probable that the temporary differences will not reverse in the foreseeable future. 84 84 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 19 STATED CAPITAL AUTHORIZED The authorized capital of Power Financial consists of an unlimited number of First Preferred Shares, issuable in series; an unlimited number of Second Preferred Shares, issuable in series; and an unlimited number of common shares. I S SU ED AN D OUTSTAN DING DECEMBER 31, 2013 DECEMBER 31, 2012 JANUARY 1, 2012 NUMBER OF SHARES STATED CAPITAL NUMBER OF SHARES STATED CAPITAL NUMBER OF SHARES STATED CAPITAL FIRST PREFERRED SHARES (Perpetual) Series A [i] Series D [ii] Series E [iii] Series F [iv] Series H [v] Series I [vi] Series K [vii] Series L [viii] Series M [ix] Series O [x] Series P [xi] Series R [xii] Series S [xiii] Series T [xiv] 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 10,000,000 12,000,000 8,000,000 100 150 200 150 150 200 250 200 175 150 280 250 300 200 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 10,000,000 – – 100 150 200 150 150 200 250 200 175 150 280 250 – – 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 – – – 2,755 2,255 COMMON SHARES [xv] 711,173,680 721 709,104,080 664 708,173,680 COMMON SHARES Balance, beginning of year Issued under Stock Option Plan Balance, end of year 709,104,080 2,069,600 711,173,680 664 708,173,680 57 930,400 721 709,104,080 639 25 664 708,173,680 – 708,173,680 100 150 200 150 150 200 250 200 175 150 280 – – – 2,005 639 639 – 639 [i] The Series A First Preferred Shares are entitled to an annual cumulative [v] The 5.75% Non-Cumulative First Preferred Shares, Series H are entitled dividend, payable quarterly at a floating rate equal to 70% of the prime to fixed non-cumulative preferential cash dividends at a rate equal to rate of two major Canadian chartered banks and are redeemable, at the $1.4375 per share per annum, payable quarterly. The Corporation may Corporation’s option, at $25.00 per share, together with all declared and redeem for cash the Series H First Preferred Shares, in whole or in part, at unpaid dividends to, but excluding, the date of redemption. the Corporation’s option, at $25.00 per share, together with all declared [ii] The 5.50% Non-Cumulative First Preferred Shares, Series D are entitled and unpaid dividends to, but excluding, the date of redemption. to fixed non-cumulative preferential cash dividends at a rate equal to [vi] The 6.00% Non-Cumulative First Preferred Shares, Series I are entitled $1.375 per share per annum, payable quarterly. The Corporation may to fixed non-cumulative preferential cash dividends at a rate equal to redeem for cash the Series D First Preferred Shares, in whole or in part, at $1.50 per share per annum, payable quarterly. The Corporation may the Corporation’s option, at $25.00 per share, together with all declared redeem for cash the Series I First Preferred Shares, in whole or in part, at and unpaid dividends to, but excluding, the date of redemption. the Corporation’s option, at $25.00 per share, together with all declared [iii] The 5.25% Non-Cumulative First Preferred Shares, Series E are entitled and unpaid dividends to, but excluding, the date of redemption. to fixed non-cumulative preferential cash dividends at a rate equal to [vii] The 4.95% Non-Cumulative First Preferred Shares, Series K are entitled $1.3125 per share per annum, payable quarterly. The Corporation may to fixed non-cumulative preferential cash dividends at a rate equal to redeem for cash the Series E First Preferred Shares, in whole or in part, at $1.2375 per share per annum, payable quarterly. The Corporation may the Corporation’s option, at $25.00 per share, together with all declared redeem for cash the Series K First Preferred Shares, in whole or in part, and unpaid dividends to, but excluding, the date of redemption. at the Corporation’s option, at $25.25 per share if redeemed prior to [iv] 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, payable quarterly. 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. October 31, 2014, 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. POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 85 85 NOTE 19 STATED CAPITAL (CONTINUED) [viii] The 5.10% Non-Cumulative First Preferred Shares, Series L are entitled [xii] The 5.50% Non-Cumulative First Preferred Shares, Series R are entitled to fixed non-cumulative preferential cash dividends at a rate equal to to fixed non-cumulative preferential cash dividends at a rate equal to $1.2750 per share per annum, payable quarterly. The Corporation may $1.375 per share per annum, payable quarterly. On and after April 30, 2017, redeem for cash the Series L First Preferred Shares, in whole or in part, the Corporation may redeem for cash the Series R First Preferred Shares, at the Corporation’s option, at $25.50 per share if redeemed prior to in whole or in part, at the Corporation’s option, at $26.00 per share if October 31, 2014, $25.25 per share if redeemed thereafter and prior to redeemed prior to April 30, 2018, $25.75 per share if redeemed thereafter October 31, 2015, and $25.00 per share if redeemed thereafter, in each and prior to April 30, 2019, $25.50 per share if redeemed thereafter and case together with all declared and unpaid dividends to, but excluding, prior to April 30, 2020, $25.25 per share if redeemed thereafter and prior the date of redemption. [ix] The 6.00% Non-Cumulative First Preferred Shares, Series M were entitled to fixed non-cumulative preferential cash dividends at a rate equal to to April 30, 2021, 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. $1.50 per share per annum, payable quarterly. On January 31, 2014 and on [xiii] In the first quarter of 2013, the Corporation issued 12,000,000 4.80% January 31 every five years thereafter, the Corporation was permitted to Non-Cumulative First Preferred Shares, Series S for gross cash proceeds redeem for cash the Series M First Preferred shares, in whole or in part, at of $300 million. The Series S First Preferred Shares are entitled to fixed the Corporation’s option, at $25.00 per share plus all declared and unpaid non-cumulative preferential cash dividends at a rate equal to $1.20 per dividends to the date fixed for redemption, or the Series M First Preferred share per annum, payable quarterly. On and after April 30, 2018, the Shares were convertible to Non-Cumulative Floating Rate First Preferred Corporation may redeem for cash the Series S First Preferred Shares, Shares, Series N, at the option of the holders on January 31, 2014 or on in whole or in part, at the Corporation’s option, at $26.00 per share if January 31 every five years thereafter. On January 31, 2014, the Corporation redeemed prior to April 30, 2019, $25.75 per share if redeemed thereafter redeemed all of its 6.00% Non-Cumulative First Preferred Shares, Series and prior to April 30, 2020, $25.50 per share if redeemed thereafter and M for cash consideration of $175 million. prior to April 30, 2021, $25.25 per share if redeemed thereafter and prior to [x] 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, payable quarterly. 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 April 30, 2022, 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. Share issue costs of $9 million in connection with the Series S First Preferred Shares were charged to retained earnings in the year ended December 31, 2013. share if redeemed prior to October 31, 2015, $25.75 per share if redeemed [xiv] In the fourth quarter of 2013, the Corporation issued 8,000,000 4.20% thereafter and prior to October 31, 2016, $25.50 per share if redeemed Non-Cumulative First Preferred Shares, Series T for gross cash proceeds thereafter and prior to October 31, 2017, $25.25 per share if redeemed of $200 million. The Series T First Preferred Shares are entitled to fixed thereafter and prior to October 31, 2018, and $25.00 per share if redeemed non-cumulative preferential cash dividends at a rate equal to $1.05 per thereafter, in each case together with all declared and unpaid dividends share per annum, payable quarterly during the period ending, but to, but excluding, the date of redemption. excluding, January 31, 2019. Thereafter, during the “Subsequent Fixed [xi] The 4.40% Non-Cumulative First Preferred Shares, Series P are entitled to fixed non-cumulative preferential cash dividends at a rate equal to $1.10 per share per annum, payable quarterly, during the period ending, but excluding, January 31, 2016. Thereafter, during the “Subsequent Fixed Rate Periods” (that is, for the initial Subsequent Fixed Rate Period, the period from and including January 31, 2016 up to but excluding January 31, 2021 and for each succeeding Subsequent Fixed Rate Period, the period commencing on the day immediately following the end of the immediately preceding Subsequent Fixed Rate Period to, but excluding, January 31 in the fifth year thereafter), the Series P First Preferred Shares have fixed non-cumulative preferential dividends equal to a product of $25.00 and the rate of interest equal to the sum of the Government of Canada Yield on the applicable “Fixed Rate Calculation Date” (that is, for any Subsequent Fixed Rate Period, the 30th day prior to the first day of the applicable Subsequent Fixed Rate Period) plus 1.60 per cent, payable quarterly. On January 31, 2016 and on January 31 every five years thereafter, the Corporation may redeem for cash the Series P First Preferred Shares, in whole or in part, at the Corporation’s option, at $25.00 per share plus all declared and unpaid dividends to the date fixed for redemption, or the Series P First Preferred Shares are convertible to Non-Cumulative Rate Periods” (that is, for the initial Subsequent Fixed Rate Period, the period from and including January 31, 2019 up to, but excluding January 31, 2024 and for each succeeding Subsequent Fixed Rate Period, the period commencing on the day immediately following the end of the immediately preceding Subsequent Fixed Rate Period to, but excluding January 31 in the fifth year thereafter), the Series T First Preferred Shares have fixed non-cumulative preferential dividends equal to a product of $25.00 and the rate of interest equal to the sum of the Government of Canada Yield on the applicable “Fixed Rate Calculation Date” (that is, for any Subsequent Fixed Rate Period, the 30th day prior to the first day of the applicable Subsequent Fixed Rate Period) plus 2.37 per cent, payable quarterly. On January 31, 2019 and on January 31 every five years thereafter, the Corporation may redeem for cash the Series T 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 T First Preferred Shares are convertible to Non-Cumulative Floating Rate First Preferred Shares, Series U, at the option of the holders on January 31, 2019 or on January 31 every five years thereafter. Share issue costs of $5 million in connection with the Series T Preferred Shares were charged to retained earnings in the year ended December 31, 2013. Floating Rate First Preferred Shares, Series Q, at the option of the holders [xv] During the year 2013, 2,069,600 common shares (930,400 in 2012) were on January 31, 2016 or on January 31 every five years thereafter. issued under the Corporation’s Employee Stock Option Plan for a consideration of $45 million ($20 million in 2012). Dividends declared on the Corporation’s common shares in 2013 amounted to $1.40 per share ($1.40 per share in 2012). 86 86 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 20 SHARE-BASED COMPENSATION STOCK OPTION PL AN date of the grant of the option. Generally, options granted vest on a delayed Under Power Financial’s Employee Stock Option Plan, 14,421,600 additional basis over periods beginning no earlier than one year from the date of grant common shares are reserved for issuance. The plan requires that the exercise and no later than five years from the date of grant. Options recently granted, price under the option must not be less than the market value of a share on the which are not fully vested, have the following vesting conditions: YEAR OF GRANT OPTIONS VESTING CONDITIONS 2010 2010 2011 2011 2012 2012 2013 2013 679,525 38,293 743,080 34,423 598,325 70,254 702,713 53,476 Vest equally over a period of five years Vest 50% after three years and 50% after four years Vest equally over a period of five years Vest 50% after three years and 50% after four years Vest equally over a period of five years Vest 50% after three years and 50% after four years Vest equally over a period of five years Vest 50% after three years and 50% after four years A summary of the status of Power Financial’s Employee Stock Option Plan as at December 31, 2013 and 2012, 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 2013 2012 OPTIONS WEIGHTED-AVERAGE EXERCISE PRICE OPTIONS WEIGHTED-AVERAGE EXERCISE PRICE 8,835,797 756,189 (2,069,600) 7,522,386 $ 28.32 32.44 21.65 30.56 9,097,618 668,579 (930,400) 8,835,797 5,468,569 31.29 6,958,267 $ 27.85 25.31 21.65 28.32 28.73 The following table summarizes information about stock options outstanding at December 31, 2013: RANGE OF EXERCISE PRICES $ 25.07 – 26.97 28.13 – 29.95 30.18 – 31.59 32.24 32.46 – 32.58 34.45 – 37.13 OPTIONS OUTSTANDING OPTIONS EXERCISABLE OPTIONS WEIGHTED-AVERAGE REMAINING LIFE WEIGHTED-AVERAGE EXERCISE PRICE OPTIONS WEIGHTED-AVERAGE EXERCISE PRICE 1,575,467 1,532,879 602,383 2,015,000 741,006 1,055,651 7,522,386 (YRS) 7.6 5.5 5.2 1.4 9.4 4.2 5.0 $ 25.87 28.96 31.42 32.24 32.57 34.81 30.56 603,079 1,238,695 527,370 2,015,000 28,774 1,055,651 5,468,569 $ 26.13 29.12 31.55 32.24 32.46 34.81 31.29 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 87 87 NOTE 20 SHARE-BASED COMPENSATION (CONTINUED) Compensation expense Lifeco and IGM have also established stock option value of the options at the grant date, amortized over the vesting period. plans pursuant to which options may be granted to certain officers and Total compensation expense relating to the stock options granted by the employees. Compensation expense is recorded for options granted under Corporation and its subsidiaries amounted to $15 million in 2013 ($13 million the Corporation’s and its subsidiaries’ stock option plans based on the fair in 2012). During the year ended December 31, 2013, Power Financial granted 756,189 options (668,579 options in 2012) under its Employee Stock Option Plan. The fair value of these options was estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions: Dividend yield Expected volatility Risk-free interest rate Expected life (years) Fair value per stock option ($/option) Weighted-average exercise price ($/option) 2013 5.0% 18.3% 2.3% 9 $2.78 $32.44 2012 4.8% 18.7% 1.7% 9 $2.08 $25.31 Expected volatility has been estimated based on the historical volatility of the Corporation’s share price over nine years, which is reflective of the expected option life. PERFORMANCE SHARE U N IT PL AN Stock Exchange of the common shares of the Corporation on the last five In 2013, Power Financial introduced a Performance Share Unit (PSU) plan days of the fiscal quarter (the value of a deferred share unit). A Director will for selected employees and officers (participants) to assist in retaining and receive additional deferred share units in respect of dividends payable on the further aligning the interests of participants with those of the shareholders. common shares, based on the value of a deferred share unit on the date on Under the terms of the plan, PSUs may be awarded annually and are subject to which the dividends were paid on the common shares. A deferred share unit time and performance vesting conditions. The value of each PSU is based on is payable, at the time a Director’s membership on the Board is terminated or the share price of the Corporation’s common shares. The PSUs are cash settled in the event of the death of a Director, by a lump-sum cash payment, based on and vest over a three-year period. Participants can elect at the time of grant to the value of a deferred share unit at that time. At December 31, 2013, the value receive a portion of their PSUs in the form of performance deferred share units of the deferred share units outstanding was $18 million ($13 million in 2012). (PDSU) which also vest over a three-year period. PDSUs are redeemable when Alternatively, Directors may participate in the Directors Share Purchase Plan. a participant is no longer an employee of the Corporation or any of its affiliates, or in the event of the death of the participant, by a lump sum payment based on the value of the PDSU at that time. Additional PSUs and PDSUs are issued in respect of dividends payable on common shares based on the value of the PSU or PDSU at the dividend payment date. The Corporation recorded compensation expense, excluding the impact of hedging, of $1.3 million in 2013 and a liability of $1.3 million as at December 31, 2013. EM PLOYEE SHARE PU RCHASE PROG R AM 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 Power Financial invest, on the employee’s behalf, up to an equal amount. The amount paid on behalf of employees was $0.1 million in 2013 ($0.1 million in 2012). DEFERRED SHARE U N IT PL AN On October 1, 2000, Power Financial established a Deferred Share Unit Plan for its Directors to promote a greater alignment of interests between Directors and shareholders of the Corporation. Under this plan, each Director participating in the plan will receive half of his or her annual retainer in the form of deferred share units and may elect to receive the remainder of his or her annual retainer and attendance fees entirely in the form of deferred OTH ER SHARE- BASED AWARDS OF SU B SIDIARIES The subsidiaries of the Corporation also establish other share-based awards for their directors, management and employees. Some of these share- base awards are cash settled and included within other liabilities on the balance sheets. The compensation expense related to these subsidiary share- based awards is recorded in operating and administrative expenses on the share units, entirely in cash, or equally in cash and deferred share units. The statements of earnings. 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 88 88 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 21 NON-CONTROLLING INTERESTS The Corporation has controlling equity interests in Lifeco and IGM as at December 31, 2013, December 31, 2012 and January 1, 2012. The non-controlling interests of Lifeco and IGM and their subsidiaries reflected in the balance sheets are as follows: DECEMBER 31 LIFECO IGM TOTAL LIFECO IGM 2013 Non-controlling interests, beginning of year Earnings allocated to non-controlling interests Other comprehensive income (loss) allocated to non-controlling interests Dividends Issuance of preferred shares Repurchase of preferred shares Change in ownership interest 8,327 683 1,775 301 10,102 984 7,300 892 1,831 301 304 (472) – (230) 501 10 (213) – – 4 314 (685) – (230) 505 (90) (440) 650 – 15 (16) (219) – – (122) 2012 TOTAL 9,131 1,193 (106) (659) 650 – (107) Non-controlling interests, end of year 9,113 1,877 10,990 8,327 1,775 10,102 The carrying value of non-controlling interests as at December 31, 2013 and 2012 consists of the following: DECEMBER 31 Common shareholders Preferred shareholders Participating shareholders LIFECO IGM TOTAL LIFECO IGM 2013 4,445 2,314 2,354 9,113 1,727 150 – 6,172 2,464 2,354 1,877 10,990 3,332 2,544 2,451 8,327 1,625 150 – 1,775 10,102 2012 TOTAL 4,957 2,694 2,451 Change in ownership in Lifeco in 2013 is mainly attributable to the issuance As at December 31, 2013, Power Financial and IGM held 67.0% and 4.0%, of Lifeco’s common shares in regards to the acquisition of Irish Life (Note 4). respectively, of Lifeco’s common shares, representing approximately 65.0% of Other changes in ownership in 2013 and 2012 are due to the issuance of the voting rights attached to the outstanding Lifeco voting shares. common shares under stock option plans as well as the repurchase of common shares by subsidiaries. Lifeco and IGM’s financial information as at and for the year ended December 31, 2013 can be obtained in their publicly available financial statements. NOTE 22 CAPITAL MANAGEMENT As a holding company, Power Financial’s objectives in managing its capital LIFECO are to: > provide sufficient financial flexibility to pursue its growth strategy and Lifeco manages its capital on both a consolidated basis as well as at the individual operating subsidiary level. The primary objectives of Lifeco’s capital support its group companies and other investments; management strategy are: > maintain an appropriate credit rating to ensure stable access to the capital markets; and > provide attractive long-term returns to shareholders of the Corporation. The Corporation manages its capital taking into consideration the risk characteristics and liquidity of its holdings. In order to maintain or adjust its capital structure, the Corporation may adjust the amount of dividends paid to shareholders, return capital to shareholders or issue new forms of capital. > 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; > to maintain strong credit and financial strength ratings of Lifeco ensuring stable access to capital markets; and > to provide an efficient capital structure to maximize shareholder value in the context of Lifeco’s operational risks and strategic plans. 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. Lifeco has established policies and procedures designed to identify, measure and report all material risks. Management of Lifeco is responsible for establishing capital management procedures for implementing and The Corporation utilizes perpetual preferred shares as a permanent and cost- monitoring the capital plan. 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. Whereas the Corporation itself is not subject to externally imposed regulatory capital requirements, certain of the Corporation’s major operating subsidiaries (Lifeco and IGM) are subject to regulatory capital requirements and they manage their capital as described below. POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 89 89 NOTE 22 CAPITAL MANAGEMENT (CONTINUED) Lifeco’s subsidiaries Great-West Life, Great-West Life & Annuity and to self-assess an appropriate amount of capital it should hold, based Canada Life UK are subject to minimum regulatory capital requirements. on the risks encountered from its business activities. At the end of 2013, Lifeco’s practice is to maintain the capitalization of its regulated operating Canada Life UK complied with the capital resource requirements in the subsidiaries at a level that will exceed the relevant minimum regulatory United Kingdom. capital requirements in the jurisdictions in which they operate: > Other foreign operations and foreign subsidiaries of Lifeco are required > In Canada, the Office of the Superintendent of Financial Institutions to comply with local capital or solvency requirements in their respective has established a capital adequacy measurement for life insurance jurisdictions. At December 31, 2013 and 2012, Lifeco maintained capital companies incorporated under the Insurance Companies Act (Canada) and levels above the minimum local regulatory requirements in each of its their subsidiaries, known as the Minimum Continuing Capital and Surplus other foreign operations. Requirements (MCCSR). As at December 31, 2013, the MCCSR ratio for Great-West Life was 223% (207% at December 31, 2012). IG M FINANCIAL > At December 31, 2013, the Risk-Based Capital ratio (RBC) of Great-West Life & Annuity, Lifeco’s regulated U.S. operating company, was estimated to be 480% of the Company Action Level set by the National Association of Insurance Commissioners. Great-West Life & Annuity reports its RBC ratio annually to U.S. insurance regulators. > 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 Prudential Regulatory Authority Handbook. The capital requirements are prescribed by a formulaic capital requirement (Pillar 1) and an individual capital adequacy framework which requires an entity IGM’s capital management objective is to maximize shareholder returns while ensuring that IGM is capitalized in a manner which appropriately supports regulatory capital requirements, working capital needs and business expansion. IGM’s capital management practices are focused on preserving the quality of its financial position by maintaining a solid capital base and a strong balance sheet. IGM subsidiaries subject to regulator y capital requirements include investment dealers, mutual fund dealers, exempt market dealers, portfolio managers, investment fund managers and a trust company. IGM subsidiaries are required to maintain minimum levels of capital based on either working capital, liquidity or shareholders’ equity. IGM subsidiaries have complied with all regulatory capital requirements. NOTE 23 RISK MANAGEMENT The Corporation and its subsidiaries have established policies, guidelines or Management of the Corporation and its subsidiaries are responsible procedures designed to identify, measure, monitor and mitigate all material for establishing capital management procedures for implementing and risks associated with financial instruments. The key risks related to financial monitoring their capital plans. The Board of Directors of the Corporation instruments are liquidity risk, credit risk and market risk. and the boards of directors of its subsidiaries review and approve all capital > Liquidity risk is the risk that the Corporation and its subsidiaries will not be transactions undertaken by the respective managements. able to meet all cash outflow obligations as they come due. This note includes estimates of sensitivities and risk exposure measures for > Credit risk is the potential for financial loss to the Corporation and its subsidiaries if a counterparty in a transaction fails to meet its obligations. > Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate as a result of changes in market factors. Market factors include three types of risks: currency risk, interest rate risk and certain risks, such as 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 equity price risk. scenarios considered; > Currency risk relates to the Corporation, its subsidiaries and its jointly controlled corporations and associate operating in different currencies > changes in actuarial, investment return and future investment activity assumptions; and converting non-Canadian earnings at different points in time at > actual experience differing from the assumptions; different foreign exchange levels when adverse changes in foreign > changes in business mix, effective tax rates and other market factors; currency exchange rates occur. > interactions among these factors and assumptions when more than one > Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in the market interest rates. changes; and > the general limitations of internal models. > Equity price risk is the uncertainty associated with the valuation of assets arising from changes in equity markets. 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 above. 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. 90 90 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 23 RISK MANAGEMENT (CONTINUED) POWER FINANCIAL LIQ U IDIT Y RI SK credit ratings of derivative financial instrument counterparties. Derivative Power Financial is a holding company. As such, corporate cash flows from contracts are over-the-counter traded with counterparties that are highly operations, before payment of dividends to its common and preferred rated financial institutions. shareholders, are principally made up of dividends received from its subsidiaries and jointly controlled corporation, and income from investments, less operating expenses, financing charges and income taxes. The ability of Lifeco and IGM, which are also holding companies, to meet their obligations and pay dividends depends in particular upon receipt of sufficient funds from their own subsidiaries. In 2013, the Corporation entered into other derivative contracts which consist primarily of an equity put option on the S&P 500 related to a macro capital hedge as well as total return swaps to hedge-deferred compensation arrangements. The fair value of the equity put option was $3 million on an outstanding notional amount of $3.5 billion at December 31, 2013. The fair value of the total return swaps was $1 million on an outstanding notional Power Financial seeks to maintain a sufficient level of liquidity to meet all its amount of $5 million at December 31, 2013. The exposure to credit risk, net of cash flow requirements. In addition, Power Financial and its parent, Power collateral received, was $1 million at December 31, 2013. Corporation of Canada, jointly have a $100 million uncommitted line of credit with a Canadian chartered bank. Power Corporation and Power Financial never accessed the uncommitted line of credit in the past; however, any advances made by the bank under the uncommitted line of credit would be at the bank’s sole discretion. Principal payments on debentures (other than those of Lifeco and IGM discussed below) of $250 million due after five years represent the only significant contractual liquidity requirement of Power Financial. Power Financial’s liquidity position and its management of liquidity risk have not changed materially since December 31, 2012. CREDIT RI SK Cash and cash equivalents, fixed income securities, and derivatives are subject to credit risk. The Corporation mitigates credit risk on these financial instruments by adhering to its Investment Policy, which outlines credit risk parameters and concentration limits. Cash and cash equivalents amounting to $470 million and fixed income securities amounting to $455 million consist primarily of bonds, bankers’ acceptances and highly liquid temporary deposits with Canadian chartered banks as well as bonds and short-term securities of, or guaranteed by, the MARKET RI SK Currency risk Power Financial’s financial instruments are essentially cash and cash equivalents, fixed income securities and long-term debt. In managing its own cash and cash equivalents, 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, 2013, essentially all of Power Financial’s cash and cash equivalents were denominated in Canadian dollars or in foreign currencies with currency hedges in place. Power Financial is exposed through Parjointco to foreign exchange risk as a result of Parjointco’s investment in Pargesa, a company whose functional currency is the Swiss franc. In accordance with IFRS, foreign currency translation gains and losses from Pargesa are recorded in other comprehensive income. Interest rate risk Power Financial’s financial instruments are essentially cash and cash equivalents, fixed income securities and long-term debt that do not have significant exposure to interest rate risk. Canadian government. The Corporation regularly reviews the credit ratings Equity price risk Power Financial’s financial instruments are essentially of its counterparties. The maximum exposure to credit risk on these financial cash and cash equivalents, fixed income securities and long-term debt that instruments is their carrying value. do not have exposure to equity price risk. Derivatives continue to be utilized on a basis consistent with the risk Pargesa indirectly holds substantial investments classified as available management guidelines of the Corporation and are monitored by the for sale, therefore unrealized gains and losses on these investments are Corporation for effectiveness as economic hedges even if specific hedge recorded in other comprehensive income until realized. These investments accounting requirements are not met. The Corporation regularly reviews the are reviewed periodically to determine whether there is objective evidence of an impairment in value. LIFECO The risk committee of the board of directors of Lifeco is responsible for the oversight of Lifeco’s key risks. LIQ U IDIT Y RI SK > Management of Lifeco closely monitors the solvency and capital positions The following policies and procedures are in place to manage liquidity risk: of its principal subsidiaries opposite liquidity requirements at the holding > Lifeco closely manages operating liquidity through cash flow matching of assets and liabilities and forecasting earned and required yields, to ensure consistency between policyholder requirements and the yield of assets. Approximately 69% (70% in 2012) of insurance and investment contract liabilities are non-cashable prior to maturity or subject to market value adjustments. > Management of Lifeco monitors the use of lines of credit on a regular basis, and assesses the ongoing availability of these and alternative forms of operating credit. company. Additional liquidity is available through established lines of credit or via capital market transactions. Lifeco maintains $350 million of liquidity at the Lifeco level through committed lines of credit with a Canadian chartered bank. As well, Lifeco maintains a $150 million liquidity facility at Great-West Life, a US$500 million revolving credit agreement with a syndicate of banks for use by Putnam, a US$304 million non-revolving term loan facility provided for Putnam by a syndicate of banks and a US$50 million line of credit at Great-West Financial. 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. POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 91 91 NOTE 23 RISK MANAGEMENT (CONTINUED) PAYMENTS DUE BY PERIOD DECEMBER 31, 2013 1 YEAR 2 YEARS 3 YEARS 4 YEARS 5 YEARS Debentures and other debt instruments Capital trust debentures [1] Purchase obligations Pension contributions 658 – 61 168 887 322 – 33 – 355 – – 28 – 28 294 – 25 – 319 AFTER 5 YEARS 4,283 150 33 – TOTAL 5,757 150 197 168 200 – 17 – 217 4,466 6,272 [1] Payments due have not been reduced to reflect that Lifeco held capital trust securities of $37 million principal amount ($47 million carrying value). CREDIT RI SK > Credit risk associated with derivative instruments is evaluated quarterly The following policies and procedures are in place to manage credit risk: based on conditions that existed at the balance sheet date, using practices > Investment guidelines are in place that require only the purchase of that are at least as conservative as those recommended by regulators. investment-grade assets and minimize undue concentration of assets in > Lifeco is exposed to credit risk relating to premiums due from policyholders any single geographic area, industry and company. during the grace period specified by the insurance policy or until the policy > Investment guidelines specify minimum and maximum limits for each asset class. Credit ratings are determined by recognized external credit rating is paid up or terminated. Commissions paid to agents and brokers are netted against amounts receivable, if any. agencies and/or internal credit review. > Reinsurance is placed with counterparties that have a good credit > Investment guidelines also specify collateral requirements. > Portfolios are monitored continuously, and reviewed regularly with the risk committee of Lifeco and the investment committee of the board of directors of Lifeco. rating and concentration of credit risk is managed by following policy guidelines set each year by the board of directors of Lifeco. Management of Lifeco continuously monitors and performs an assessment of the creditworthiness of reinsurers. Maximum exposure to credit risk for Lifeco The following table summarizes Lifeco’s maximum exposure to credit risk related to financial instruments. The maximum credit exposure is the carrying value of the asset net of any allowances for losses. DECEMBER 31, 2013 DECEMBER 31, 2012 JANUARY 1, 2012 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 Interest due and accrued Accounts receivable Premiums in course of collection Trading account assets Other financial assets[2] Derivative assets 2,791 70,144 7,915 11,855 19,063 7,332 10,832 5,070 1,242 1,248 578 376 831 593 1,895 64,865 6,782 10,934 17,875 7,082 10,599 2,064 1,098 1,065 484 144 754 997 2,056 61,723 6,888 9,744 17,432 7,162 9,978 2,061 1,108 849 422 141 607 968 Total balance sheet maximum credit exposure 139,870 126,638 121,139 [1] Includes $9,848 million as at December 31, 2013 ($9,951 million at December 31, 2012 and $9,411 million at January 1, 2012) of funds held by ceding insurers where Lifeco retains the credit risk of the assets supporting the liabilities ceded (see Note 7). [2] Includes items such as current income taxes receivable and miscellaneous other assets of Lifeco. Credit risk is also mitigated by entering into collateral agreements. The Concentration of credit risk for Lifeco Concentrations of credit risk arise amount and type of collateral required depends on an assessment of the credit from exposures to a single debtor, a group of related debtors or groups of risk of the counterparty. Guidelines have been implemented by regarding the debtors that have similar credit risk characteristics in that they operate in the acceptability of types of collateral and the valuation parameters. Management same geographic region or in similar industries. The characteristics of such of Lifeco monitors the value of the collateral, requests additional collateral debtors are similar in that changes in economic or political environments may when needed and performs an impairment valuation when applicable. Lifeco impact their ability to meet obligations as they come due. has $19 million of collateral received as at December 31, 2013 ($25 million as at December 31, 2012) relating to derivative assets. 92 92 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 23 RISK MANAGEMENT (CONTINUED) The following table provides details of the carrying value of bonds of Lifeco by issuer, by industry sector and geographic distribution: DECEMBER 31, 2013 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, 2012 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 4,276 5,739 297 130 2,641 399 2,677 26 2,012 791 278 490 1,807 919 1,056 1,021 1,726 4,715 1,314 32,314 3,321 35,635 3 2,028 3,827 22 – 7 3,115 307 331 1,620 978 222 2,198 1,052 665 140 827 3,703 970 22,015 76 22,091 51 52 902 11,216 1,553 704 860 189 2,846 2,154 272 603 1,882 538 509 2,249 703 3,433 389 31,105 1,083 32,188 4,330 7,819 5,026 11,368 4,194 1,110 6,652 522 5,189 4,565 1,528 1,315 5,887 2,509 2,230 3,410 3,256 11,851 2,673 85,434 4,480 89,914 CANADA UNITED STATES EUROPE TOTAL 4,873 6,454 305 151 2,585 453 2,587 16 2,140 846 252 499 1,903 873 1,100 850 1,747 4,257 1,316 3 1,881 3,421 29 – 11 3,117 452 359 1,578 724 181 43 61 976 8,044 1,205 289 830 165 2,317 1,964 231 553 1,975 1,867 984 665 – 696 3,317 856 323 565 1,739 598 3,342 312 33,207 2,388 35,595 20,249 25,424 358 955 20,607 26,379 4,919 8,396 4,702 8,224 3,790 753 6,534 633 4,816 4,388 1,207 1,233 5,745 2,180 2,330 2,589 3,041 10,916 2,484 78,880 3,701 82,581 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 93 93 NOTE 23 RISK MANAGEMENT (CONTINUED) JANUARY 1, 2012 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 2,110 443 2,696 26 2,168 1,137 233 508 1,848 695 1,127 608 1,721 3,792 1,207 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 3,065 666 6,900 810 4,442 4,201 1,195 1,230 5,432 1,732 2,241 2,218 3,017 9,639 2,298 31,533 2,980 34,513 19,122 23,826 323 571 19,445 24,397 74,481 3,874 78,355 The following table provides details of the carrying value of mortgage loans of Lifeco by geographic location: SINGLE-FAMILY RESIDENTIAL MULTI-FAMILY RESIDENTIAL COMMERCIAL TOTAL 1,758 – – 1,758 3,435 1,052 325 4,812 6,942 2,504 3,047 12,135 3,556 3,372 12,493 19,063 SINGLE-FAMILY RESIDENTIAL MULTI-FAMILY RESIDENTIAL COMMERCIAL TOTAL 1,676 3,250 – – 921 187 6,982 2,139 2,720 11,908 3,060 2,907 1,676 4,358 11,841 17,875 SINGLE-FAMILY RESIDENTIAL MULTI-FAMILY RESIDENTIAL COMMERCIAL TOTAL 1,591 3,407 – 79 811 108 7,022 1,999 2,415 12,020 2,810 2,602 1,670 4,326 11,436 17,432 DECEMBER 31, 2013 Canada United States Europe DECEMBER 31, 2012 Canada United States Europe JANUARY 1, 2012 Canada United States Europe 94 94 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 23 RISK MANAGEMENT (CONTINUED) Asset quality BOND PORTFOLIO QUALIT Y DECEMBER 31, 2013 DECEMBER 31, 2012 JANUARY 1, 2012 AAA AA A BBB BB and lower Total bonds 30,626 15,913 25,348 16,809 1,218 89,914 29,302 13,463 23,812 14,662 1,342 82,581 29,612 12,525 22,717 12,399 1,102 78,355 DERIVATIVE PORTFOLIO QUALIT Y DECEMBER 31, 2013 DECEMBER 31, 2012 JANUARY 1, 2012 Over-the-counter contracts (counterparty credit ratings): AAA AA A Total 8 86 499 593 9 106 882 997 12 361 595 968 Loans of Lifeco past due, but not impaired Loans that are past due but not considered impaired are loans for which scheduled payments have not been received, but management of Lifeco has reasonable assurance of collection of the full amount of principal and interest due. The following table provides carrying values of the loans past due, but not impaired: Less than 30 days 30–90 days Greater than 90 days Total DECEMBER 31, 2013 DECEMBER 31, 2012 JANUARY 1, 2012 6 – 2 8 12 – 4 16 3 1 1 5 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 MARKET RI SK DECEMBER 31, 2013 DECEMBER 31, 2012 JANUARY 1, 2012 999 1,796 2,795 892 1,667 2,559 852 1,648 2,500 > Investments are normally made in the same currency as the liabilities Currency risk For Lifeco, if the assets backing insurance and investment supported by those investments. Segmented investment guidelines contract liabilities are not matched by currency, changes in foreign exchange include maximum tolerances for unhedged currency mismatch exposures. 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 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. > 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. POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 95 95 NOTE 23 RISK MANAGEMENT (CONTINUED) Interest rate risk The following policies and procedures are in place to The range of interest rates covered by these provisions is set in consideration mitigate exposure to interest rate risk: of long-term historical results and is monitored quarterly with a full review > Lifeco utilizes a formal process for managing the matching of assets and liabilities. This involves grouping general fund assets and liabilities into segments. Assets in each segment are managed in relation to the liabilities annually. An immediate 1% parallel shift in the yield curve would not have a material impact on Lifeco’s view of the range of interest rates to be covered by the provisions. If sustained however, the parallel shift could impact Lifeco’s in the segment. range of scenarios covered. > Interest rate risk is managed by investing in assets that are suitable for The total provision for interest rates also considers the impact of the Canadian the products sold. Institute of Actuaries-prescribed scenarios. > Where these products have benefit or expense payments that are dependent on inflation (inflation-indexed annuities, pensions and disability > The effect of an immediate 1% parallel increase in the yield curve on the prescribed scenarios would not change the total provision for interest rates. claims), Lifeco generally invests in real return instruments to hedge its real > The effect of an immediate 1% parallel decrease in the yield curve on the dollar liability cash flows. Some protection against changes in the inflation prescribed scenarios would not change the total provision for interest rates. 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. Another way of measuring the interest rate risk associated with this assumption is to determine the effect on the insurance and investment > For products with fixed and highly predictable benefit payments, contract liabilities impacting the shareholders earnings of Lifeco of a investments are made in fixed income assets or real estate whose cash 1% change in Lifeco’s view of the range of interest rates to be covered by flows closely match the liability product cash flows. Where assets are these provisions. 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. > The effect of an immediate 1% increase in the low and high end of the range of interest rates recognized in the provisions would be to decrease these insurance and investment contract liabilities by approximately $33 million, causing an increase in net earnings of Lifeco of approximately $12 million (Power Financial’s share – $8 million). > The effect of an immediate 1% decrease in the low and high end of the range of interest rates recognized in the provisions would be to increase these insurance and investment contract liabilities by approximately $481 million, causing a decrease in net earnings of Lifeco of approximately $322 million (Power Financial’s share – $217 million). Equity price risk For Lifeco, the risks associated with segregated fund guarantees have been mitigated through a hedging program for lifetime Guaranteed Minimum Withdrawal Benefit guarantees using equity futures, Projected cash flows from the current assets and liabilities are used in currency forwards, and interest rate derivatives. For policies with segregated the Canadian Asset Liability Method to determine insurance contract fund guarantees, Lifeco generally determines insurance contract liabilities at liabilities. Valuation assumptions have been made regarding rates of returns a conditional tail expectation of 75 (CTE75) level. on supporting assets, fixed income, equity and inflation. The valuation assumptions use best estimates of future reinvestment rates and inflation assumptions with an assumed correlation together with margins for adverse deviation set in accordance with professional standards. These margins are necessary to provide for possibilities of misestimation and/or future deterioration in the best estimate assumptions and provide reasonable assurance that insurance contract liabilities cover a range of possible outcomes. Margins are reviewed periodically for continued appropriateness. Some insurance and investment contract liabilities are supported by investment properties, common stocks and private equities, for example, segregated fund products and products with longtail cash flows. Generally these liabilities will fluctuate in line with equity market values. A 10% increase in equity markets would be expected to additionally decrease non-par ticipating insurance and investment contract liabilities by approximately $43 million, causing an increase in net earnings of Lifeco of approximately $34 million (Power Financial’s share – $23 million). A 10% Projected cash flows from fixed income assets used in actuarial calculations decrease in equity markets would be expected to additionally increase are reduced to provide for potential asset default losses. The net effective yield non-par ticipating insurance and investment contract liabilities by rate reduction averaged 0.19% (0.18% in 2012). The calculation for future credit approximately $192 million, causing a decrease in net earnings of Lifeco of losses on assets is based on the credit quality of the underlying asset portfolio. approximately $150 million (Power Financial’s share – $101 million). Testing under several interest rate scenarios (including increasing and The best estimate return assumptions for equities are primarily based on decreasing rates) is done to assess reinvestment risk. The total provision long-term historical averages. Changes in the current market could result in for interest rates is sufficient to cover a broader or more severe set of changes to these assumptions and will impact both asset and liability cash risks than the minimum arising from the current Canadian Institute of flows. A 1% increase in the best estimate assumption would be expected to Actuaries-prescribed scenarios. Effective January 1, 2013, Lifeco refined its methodology for estimating interest rate provisions. The total provision was realigned into provisions designed to cover shorter-term modelling risks and those to cover inherent long- term modelling and cash flow mismatch risks, with no net impact on total provisions upon realignment. The realignment, however, did have an impact on the pattern of expected emergence of these provisions into net earnings. This realignment increased 2013 annual net earnings by approximately $74 million after tax compared to 2012 on the prior methodology. decrease non-participating insurance contract liabilities by approximately $458 million, causing an increase in net earnings of Lifeco of approximately $353 million (Power Financial’s share – $237 million). A 1% decrease in the best estimate assumption would be expected to increase non-participating insurance contract liabilities by approximately $514 million, causing a decrease in net earnings of Lifeco of approximately $392 million (Power Financial’s share – $264 million). 96 96 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 23 RISK MANAGEMENT (CONTINUED) IGM FINANCIAL LIQ U IDIT Y RI SK > third parties, including Canada Mortgage and Housing Corporation IGM’s liquidity management practices include: controls over liquidity (CMHC) or Canadian bank-sponsored securitization trusts; or management processes; stress testing of various operating scenarios; and oversight over liquidity management by committees of the board of directors of IGM. A key liquidity requirement for IGM 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. > institutional investors through private placements. Certain subsidiaries of IGM 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 mortgages. IGM’s continued ability to fund residential mortgages through Canadian bank- IGM also maintains sufficient liquidity to fund and temporarily hold sponsored securitization trusts and NHA MBS is dependent on securitization mortgages. Through its mortgage banking operations, residential mortgages market conditions that are subject to change. A condition of the NHA MBS are sold or securitized to: > Investors Mortgage and Short Term Income Fund and Investors Canadian Corporate Bond Fund; and CMB Programs is that securitized loans be insured by an insurer that is approved by CMHC. The availability of mortgage insurance is dependent upon market conditions that are subject to change. IGM’s contractual obligations were as follows: DECEMBER 31, 2013 Derivative financial instruments Deposits and certificates Obligations to securitization entities Long-term debt Operation leases Pension funding DEMAND LESS THAN 1 YEAR 1–5 YEARS AFTER 5 YEARS – 161 – – – – 11 10 890 – 54 20 25 11 4,649 150 147 – – 5 33 1,175 65 – TOTAL 36 187 5,572 1,325 266 20 Total contractual obligations 161 985 4,982 1,278 7,406 In addition to IGM’s current balance of cash and cash equivalents, liquidity At December 31, 2012, fair value through profit or loss securities included is available through IGM’s operating lines of credit. IGM’s operating lines of Canada Mortgage Bonds with a fair value of $226 million. The investment in credit with various Schedule I Canadian chartered banks totalled $525 million these bonds was disposed during the third quarter of 2013. as at December 31, 2013, unchanged from December 31, 2012. The lines of credit as at December 31, 2013 consisted of committed lines of $350 million ($350 million in 2012) and uncommitted lines of $175 million ($175 million in 2012). IGM has accessed its uncommitted lines of credit in the past; however, any advances made by the banks under the uncommitted lines are at the banks’ sole discretion. As at December 31, 2013 and 2012, IGM was not utilizing its committed lines of credit or its uncommitted lines of credit. IGM’s liquidity position and its management of liquidity and funding risk have not changed materially since December 31, 2012. CREDIT RI SK IGM’s cash and cash equivalents, securities holdings, mortgage and investment loan portfolios, and derivatives are subject to credit risk. IGM monitors its credit risk management practices continuously to evaluate their effectiveness. IGM regularly reviews the credit quality of the mortgage portfolios related to IGM’s mortgage banking operations and its intermediary operations, as well as the adequacy of the collective allowance. As at December 31, 2013, mortgages totalled $5.9 billion ($4.9 billion in 2012) and consisted of residential mortgages: > Sold to securitization programs which are classified as loans and receivables and totalled $5.5 billion compared to $4.6 billion at December 31, 2012. An offsetting liability, obligations to securitization entities, has been recorded and totalled $5.6 billion at December 31, 2013, compared to $4.7 billion at December 31, 2012. > Related to IGM’s mortgage banking operations which are classified as held for trading and totalled $324 million, compared to $249 million at December 31, 2012. These loans are held by IGM pending sale or securitization. At December 31, 2013, cash and cash equivalents of $1,082 million ($1,059 million in 2012) consisted of cash balances of $89 million ($101 million in 2012) on deposit with Canadian chartered banks and cash equivalents of $994 million > Related to IGM’s intermediary operations which are classified as loans and receivables and totalled $36 million at December 31, 2013, compared to $35 million at December 31, 2012. ($958 million in 2012). Cash equivalents are composed of Government of As at December 31, 2013, the mortgage portfolios related to IGM’s intermediary Canada treasury bills totalling $42 million ($233 million in 2012), provincial operations were geographically diverse, 100% residential (100% in 2012) and government and government-guaranteed commercial paper of $564 million 88.6% insured (86.2% in 2012). As at December 31, 2013, impaired mortgages ($473 million in 2012) and bankers’ acceptances issued by Canadian chartered were nil, unchanged from December 31, 2012. Uninsured non-performing banks of $388 million ($253 million in 2012). IGM regularly reviews the credit mortgages over 90 days were nil, unchanged from December 31, 2012. The ratings of its counterparties. The maximum exposure to credit risk on these characteristics of the mortgage portfolios have not changed significantly financial instruments is their carrying value. IGM manages credit risk related during 2013. to cash and cash equivalents by adhering to its Investment Policy that outlines credit risk parameters and concentration limits. POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 97 97 NOTE 23 RISK MANAGEMENT (CONTINUED) The NHA MBS and CMB Program require that all securitized mortgages be risk associated with the CMB Program. The negative fair value of these insured against default by an approved insurer. The ABCP programs do not swaps totalled $17 million at December 31, 2013 ($27 million in 2012) and the require mortgages to be insured; however, at December 31, 2013, 58.9% of outstanding notional amount was $6.8 billion ($5.7 billion in 2012). Certain these mortgages were insured compared to 66.6% at December 31, 2012. of these swaps relate to securitized mortgages that have been recorded on At December 31, 2013, 86.1% of the securitized portfolio and the residential the balance sheet with an associated obligation. Accordingly, these swaps, mortgages classified as held for trading were insured, compared to 88.3% with an outstanding notional amount of $3.6 billion ($3.3 billion in 2012) and at December 31, 2012. As at December 31, 2013, impaired mortgages on these having a negative fair value of $28 million ($29 million in 2012), are not reflected portfolios were $2 million, compared to $1 million at December 31, 2012. on the balance sheet. Principal reinvestment account swaps and hedges of Uninsured non-performing mortgages over 90 days on these portfolios were reinvestment and interest rate risk, with an outstanding notional amount of $1 million at December 31, 2013, unchanged from December 31, 2012. $3.2 billion ($2.4 billion in 2012) and having a fair value of $11 million ($3 million IGM retains certain elements of credit risk on securitized loans. At December 31, 2013, 87.4% of securitized loans were insured against credit losses compared to 90.2% at December 31, 2012. IGM’s credit risk on its securitization in 2012), 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 $47 million at December 31, 2013, compared to $63 million at December 31, 2012. activities is limited to its retained interests. The fair value of IGM’s retained IGM utilizes interest rate swaps to hedge interest rate risk associated with interests in securitized mortgages was $113 million at December 31, 2013, mortgages securitized through Canadian bank-sponsored ABCP programs. compared to $69 million at December 31, 2012. Retained interests include: The negative fair value of these interest rate swaps totalled $1 million > Cash reserve accounts and rights to future net interest income, which were $29 million ($24 million in 2012) and $100 million ($102 million in 2012), respectively, at December 31, 2013. Cash reserve accounts are reflected on the balance sheet, whereas rights to future net interest income are ($5 million in 2012) on an outstanding notional amount of $66 million at December 31, 2013 ($435 million in 2012). The exposure to credit risk, which is limited to the fair value of swaps in a gain position, was nil at December 31, 2013, unchanged from December 31, 2012. not reflected on the balance sheet and will be recorded over the life of Interest rate swaps utilized to hedge IGM’s interest rate risk associated with the mortgages. its investments in Canada Mortgage Bonds were settled during the third The portion of this amount pertaining to Canadian bank-sponsored quarter of 2013. securitization trusts of $59 million ($55 million in 2012) is subordinated to IGM enters into other derivative contracts which consist primarily of interest the interests of the trust and represents the maximum exposure to credit rate swaps utilized to hedge interest rate risk related to mortgages held risk for any failure of the borrowers to pay when due. Credit risk on these pending sale, or committed to, by IGM as well as total return swaps and mortgages is mitigated by any insurance on these mortgages, as previously forward agreements on IGM’s common shares utilized to hedge deferred discussed, and IGM’s credit risk on insured loans is to the insurer. compensation arrangements. The fair value of interest rate swaps, total Rights to future net interest income under the NHA MBS and CMB Programs totalled $70 million ($70 million in 2012). 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 return swaps and forward agreements was $12 million on an outstanding notional amount of $154 million at December 31, 2013, compared to a fair value of $0.1 million on an outstanding notional amount of $125 million at December 31, 2012. The exposure to credit risk, which is limited to the fair value of those instruments which are in a gain position, was $12 million at December 31, 2013, compared to $2 million as at December 31, 2012. programs. Outstanding mortgages securitized under these programs are The aggregate credit risk exposure related to derivatives that are in a $3.8 billion ($3.3 billion in 2012). > Fair value of principal reinvestment account swaps had a negative fair value of $16 million at December 31, 2013 ($56 million in 2012) and 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 $1,023 million at December 31, 2013 ($932 million in 2012). gain position of $58 million ($65 million in 2012) does not give effect to any netting agreements or collateral arrangements. The exposure to credit risk, considering netting agreements and collateral arrangements, was $4 million at December 31, 2013 (nil in 2012). 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, 2013. Management of credit risk has not changed materially since December 31, 2012. IGM’s exposure to and management of credit risk related to cash and cash MARKET RI SK equivalents, fixed income securities and mortgage portfolios have not changed materially since December 31, 2012. Currency risk IGM’s financial instruments are generally denominated in Canadian dollars, and do not have significant exposure to changes in foreign IGM utilizes over-the-counter derivatives to hedge interest rate risk and exchange rates. reinvestment risk associated with its mortgage banking and securitization activities, as well as market risk related to certain stock-based compensation arrangements. To the extent that the fair value of the derivatives is in a gain position, IGM is exposed to the credit risk that its counterparties fail to fulfill their obligations under these arrangements. 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 offsetting interest rate swaps with the same bank counterparties to hedge interest rate and reinvestment Interest rate risk 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 interest rate exposure. As at December 31, 2013, the total gap between deposit assets and liabilities was within IGM’s trust subsidiaries’ stated guidelines. 98 98 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 23 RISK MANAGEMENT (CONTINUED) IGM utilizes interest rate swaps with Canadian Schedule I chartered bank As at December 31, 2013, the impact to annual net earnings of IGM of a counterparties in order to reduce the impact of fluctuating interest rates on 100-basis-point change in interest rates would have been a decrease of its mortgage banking operations, as follows: approximately $2 million (Power Financial’s share – $1 million). IGM’s exposure > IGM has funded fixed rate mor tgages with ABCP as par t of the to and management of interest rate risk has not changed materially since securitization transactions with bank-sponsored securitization trusts. December 31, 2012. IGM enters into interest rate swaps with Canadian Schedule I chartered Equity price risk IGM is exposed to equity price risk on its proprietary banks to hedge the risk that ABCP rates rise. However, IGM remains investment funds which are classified as available-for-sale securities and exposed to the basis risk that ABCP rates are greater than the bankers’ its equity securities which are classified as fair value through profit or loss. acceptance rates that it receives on its hedges. Unrealized gains and losses on available-for-sale securities are recorded in > IGM has in certain instances funded floating rate mortgages with fixed rate Canada Mortgage Bonds as part of the securitization transactions under the CMB Program. IGM enters into interest rate swaps with Canadian other comprehensive income until they are realized or until management of IGM determines there is objective evidence of impairment in value, at which time they are recorded in the statements of earnings. Schedule I chartered banks to hedge the risk that the interest rates earned IGM sponsors a number of deferred compensation arrangements where on floating rate mortgages decline. As previously discussed, as part of the payments to participants are linked to the performance of the common CMB Program, IGM also is entitled to investment returns on reinvestment shares of IGM Financial Inc. IGM hedges this risk through the use of forward of principal repayments of securitized mortgages and is obligated to pay agreements and total return swaps. 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 bank counterparties. > 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. RI SKS REL ATED TO AS SETS U N DER MANAG EM ENT – MARKET RI SK Risks related to the performance of the equity markets, changes in interest rates and changes in foreign currencies relative to the Canadian dollar can have a significant impact on the level and mix of assets under management. These changes in assets under management directly impact earnings of IGM. NOTE 24 OPERATING AND ADMINISTRATIVE EXPENSES YEARS ENDED DECEMBER 31 Salaries and other employee benefits Amortization, depreciation and impairment Premium taxes Restructuring and acquisition expenses Sub-advisor fees [1] Other 2013 2,511 199 313 107 110 1,234 4,474 2012 2,190 178 293 – 98 1,047 3,806 [1] Lifeco reclassified sub-advisor fees which were previously set off against fee income to operating and administrative expenses. RESTRUCTU RING AN D ACQ U I SITION EXPEN SES With the acquisition of Irish Life on July 18, 2013, Lifeco has developed a restructuring plan to combine the life and pension operations of Canada Life (Ireland) and Irish Life. In addition, other restructuring expenses have been incurred by Lifeco and IGM. Restructuring and acquisition expenses by major categories were as follows: YEAR ENDED DECEMBER 31 Acquisition expenses Restructuring – Irish Life Staff costs Information systems Other Impairment of Canada Life Ireland brand value [Note 11] Other restructuring expenses Total 2013 29 17 3 11 31 34 13 107 Included in the above restructuring expenses are provisions of $34 million which are included within other liabilities. These provisions are expected to be realized within 12 months from the reporting date. POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 99 99 NOTE 25 FINANCING CHARGES YEARS ENDED DECEMBER 31 Interest on debentures and debt instruments Net interest on capital trust debentures Other 2013 364 11 25 400 2012 341 41 27 409 NOTE 26 PENSION PLANS AND OTHER POST-EMPLOYMENT BENEFITS CHAR ACTERI STIC S , FU N DING AN D RI SK The defined contribution pension plans provide pension benefits based on The Corporation and its subsidiaries maintain funded defined benefit pension accumulated employee and company contributions. Contributions to these plans for certain employees and advisors as well as unfunded supplementary plans are a set percentage of employees’ annual income and may be subject employee retirement plans (SERP) for certain employees. The Corporation’s to certain vesting requirements. subsidiaries also maintain defined contribution pension plans for eligible employees and advisors. The Corporation and its subsidiaries also provide post-employment health, dental and life insurance benefits to eligible employees, advisors and their The defined benefit pension plans provide pensions based on length of service dependents. These post-employment benefits are not pre-funded. The and final average earnings. For most plans, active plan participants share amount of the obligation for these benefits is included in other liabilities and in the cost by making contributions in respect of current service. Certain is supported by general assets. pension payments are indexed either on an ad hoc basis or a guaranteed basis. The determination of the defined benefit obligation reflects pension benefits, in accordance with the terms of the plans, and assuming the plans are not terminated. The assets supporting the funded pension plans are held in separate trusteed pension funds. The obligations for the wholly unfunded The Corporation and its subsidiaries have pension and benefit committees or a trustee arrangement that provides oversight for the benefit plans. The benefit plans are monitored on an ongoing basis to assess the benefit, funding and investment policies, financial status, and funding requirements of the Corporation and its subsidiaries. Significant changes to benefit plans plans are supported by general assets. require approval. Effective July 1, 2012, the defined benefit pension plan of IGM was closed and will only accept members hired prior to July 1, 2012. For all eligible employees hired after July 1, 2012, IGM introduced a registered defined contribution pension plan. The Corporation and its subsidiaries’ funding policy for the funded pension plans is to make annual contributions equal to or greater than those required by the applicable regulations and plan provisions that govern the funding of the plans. Where funded plans have a net defined benefit asset, the Effective January 1, 2013, both the Great-West Life Assurance Company Canadian Corporation and its subsidiaries determine if an economic benefit exists in Employees’ Pension Plan and the London Life Staff Pension Plan added a the form of potential reductions in future contributions and in the form of defined contribution provision to their plans. All new hires after this date surplus refunds, where permitted by applicable regulation and plan provisions. are eligible only for defined contribution benefits. This change is consistent with the benefit provisions of the majority of Lifeco’s pension plans and will continue to reduce Lifeco’s defined benefit plan exposure in future years. By their design, the defined benefit plans expose the Corporation and its subsidiaries to the typical risks faced by defined benefit plans such as investment performance, changes to the discount rates used to value Subsidiaries of Lifeco have declared partial windups in respect of certain the obligations, longevity of plan members, and future inflation. Pension defined benefit pension plans. Lifeco holds after-tax provisions in the amount and benefit risk is managed by regular monitoring of the plans, applicable of $34 million for these plans. regulations and other factors that could impact the expenses and cash flows of the Corporation and its subsidiaries. 100 100 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 26 PENSION PLANS AND OTHER POST-EMPLOYMENT BENEFITS (CONTINUED) PL AN AS SETS , B EN EFIT OB LIGATION S AN D FU N DED STATUS DECEMBER 31 CHANGE IN FAIR VALUE OF PLAN ASSETS Fair value of plan assets, beginning of year Interest income Employee contributions Employer contributions Actual return over interest income Benefits paid Administrative expenses Acquisition of Irish Life Foreign exchange and other Fair value of plan assets, end of year CHANGE IN DEFINED BENEFIT OBLIGATION Defined benefit obligation, beginning of year Current service cost Employee contributions Interest cost Actuarial (gains) losses on: Financial assumption changes Demographic assumption changes Arising from member experience Benefits paid Past service cost Acquisition of Irish Life Foreign exchange and other Defined benefit obligation, end of year FUNDED STATUS Fund deficit Unrecognized amount due to limit on asset Accrued benefit liability 2013 2012 PENSION PL ANS OTHER POST- EMPLOYMENT BENEFITS PENSION PL ANS OTHER POST- EMPLOYMENT BENEFITS 3,539 176 22 164 310 (210) (6) 1,196 158 5,349 4,389 125 22 212 (332) 37 8 (210) 1 1,202 199 5,653 (304) (44) (348) – – – 19 – (19) – – – – 470 4 – 19 (29) (11) 3 (19) – – 1 3,359 168 20 93 112 (185) (5) – (23) 3,539 – – – 19 – (19) – – – – 3,868 449 91 20 191 416 9 3 (185) 1 – (25) 3 – 22 49 10 (44) (19) – – – 438 4,389 470 (438) – (438) (850) (41) (891) (470) – (470) The aggregate defined benefit obligation of pension plans is as follows: YEARS ENDED DECEMBER 31 Wholly or partly funded plans Wholly unfunded plans The net accrued benefit asset (liability) shown above is presented in these financial statements as follows: DECEMBER 31 Pension benefit asset Pension and other post-employment benefit liabilities Accrued benefit asset (liability) PENSION PL ANS OTHER POST- EMPLOYMENT BENEFITS 408 (756) (348) – (438) (438) 2013 5,229 424 PENSION PL ANS 202 2013 TOTAL 408 (1,194) (1,093) (786) (891) 2012 3,975 414 2012 TOTAL 202 (1,563) (1,361) OTHER POST- EMPLOYMENT BENEFITS – (470) (470) POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 101 101 NOTE 26 PENSION PLANS AND OTHER POST-EMPLOYMENT BENEFITS (CONTINUED) Under International Financial Reporting Interpretations Committee (IFRIC) through future contribution reductions or refunds. In the event the 14, The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Corporation and its subsidiaries are not entitled to a benefit, a limit or “asset Interaction, the Corporation and its subsidiaries must assess whether the ceiling” is required on the balance. The following provides a breakdown of the pension asset is of economic benefit to the Corporation and its subsidiaries changes in the asset ceiling. DECEMBER 31 Asset ceiling, beginning of year Interest on beginning of period asset ceiling Change in asset ceiling Asset ceiling, end of year PEN SION AN D OTH ER POST- EM PLOYM ENT B EN EFIT EXPEN SE DECEMBER 31 Defined benefit current service cost Employee contributions Net interest cost Past service cost Administration fees Defined contribution current service cost Expense recognized in net earnings Actuarial (gain) loss recognized Return on assets (greater) less than assumed Effect of the asset ceiling Expense recognized in other comprehensive income Total expense (income) 2013 41 2 1 44 2012 71 4 (34) 41 2013 2012 PENSION PL ANS OTHER POST- EMPLOYMENT BENEFITS PENSION PL ANS OTHER POST- EMPLOYMENT BENEFITS 147 (22) 125 38 1 6 31 201 (287) (310) 1 (596) (395) 4 – 4 19 – – – 23 (37) – – (37) (14) 111 (20) 91 27 1 5 26 150 428 (112) (34) 282 432 3 – 3 22 – – – 25 15 – – 15 40 During 2013, the Corporation and its subsidiaries incurred $23 million of actuarial gains ($7 million of actuarial losses in 2012) for pension plan remeasurements not included in the table shown above. This primarily relates to the share of actuarial gains (losses) for investments accounted for under the equity method. AS SET ALLOCATION BY MAJOR CATEGORY WEIG HTED BY PL AN AS SETS % Equity securities Debt securities All other assets DECEMBER 31, 2013 DECEMBER 31, 2012 JANUARY 1, 2012 DEFINED BENEFIT PENSION PL ANS 54 37 9 100 52 38 10 100 47 41 12 100 No plan assets are directly invested in the Corporation’s or subsidiaries’ $1,430 million at January 1, 2012). Plan assets do not include any property securities. Lifeco’s plan assets include investments in segregated funds occupied or other assets used by Lifeco. IGM’s plan assets are invested in IGM’s and other funds managed by subsidiaries of Lifeco in the balance sheet of mutual funds. Power Financial’s plan assets are invested in segregated funds $3,012 million at December 31, 2013 ($1,523 million at December 31, 2012 and managed by a subsidiary of Lifeco. 102 102 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 26 PENSION PLANS AND OTHER POST-EMPLOYMENT BENEFITS (CONTINUED) DETAIL S OF DEFIN ED B EN EFIT OB LIGATION PORTION OF DEFIN ED B EN EFIT OB LIGATION SU B J ECT TO FUTU RE SAL ARIES DECEMBER 31 Benefit obligation without future salary increases Effect of assumed future salary increases Defined benefit obligation ALLOCATION OF DEFIN ED B EN EFIT OB LIGATION BY M EM B ERSH IP DECEMBER 31 % Actives Deferred vesteds Retirees Total Weighted average duration of defined benefit obligation (in years) CASH FLOW IN FORMATION The expected employer contributions for the year 2014 are as follows: Funded (wholly or partly) defined benefit plans Unfunded defined benefit plans Defined contribution plans Total ACTUARIAL AS SU M PTION S AN D SEN SITIVITIES ACTUARIAL AS SU M PTION S % RANGE OF DISCOUNT RATES To determine benefit cost To determine accrued benefit obligation at year-end WEIGHTED AVERAGE ASSUMPTIONS USED TO DETERMINE BENEFIT COST [1] Discount rate Rate of compensation increase WEIGHTED AVERAGE ASSUMPTIONS USED TO DETERMINE ACCRUED BENEFIT OBLIGATION AT YEAR-END [1] Discount rate Rate of compensation increase WEIGHTED AVERAGE HEALTHCARE TREND RATES [1] Initial healthcare trend rate Ultimate healthcare trend rate Year ultimate trend rate is reached [1] Based on the obligations of each plan. 2013 OTHER POST- EMPLOYMENT BENEFITS 438 – 438 PENSION PL ANS 5,036 617 5,653 2012 OTHER POST- EMPLOYMENT BENEFITS 470 – 470 PENSION PL ANS 4,030 359 4,389 2013 2012 PENSION PL ANS OTHER POST- EMPLOYMENT BENEFITS PENSION PL ANS OTHER POST- EMPLOYMENT BENEFITS 46 15 39 100 18.2 25 – 75 100 11.9 44 15 41 100 16.3 27 – 73 100 12.7 DEFINED BENEFIT PENSION PL ANS OTHER POST-EMPLOYMENT BENEFITS 118 22 34 174 – 22 – 22 DEFINED BENEFIT PENSION PL ANS OTHER POST-EMPLOYMENT BENEFITS 2013 2012 2013 2012 4.1 – 4.6 4.5 – 5.5 4.1 – 4.5 4.5 – 5.1 4.7 – 5.1 4.1 – 4.6 4.7 – 5.0 4.1 – 4.5 4.4 3.2 4.7 3.3 5.1 3.6 4.4 3.2 4.2 – 4.8 – 6.4 4.5 2024 5.1 – 4.2 – 6.5 4.5 2024 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 103 103 NOTE 26 PENSION PLANS AND OTHER POST-EMPLOYMENT BENEFITS (CONTINUED) SAM PLE LIFE EXPECTANCIES BASED ON MORTALIT Y AS SU M PTION S DECEMBER 31 Weighted average life expectancies based on mortality assumptions [1]: Male Age 65 in fiscal year Age 65 in fiscal year + 30 years Female Age 65 in fiscal year Age 65 in fiscal year + 30 years [1] Based on the obligations of each plan. 2013 2012 PENSION PL ANS OTHER POST- EMPLOYMENT BENEFITS PENSION PL ANS OTHER POST- EMPLOYMENT BENEFITS 22.0 24.3 23.9 25.8 21.4 23.0 23.7 25.0 21.0 23.3 23.1 24.5 20.8 22.9 23.2 24.3 Mortality assumptions are significant in measuring the defined benefit its subsidiaries take into consideration average life expectancy, including obligation for defined benefit plans. The period of time over which benefits allowances for future mortality improvement as appropriate, and reflect are assumed to be paid is based on best estimates of future mortality, variations in such factors as age, gender and geographic location. including allowances for mortality improvements. This estimate is subject to considerable uncertainty and judgment is required in establishing this assumption. The mortality assumptions applied by the Corporation and The mortality tables are reviewed at least annually, and assumptions are in accordance with accepted actuarial practice. Emerging plan experience is reviewed and considered in establishing the best estimate for future mortality. IM PACT OF CHANG ES TO AS SU M PTION S DECEMBER 31, 2013 DEFINED BENEFIT PENSION PLANS: Impact of a change to the discount rate Impact of a change to the rate of compensation increase Impact of a change to the rate of inflation OTHER POST-EMPLOYMENT BENEFITS: Impact of a change to assumed medical cost trend rates Impact of a change to the discount rate 1% INCREASE 1% DECREASE (856) 268 662 45 (48) 1,100 (218) (523) (37) 58 To measure the impact of a change in an assumption, all other assumptions were held constant. It would be expected that there would be interaction between at least some of the assumptions and therefore the sensitivity analysis presented may not be representative of the actual change. 104 104 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 27 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: 2013 DERIVATIVES NOT DESIGNATED AS ACCOUNTING HEDGES NOTIONAL AMOUNT 1 YEAR OR LESS 1–5 YEARS OVER 5 YEARS TOTAL MA XIMUM CREDIT RISK TOTAL ESTIMATED FAIR VALUE 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 Other forward contracts CASH FLOW HEDGES Interest rate contracts Swaps Foreign exchange contracts Cross-currency swaps Other derivative contracts Forward contracts and total return swap FAIR VALUE HEDGES Interest rate contracts Swaps 4 13 2,455 265 2,737 602 213 815 – – 3,191 327 3,518 476 2,053 2,529 10,660 102 15 301 157 11,133 14,685 – – 15 15 – – – 102 6,149 – 1,500 17 1,517 – 14,700 17 7,683 – – 990 89 1,079 – 4,986 4,986 – – – – – 6,065 33 12 – 45 66 4 13 6,636 681 7,334 1,078 7,252 8,330 10,762 15 301 157 11,235 26,899 33 1,512 32 1,577 83 6,176 28,559 – – 269 30 299 11 313 324 11 – – – 11 634 7 – 8 15 – – 176 30 206 6 (167) (161) (90) – (6) – (96) (51) 7 (94) 8 (79) 5 654 5 (125) POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 105 105 NOTE 27 DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) 2012 DERIVATIVES NOT DESIGNATED AS ACCOUNTING HEDGES NOTIONAL AMOUNT 1 YEAR OR LESS 1–5 YEARS OVER 5 YEARS TOTAL MA XIMUM CREDIT RISK TOTAL ESTIMATED FAIR VALUE 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 Other forward contracts CASH FLOW HEDGES Interest rate contracts Swaps Foreign exchange contracts Cross-currency swaps Other derivative contracts Forward contracts and total return swap FAIR VALUE HEDGES Interest rate contracts Swaps 9 71 1,844 257 2,181 300 205 505 900 7 224 290 1,421 4,107 – – 3 3 – 4,110 – – 2,613 513 3,126 – 2,001 2,001 4 – – – 4 – – 1,348 87 1,435 – 4,772 4,772 – – – – – 9 71 5,805 857 6,742 300 6,978 7,278 904 7 224 290 1,425 – – 410 46 456 1 565 566 8 – – – 8 – – 318 46 364 – 290 290 (5) – (4) – (9) 5,131 6,207 15,445 1,030 645 – 30 30 1,000 500 1,500 18 1,018 – 530 21 1,551 58 6,207 124 6,861 182 17,178 1,060 14 16 – 30 – 13 (8) (2) 3 (1) 647 The amount subject to credit risk is limited to the current fair value of the Call options grant the Corporation and its subsidiaries the right to enter into instruments which are in a gain position. The credit risk is presented without a swap with predetermined fixedrate payments over a predetermined time giving effect to any netting agreements and does not reflect actual or period on the exercise date. Call options are used to manage the variability expected losses. The total estimated fair value represents the total amount in future interest payments due to a change in credited interest rates and the that the Corporation and its subsidiaries would receive (or pay) to terminate related potential change in cash flows due to surrenders. Call options are also all agreements at year-end. However, this would not result in a gain or loss used to hedge minimum rate guarantees. to the Corporation and its subsidiaries as the derivative instruments which correlate to certain assets and liabilities provide offsetting gains or losses. FOREIG N EXCHANG E CONTR ACTS INTEREST R ATE CONTR ACTS Cross-currency swaps are used in combination with other investments to manage foreign currency risk associated with investment activities and Interest rate swaps, futures and options are used as part of a portfolio of insurance and investment contract liabilities. Under these swaps, principal assets to manage interest rate risk associated with investment activities amounts and fixed and floating interest payments may be exchanged in and insurance and investment contract liabilities and to reduce the impact different currencies. The Corporation and its subsidiaries may also enter of fluctuating interest rates on the mortgage banking operations and into certain foreign exchange forward contracts to hedge certain product intermediary operations. Interest rate swap agreements require the periodic liabilities, cash and cash equivalents and cash flows. exchange of payments without the exchange of the notional principal amount on which payments are based. 106 106 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 27 DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) OTH ER DERIVATIVE CONTR ACTS Equity index swaps, futures and options are used to hedge certain product EN FORCEAB LE MASTER N ET TING AG REEM ENTS OR SIM IL AR AG REEM ENTS liabilities. Equity index swaps are also used as substitutes for cash instruments The following disclosure shows the potential effect on the Corporation’s and are used to periodically hedge the market risk associated with certain balance sheets on financial instruments that have been shown in a gross fee income. Equity put options are used to manage the potential credit risk position where right of set-off exists under certain circumstances that do impact of significant declines in certain equity markets. not qualify for netting on the balance sheets. Forward agreements and total return swaps are used to manage exposure The Corporation and its subsidiaries enter into the International Swaps and to fluctuations in the total return of common shares related to deferred Derivative Association’s master agreements for transacting over-the-counter compensation arrangements. Total return swap and forward agreements derivatives. The Corporation and its subsidiaries receive and pledge collateral require the exchange of net contractual payments periodically or at maturity according to the related International Swaps and Derivative Association’s without the exchange of the notional principal amounts on which the Credit Support Annexes. The International Swaps and Derivative Association’s payments are based. Certain of these instruments are not designated as master agreements do not meet the criteria for offsetting on the balance hedges. Changes in fair value are recorded in operating and administrative sheets because they create a right of set-off that is enforceable only in the expenses in the statements of earnings for those instruments not designated event of default, insolvency, or bankruptcy. as hedges. DECEMBER 31, 2013 FINANCIAL INSTRUMENTS (ASSETS) Derivative financial instruments Reverse repurchase agreements [3] Total financial instruments (assets) FINANCIAL INSTRUMENTS (LIABILITIES) Derivative instruments Total financial instruments (liabilities) DECEMBER 31, 2012 FINANCIAL INSTRUMENTS (ASSETS) Derivative financial instruments Reverse repurchase agreements [3] Total financial instruments (assets) FINANCIAL INSTRUMENTS (LIABILITIES) Derivative instruments Total financial instruments (liabilities) For exchange-traded derivatives subject to derivative clearing agreements with exchanges and clearing houses, there is no provision for set-off at default. Initial margin is excluded from the table below as it would become part of a pooled settlement process. Lifeco’s reverse repurchase agreements are also subject to right of set-off in the event of default. These transactions and agreements include master netting arrangements which provide for the netting of payment obligations between Lifeco and its counterparties in the event of default. REL ATED AMOUNTS NOT SET OFF IN THE BAL ANCE SHEETS GROSS AMOUNT OF FINANCIAL INSTRUMENTS PRESENTED IN THE BAL ANCE SHEET OFFSET TING COUNTERPART Y POSITION [1] FINANCIAL COLL ATERAL RECEIVED / PLEDGED [2] NET EXPOSURE 654 87 741 779 779 (271) – (271) (271) (271) (22) (87) (109) (199) (199) 361 – 361 309 309 REL ATED AMOUNTS NOT SET OFF IN THE BAL ANCE SHEETS GROSS AMOUNT OF FINANCIAL INSTRUMENTS PRESENTED IN THE BAL ANCE SHEET OFFSET TING COUNTERPART Y POSITION [1] FINANCIAL COLL ATERAL RECEIVED / PLEDGED [2] NET EXPOSURE 1,060 101 1,161 413 413 (275) – (275) (275) (275) (25) (101) (126) (96) (96) 760 – 760 42 42 [1] Includes counterparty amounts recognized on the balance sheets where the Corporation has a potential offsetting position (as described above) but does not meet the criteria for offsetting on the balance sheets, excluding collateral. [2] Financial collateral presented above excludes overcollateralization and, for exchange-traded derivatives, initial margin. Financial collateral received on reverse repurchase agreements is held by a third party. Total financial collateral, including initial margin and overcollateralization, received on derivative assets was $22 million ($25 million at December 31, 2012), received on reverse repurchase agreements was $89 million ($103 million at December 31, 2012), and pledged on derivative liabilities was $222 million ($118 million at December 31, 2012). [3] Assets related to reverse repurchase agreements are included in bonds in the balance sheets. POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 107 107 NOTE 28 FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents the carrying amounts and fair value of the The table excludes fair value information for financial assets and financial Corporation’s financial assets and financial liabilities, including their levels liabilities not measured at fair value if the carrying amount is a reasonable in the fair value hierarchy using the valuation methods and assumptions approximation of the fair value. The excluded items are cash and cash described in the summary of significant accounting policies and below. Fair equivalents, dividends, interest and accounts receivable, income tax values are management’s estimates and are generally calculated using market receivable, loans to policyholders, certain other financial assets, accounts information at a specific point in time and may not reflect future fair values. payable, repurchase agreements, dividends payable, interest payable, income The calculations are subjective in nature, involve uncertainties and matters tax payable and certain other financial liabilities. of significant judgment. The table distinguishes between those financial instruments recorded at fair value and those recorded at amortized cost. DECEMBER 31, 2013 FINANCIAL ASSETS Financial assets recorded at fair value Bonds Fair value through profit or loss Available for sale Mortgage and other loans Fair value through profit or loss Shares Fair value through profit or loss Available for sale Investment properties Derivative instruments Other assets Financial assets recorded at amortized cost Bonds Loans and receivables Mortgage and other loans Loans and receivables Shares Available for sale [1] Total financial assets FINANCIAL LIABILITIES Financial liabilities recorded at fair value Investment contract liabilities Derivative instruments Other liabilities Financial liabilities recorded at amortized cost Obligations to securitization entities Debentures and debt instruments Capital trust debentures Deposits and certificates Total financial liabilities CARRYING VALUE LEVEL 1 LEVEL 2 LEVEL 3 TOTAL FAIR VALUE 70,104 8,370 324 7,297 117 4,288 654 396 91,550 11,855 24,591 632 37,078 128,628 (889) (779) (20) (1,688) (5,572) (7,275) (163) (187) (13,197) (14,885) – – – 7,264 116 – – 244 7,624 – – – – 69,771 8,346 324 7 – – 646 131 333 24 – 26 1 4,288 8 21 70,104 8,370 324 7,297 117 4,288 654 396 79,225 4,701 91,550 12,544 128 12,672 19,517 5,695 25,212 – 32,061 632 6,455 632 38,516 7,624 111,286 11,156 130,066 – (6) (20) (26) (859) (749) – (1,608) (30) (24) – (54) – – (5,671) (582) (7,409) – – (582) (608) (205) (188) (7,802) (9,410) (75) – – (5,746) (14,130) (5,800) (15,818) (889) (779) (20) (1,688) (5,671) (8,066) (205) (188) [1] Fair value cannot be reliably measured as these are unique private companies across various industries. In addition, the financial data that the Corporation receives is not available on a timely basis to allow accurate estimates on reporting dates, therefore the investments are held at cost. 108 108 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 28 FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) DECEMBER 31, 2012 FINANCIAL ASSETS Financial assets recorded at fair value Bonds Fair value through profit or loss Available for sale Mortgage and other loans Fair value through profit or loss Shares Fair value through profit or loss Available for sale Investment properties Derivative instruments Other assets Financial assets recorded at amortized cost Bonds Loans and receivables Mortgage and other loans Loans and receivables Shares Available for sale Total financial assets FINANCIAL LIABILITIES Financial liabilities recorded at fair value Investment contract liabilities Derivative instruments Other liabilities Financial liabilities recorded at amortized cost Obligations to securitization entities Debentures and debt instruments Capital trust debentures Deposits and certificates Total financial liabilities There were no significant transfers between Level 1 and Level 2 in 2013 and 2012. 65,050 7,407 249 5,949 138 3,572 1,060 285 83,710 10,934 22,548 674 34,156 117,866 (739) (413) (141) (1,293) (4,701) (5,817) (164) (163) (10,845) (12,138) CARRYING VALUE LEVEL 1 LEVEL 2 LEVEL 3 TOTAL FAIR VALUE 64,551 7,380 249 7 5 – 1,060 84 274 27 – 12 1 3,572 – 9 65,050 7,407 249 5,949 138 3,572 1,060 285 73,336 3,895 83,710 12,372 66 12,438 19,067 4,792 23,859 225 – – 5,930 132 – – 192 6,479 – – – – – 31,439 674 5,532 9,427 674 36,971 120,681 6,479 104,775 – (4) (141) (145) (706) (353) – (1,059) (33) (56) – (89) – – (4,787) (295) (6,484) – – (295) (440) (216) (165) (6,865) (7,924) – – – (739) (413) (141) (1,293) (4,787) (6,779) (216) (165) (4,787) (11,947) (4,876) (13,240) POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 109 109 NOTE 28 FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) The Corporation’s financial assets and financial liabilities recorded at fair a matrix which is based on credit quality and average life, government and value have been categorized based upon the following fair value hierarchy: agency securities, restricted stock, some private bonds and equities, most > 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, exchange-traded futures, and mutual and segregated funds which have available prices in an active market with no redemption restrictions. Level 1 assets also include, open- end investment fund units, and investments in Government of Canada Bonds and Canada Mortgage Bonds in instances where there are quoted prices available from active markets. investment-grade and high-yield corporate bonds, most asset-backed securities, most over-the-counter derivatives, mortgage loans, deposits and certificates, and long-term debt. The fair value of derivative financial instruments and deposits and certificates is determined using valuation models, discounted cash flow methodologies, or similar techniques using primarily observable market inputs. The fair value of long-term debt is determined using indicative broker quotes. Investment contracts that are measured at fair value through profit or loss are mostly included in Level 2 category. > Level 2 inputs utilize other-than-quoted prices included in Level 1 that > Level 3 inputs utilize one or more significant inputs that are not based on are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other-than-quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. The fair values for some Level 2 securities were obtained from a pricing service. The pricing service inputs include, but are not limited to, benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, offers and reference data. Level 2 assets and liabilities include those priced using observable market inputs and include situations where there is little, if any, market activity for the asset or liability. The values of the majority of Level 3 securities were obtained from single-broker quotes, internal pricing models, external appraisers or by discounting projected cash flows. Financial assets and liabilities utilizing Level 3 inputs include certain bonds, certain asset-backed securities, some private equities, some mortgages, investments in mutual and segregated funds where there are redemption restrictions, certain over-the-counter derivatives, investment properties, and obligations to securitization entities. The following table presents additional information about financial assets and financial liabilities measured at fair value on a recurring basis for which the Corporation and its subsidiaries have utilized Level 3 inputs to determine fair value for the year ended December 31, 2013. DECEMBER 31, 2013 Balance, beginning of year Total gains (losses) In net earnings In other comprehensive income [1] Acquisition of Irish Life [Note 4] Purchases Sales Settlements Other Transfers into Level 3 Transfers out of Level 3 Balance, end of year BONDS SHARES FAIR VALUE THROUGH PROFIT OR LOSS AVAIL ABLE FOR SALE FAIR VALUE THROUGH PROFIT OR LOSS AVAIL ABLE FOR SALE INVESTMENT PROPERTIES DERIVATIVES, NET OTHER ASSETS (LIABILITIES) INVESTMENT CONTRAC T LIABILITIES TOTAL 274 68 – 120 – (104) (69) – 50 (6) 333 27 12 4 3 – – (5) (5) – – – 24 1 – 1 21 (10) – – 1 – 26 1 – – – – – – – – – 1 3,572 152 216 248 182 (82) – – – – (56) 18 – – 3 – 19 – – – 9 12 – – – – – – – – (33) 3,806 – – – – – – 3 – – 255 219 369 206 (201) (55) 3 51 (6) 4,288 (16) 21 (30) 4,647 [1] Amount of other comprehensive income for investment properties represents the unrealized gain on foreign exchange. Transfers into Level 3 are due primarily to decreased observability of inputs in valuation methodologies. Transfers out of Level 3 are due primarily to increased observability of inputs in valuation methodologies as evidenced by corroboration of market prices with multiple pricing vendors or the lifting of redemption restrictions on investments in mutual funds and segregated funds. 110 110 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 28 FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) The following table sets out information about significant unobservable inputs used at period end in measuring financial assets and financial liabilities categorized as Level 3 in the fair value hierarchy. T YPE OF ASSET VALUATION APPROACH SIGNIFICANT UNOBSERVABLE INPUT INPUT VALUE Asset-backed securities (included with bonds) Discounted cash flow Investment properties Investment property valuations are generally determined using property valuation models based on expected capitalization rates and models that discount expected future net cash flows. The determination of the fair value of investment property requires the use of estimates such as future cash flows (such as future leasing assumptions, rental rates, capital and operating expenditures) and discount, reversionary and overall capitalization rates applicable to the asset based on current market rates. Prepayment speed assumption (estimated % of collateral that prepays annually) Constant default rate assumption (estimated % of defaults in the collateral pool annually) Adjusted asset-backed securities index (ABX index) spread assumption (adjusted for internally calculated liquidity premium) 8.5% (weighted average) 5.0% (weighted average) 455 bps (weighted average) Discount rate Range of 4.0% – 11.0% Reversionary rate Range of 5.4% – 8.3% Vacancy rate Weighted average of 3.1% INTER-RELATIONSHIP BETWEEN KEY UNOBSERVABLE INPUTS AND FAIR VALUE MEASUREMENT Lifeco does not believe that changing one or more of the inputs to reasonably alternate assumptions would change their values significantly. A decrease in the discount rate would result in an increase in fair value. An increase in the discount rate would result in a decrease in fair value. A decrease in the reversionary rate would result in an increase in fair value. An increase in the reversionary rate would result in a decrease in fair value. A decrease in the expected vacancy rate would generally result in an increase in fair value. An increase in the expected vacancy rate would generally result in a decrease in fair value. POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 111 111 NOTE 29 OTHER COMPREHENSIVE INCOME YEAR ENDED DECEMBER 31, 2013 Balance, beginning of year As previously reported Change in accounting policy [Note 3] As restated Other comprehensive income (loss) Other Balance, end of year YEAR ENDED DECEMBER 31, 2012 Balance, beginning of year As previously reported Change in accounting policy [Note 3] As restated Other comprehensive income (loss) Balance, end of year ITEMS THAT MAY BE RECL ASSIFIED SUBSEQUENTLY TO NET EARNINGS ITEMS THAT WILL NOT BE RECL ASSIFIED TO NET EARNINGS INVESTMENT REVALUATION AND CASH FLOW HEDGES FOREIGN CURRENCY TRANSL ATION SHARE OF JOINTLY CONTROLLED CORPORATIONS AND ASSOCIATE AC TUARIAL GAIN (LOSSES) ON DEFINED BENEFIT PENSION PL ANS SHARE OF JOINTLY CONTROLLED CORPORATIONS AND ASSOCIATE 78 – 78 (128) 1 (49) (302) – (302) 564 2 264 76 – 76 251 – 327 – (475) (475) 292 4 (179) – (44) (44) 19 – (25) ITEMS THAT MAY BE RECL ASSIFIED SUBSEQUENTLY TO NET EARNINGS ITEMS THAT WILL NOT BE RECL ASSIFIED TO NET EARNINGS INVESTMENT REVALUATION AND CASH FLOW HEDGES FOREIGN CURRENCY TRANSL ATION SHARE OF JOINTLY CONTROLLED CORPORATIONS AND ASSOCIATE AC TUARIAL GAIN (LOSSES) ON DEFINED BENEFIT PENSION PL ANS SHARE OF JOINTLY CONTROLLED CORPORATIONS AND ASSOCIATE 96 – 96 (18) 78 (249) – (249) (53) (302) 176 – 176 (100) 76 – (335) (335) (140) (475) – (37) (37) (7) (44) TOTAL (148) (519) (667) 998 7 338 TOTAL 23 (372) (349) (318) (667) 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 EARNINGS 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 NUMBER OF COMMON SHARES (millions) Weighted average number of common shares outstanding – Basic Exercise of outstanding stock options Shares assumed to be repurchased with proceeds from exercise of stock options Weighted average number of common shares outstanding – Diluted NET EARNINGS PER COMMON SHARE Basic Diluted 2013 2012 2,027 (131) 1,896 (28) 1,868 710.8 7.4 (7.0) 711.2 2.67 2.63 1,735 (117) 1,618 (9) 1,609 708.3 3.6 (3.2) 708.7 2.29 2.27 For 2013, 141,415 stock options (5,190,730 in 2012) have been excluded from the computation of diluted earnings per share as the exercise price was higher than the market price. 112 112 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 31 CONTINGENT LIABILITIES The Corporation and its subsidiaries are from time to time subject to legal During the first quarter of 2013, Lifeco completed a review of the contingencies actions, including arbitrations and class actions, arising in the normal course relating to the cost of acquiring Canada Life Financial Corporation in 2003 and of business. It is inherently difficult to predict the outcome of any of these reduced the existing provision from $41 million to $7 million. This provision proceedings with certainty, and it is possible that an adverse resolution was further reduced to nil in the fourth quarter of 2013. 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. LIFECO A subsidiary of Lifeco, Canada Life, 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 Lifeco and its subsidiaries London Life and Great-West Life are defendants in class proceedings in Ontario regarding the participation of the London Life and Great-West Life participating accounts in the financing of the acquisition of London Insurance Group Inc. in 1997 by Great-West Life. The Ontario Superior Court of Justice released its trial decision on October 1, 2010. Lifeco and its subsidiaries appealed and the Court of Appeal for Ontario released its decision on November 3, 2011. The Court of Appeal ordered that there be adjustments to the October 1, 2010 trial judgment regarding the amounts which were to be reallocated to the participating accounts and directed the parties back to the trial judge to determine these amounts and address the remaining issues. On May 24, 2012, the Supreme Court of Canada dismissed the plaintiffs’ application for leave to appeal the Court of Appeal decision. class action also challenges the validity of charging expenses to the plan. The The parties returned to the trial judge and, on January 24, 2013 the Ontario provisions for certain Canadian retirement plans in the amounts of $97 million Superior Court of Justice released a decision ordering that $298 million after tax established by Lifeco’s subsidiaries in the third quarter of 2007 have be reallocated to the participating account surplus. Lifeco established an been reduced to $34 million in the fourth quarter of 2012. Actual results could incremental provision in the December 31, 2012 financial statements of differ from these estimates. $140 million after tax in its common shareholders account to hold $290 million In connection with the acquisition of its subsidiary Putnam, Lifeco has an in after-tax provisions for these proceedings. indemnity from a third party against liabilities arising from certain litigation During the first quarter of 2013 Lifeco subsidiaries London Life and Great-West and regulatory actions involving Putnam. Putnam continues to have potential Life reallocated an amount of $298 million to the participating account liability for these matters in the event the indemnity is not honoured. Lifeco surplus in accordance with the January 24, 2013 decision and Lifeco therefore expects the indemnity will continue to be honoured and that any liability reduced the litigation provision in its common shareholders account. The of Putnam would not have a material adverse effect on its consolidated monies to be relocated to the participating accounts are to be dealt with financial position. On October 17, 2012, a subsidiary of Lifeco, Putnam Advisory Company, LLC, received an administrative complaint from the Massachusetts Securities in accordance with Lifeco subsidiaries’ participating policyholder dividend policies in the ordinary course of business. No awards are to be paid out to individual class members. Division in relation to that subsidiary’s role as collateral manager of two Lifeco subsidiaries London Life and Great-West Life appealed the collateralized debt obligations. The complaint is seeking certain remedies, January 24, 2013 decision and the appeal was heard September 4, 2013. The including the disgorgement of fees, a civil administrative fine and a cease Court of Appeal for Ontario reserved its decision. and desist order. In addition, that same subsidiary was a defendant in two civil litigation matters brought by institutions involved in those collateralized debt obligations. In the third quarter of 2013, one of the civil litigation matters was dismissed. Based on information presently known, Lifeco believes these matters are without merit. The potential outcome of these matters is not yet determined. Subsequent event – Participating account legal matter The Court of Appeal for Ontario released a decision on February 3, 2014 overturning the January 24, 2013 decision of the Ontario Superior Court of Justice and reducing the amount to be reallocated to the participating account surplus to $52 million, which positively impacted Lifeco’s common shareholders’ net earnings by $226 million after tax. There will not be any impact on Lifeco’s capital position or on its participating policy contract terms and conditions. POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 113 113 NOTE 32 COMMITMENTS AND GUARANTEES GUAR ANTEES INVESTM ENT COM M ITM ENTS In the normal course of operations, the Corporation and its subsidiaries With respect to Lifeco, commitments to investment transactions made in the execute agreements that provide for indemnifications to third parties in normal course of operations in accordance with policies and guidelines and transactions such as business dispositions, business acquisitions, loans and that are to be disbursed upon fulfilment of certain contract conditions were securitization transactions. The Corporation and its subsidiaries have also $466 million as at December 31, 2013 ($516 million as at December 31, 2012). At agreed to indemnify their directors and certain of their officers. The nature of December 31, 2013, the full amount of $466 million will mature within 1 year (at these agreements precludes the possibility of making a reasonable estimate December 31, 2012, $470 million was to mature within 1 year and $46 million of the maximum potential amount the Corporation and its subsidiaries in 1-2 years). 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. LET TERS OF CREDIT INVESTED AS SETS ON DEPOSIT FOR REIN SU R ANCE AG REEM ENTS As at December 31, 2013, Lifeco has $582 million ($606 million at December 31, 2012) of invested assets maintained on deposit in respect of certain reinsurance agreements. Lifeco retains all rights to the cash flows on these assets, however, the investment policies for these assets are governed by the terms of the reinsurance agreements. Letters of credit are written commitments provided by a bank. For Lifeco, the total amount of letter of credit facilities is US$3.0 billion, of which COM M ITM ENTS US$2.7 billion were issued as of December 31, 2013. The Reinsurance operation periodically uses letters of credit as collateral under certain reinsurance contracts for on-balance sheet policy liabilities. 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 2014 154 2015 136 2016 117 2017 98 2018 77 2019 AND THEREAFTER 125 TOTAL 707 NOTE 33 RELATED PARTY TRANSACTIONS PRINCIPAL SU B SIDIARIES AN D JOINT VENTU RE The financial statements of Power Financial include the operations of the following subsidiaries and joint venture: CORPORATION Great-West Lifeco Inc. The Great-West Life Assurance Company London Life Insurance Company The Canada Life Assurance Company Irish Life Group Limited INCORPORATED IN PRIMARY BUSINESS OPERATION Canada Canada Canada Canada Ireland Financial services holding company Insurance and wealth management 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. (joint venture) Pargesa Holding SA Canada Canada Canada Netherlands Switzerland Financial services Financial services Financial services Financial services Holding company Holding company % HELD 67 100 100 100 100 100 95.6 58.6 100 100 50 55.6 Balances and transactions between the Corporation and its subsidiaries, which are related parties of the Corporation, have been eliminated on consolidation and are not disclosed in this note. Details of transactions between the Corporation and other related parties are disclosed below. 114 114 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 33 RELATED PARTY TRANSACTIONS (CONTINUED) TR AN SACTION S WITH REL ATED PARTIES On January 7, 2014, the Corporation renewed its tax loss consolidation In the normal course of business, Great-West Life enters into various transactions with IGM. The Corporation acquired $1.67 billion of 4.50% transactions with related companies which include providing insurance secured debentures of IGM. As sole consideration for the debentures a wholly benefits and sub-advisor y ser vices to other companies within the owned subsidiary of Power Financial issued $1.67 billion of 4.51% preferred Power Financial group of companies. In all cases, transactions are at market shares to IGM. The Corporation has legally enforceable rights to settle these terms and conditions. financial instruments on a net basis and the Corporation intends to exercise During 2013, IGM sold residential mortgage loans to Great-West Life, London Life and segregated funds maintained by London Life for $204 million ($232 million in 2012). these rights. KEY MANAG EM ENT COM PEN SATION Key management personnel are those persons having authority and Lifeco provides reinsurance, asset management and administrative services responsibility for planning, directing and controlling the activities of for employee benefit plans relating to pension and other post-employment the Corporation, directly or indirectly. The persons included in the key benefits for employees of Power Financial and Lifeco and its subsidiaries. management personnel are the members of the Board of Directors of the Corporation, as well as certain management executives of the Corporation and its subsidiaries. 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 Compensation and employee benefits Post-employment benefits Share-based payments 2013 19 4 9 32 2012 16 7 9 32 NOTE 34 SEGMENTED INFORMATION The Corporation’s reportable operating segments are Lifeco, IGM and The column entitled Corporate is made up of corporate activities of Parjointco. These reportable segments reflect Power Financial’s management Power Financial and also includes consolidation elimination entries. structure and internal financial reporting. The following provides a brief description of the three reportable operating segments: The accounting policies of the operating segments are those described in Note 2 – Basis of Presentation and Summary of Significant Accounting Policies > Lifeco offers, in Canada, the United States, Europe and Asia, a wide range of of these financial statements. life insurance, retirement and investment products, as well as reinsurance and specialty general insurance products, to individuals, businesses and other private and public organizations. The Corporation evaluates the performance based on the operating segment’s contribution to consolidated net earnings. Revenues and assets are attributed to geographic areas based on the point of origin of revenues and the location > IGM offers a comprehensive package of financial planning services and of assets. The contribution to consolidated net earnings of each segment is investment products to its client base. IGM derives its revenues from calculated after taking into account the investment Lifeco and IGM have in a range of sources, but primarily from management fees, which are each other. charged to its mutual funds for investment advisory and management services. IGM also earns revenue from fees charged to its mutual funds for administrative services. > Parjointco holds the Corporation’s interest in Pargesa, a holding company with diversified interests in Europe-based companies active in various sectors: minerals-based specialties for industry; cement, aggregates and concrete; oil, gas and alternative energies; electricity, natural gas, and energy and environmental services; water and waste management services; wines and spirits; and testing, inspection and certification. POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 115 115 NOTE 34 SEGMENTED INFORMATION (CONTINUED) IN FORMATION ON PROFIT M EASU RE FOR THE YEAR ENDED DECEMBER 31, 2013 LIFECO IGM PARJOINTCO CORPORATE TOTAL 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 of investments in jointly controlled corporations and associate Earnings before income taxes Income taxes Contribution to net earnings Attributable to Non-controlling interests Perpetual preferred shareholders Common shareholders IN FORMATION ON AS SETS AN D LIAB ILITIES M EASU RE DECEMBER 31, 2013 Goodwill Total assets Total liabilities G EOG R APH IC IN FORMATION 20,236 2,605 3,585 26,426 17,811 1,869 3,693 292 – 177 2,513 2,690 – 886 730 92 23,665 1,708 2,761 20 2,781 463 2,318 776 – 1,542 2,318 982 – 982 211 771 326 – 445 771 – – – – – – – – – – 114 114 – 114 – – 114 114 – 20,236 (121) (165) (286) 2,661 5,933 28,830 – 17,811 (165) 51 16 (98) (188) – (188) 4 (192) (118) 131 (205) (192) 2,590 4,474 400 25,275 3,555 134 3,689 678 3,011 984 131 1,896 3,011 LIFECO IGM PARJOINTCO CORPORATE TOTAL 6,272 325,975 305,906 2,833 12,340 8,173 – 2,437 – – 959 529 9,105 341,711 314,608 DECEMBER 31, 2013 CANADA UNITED STATES EUROPE TOTAL Invested assets (including cash and cash equivalents) Investments in jointly controlled corporations and associate Investments on account of segregated fund policyholders Other assets Goodwill and intangible assets Total assets Total revenues 67,129 31,206 40,919 139,254 – 62,204 3,650 10,158 – 28,168 3,356 1,828 2,664 70,407 17,622 2,400 2,664 160,779 24,628 14,386 143,141 64,558 134,012 341,711 15,211 5,231 8,388 28,830 116 116 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 34 SEGMENTED INFORMATION (CONTINUED) IN FORMATION ON PROFIT M EASU RE FOR THE YEAR ENDED DECEMBER 31, 2012 LIFECO IGM PARJOINTCO CORPORATE TOTAL 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 of investments in jointly controlled corporations and associate Earnings before income taxes Income taxes Contribution to net earnings Attributable to Non-controlling interests Perpetual preferred shareholders Common shareholders IN FORMATION ON AS SETS AN D LIAB ILITIES M EASU RE DECEMBER 31, 2012 Goodwill Total assets Total liabilities G EOG R APH IC IN FORMATION 19,257 8,310 3,030 30,597 22,875 1,781 3,080 299 28,035 2,562 – 2,562 364 2,198 964 – 1,234 2,198 – 153 2,424 2,577 – 858 669 92 1,619 958 – 958 190 768 328 – 440 768 – – – – – – – – – – 130 130 – 130 – – 130 130 – 19,257 (88) (152) (240) 8,375 5,302 32,934 – 22,875 (152) 57 18 (77) (163) – (163) 5 (168) (99) 117 (186) (168) 2,487 3,806 409 29,577 3,357 130 3,487 559 2,928 1,193 117 1,618 2,928 LIFECO IGM PARJOINTCO CORPORATE TOTAL 5,857 253,924 236,839 2,816 11,539 7,522 – – 8,673 2,121 1,002 268,586 – 560 244,921 DECEMBER 31, 2012 CANADA UNITED STATES EUROPE TOTAL Invested assets (including cash and cash equivalents) Investments in jointly controlled corporations and associate Investments on account of segregated fund policyholders Other assets Goodwill and intangible assets Total assets Total revenues JANUARY 1, 2012 Invested assets (including cash and cash equivalents) Investments in jointly controlled corporations and associate Investments on account of segregated fund policyholders Other assets Goodwill and intangible assets Total assets 65,084 28,722 33,110 126,916 – 54,638 3,889 10,129 133,740 16,298 – 23,809 3,051 1,721 57,303 6,422 2,121 26,985 13,571 1,756 2,121 105,432 20,511 13,606 77,543 268,586 10,214 32,934 CANADA UNITED STATES EUROPE TOTAL 62,211 27,402 31,063 120,676 – 49,850 3,823 10,280 – 22,359 2,962 1,769 2,205 24,776 12,559 1,760 2,205 96,985 19,344 13,809 126,164 54,492 72,363 253,019 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 117 117 INDEPENDENT AUDITOR’S REPORT TO THE SHAREHOLDERS OF POWER FINANCIAL CORPORATION We have audited the accompanying consolidated financial statements of Power Financial Corporation, which comprise the consolidated balance sheets as at December 31, 2013, December 31, 2012 and January 1, 2012, 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, 2013 and December 31, 2012 and a summary of significant accounting policies and other explanatory information. MANAG EM ENT ’ S RESPON SIB ILIT Y FOR TH E CON SOLIDATED FINANCIAL STATEM ENTS 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. AU DITOR ’ S RESPON SIB ILIT Y Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audits 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. OPIN ION In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Power Financial Corporation as at December 31, 2013, December 31, 2012 and January 1, 2012, and its financial performance and its cash flows for the years ended December 31, 2013 and December 31, 2012 in accordance with International Financial Reporting Standards. Signed, Deloitte LLP 1 March 19, 2014 Montréal, Québec 1 CPA auditor, CA, public accountancy permit No. A104630 118 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT POWER FINANCIAL CORPORATION FIVE-YEAR FINANCIAL SUMMARY DECEMBER 31 [IN MILLIONS OF CANADIAN DOLL ARS, EXCEPT PER SHARE AMOUNTS] (UNAUDITED) 2013 2012 [1] 2011 [2] 2010 [2] 2009 CGA AP CONSOLIDATED BALANCE SHEETS Cash and cash equivalents Total assets Shareholders’ equity 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 Financing charges Share of earnings (losses) of investments in jointly controlled corporations and associate Earnings before income taxes – continuing operations 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 attributable to common shareholders Net earnings attributable to common shareholders from discontinued operations Net earnings attributable to common shareholders Dividends declared on common shares Book value at year-end MARKET PRICE (COMMON SHARES) High Low Year-end QUARTERLY FINANCIAL INFORMATION IN MILLIONS OF CANADIAN DOLL ARS, EXCEPT PER SHARE AMOUNTS] (UNAUDITED) 2013 First quarter Second quarter Third quarter Fourth quarter 2012 First quarter Second quarter Third quarter Fourth quarter 4,344 341,711 16,113 3,313 268,586 13,563 3,385 252,678 13,521 3,656 244,644 12,811 4,855 140,231 13,207 20,236 2,661 5,933 28,830 17,811 2,590 4,474 400 25,275 3,555 134 3,689 678 3,011 – 3,011 984 131 1,896 3,011 2.40 – 2.67 1.4000 18.78 36.79 27.02 36.00 19,257 8,375 5,302 32,934 22,875 2,487 3,806 409 29,577 3,357 130 3,487 559 2,928 – 2,928 1,193 117 1,618 2,928 2.37 – 2.29 1.4000 15.95 30.15 24.06 27.24 17,293 9,764 5,343 32,400 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 2.44 0.05 2.43 1.4000 16.26 31.98 23.62 25.54 17,748 9,600 5,174 32,522 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 2.30 – 2.08 1.4000 15.26 34.23 27.00 30.73 18,033 9,678 4,998 32,709 23,809 2,088 3,607 494 29,998 2,711 71 2,782 565 2,217 – 2,217 778 88 1,351 2,217 2.05 – 1.92 1.4000 16.27 31.99 14.66 31.08 TOTAL REVENUES [1] NET EARNINGS NET EARNINGS AT TRIBUTABLE TO COMMON SHAREHOLDERS EARNINGS PER SHARE AT TRIBUTABLE TO COMMON SHAREHOLDERS – BASIC EARNINGS PER SHARE AT TRIBUTABLE TO COMMON SHAREHOLDERS – DILUTED 8,150 4,236 7,803 8,641 7,111 8,376 9,216 8,231 692 780 744 795 710 691 809 718 394 475 434 593 454 429 458 277 0.55 0.67 0.61 0.84 0.64 0.61 0.65 0.39 0.55 0.67 0.61 0.84 0.64 0.60 0.65 0.38 [1] During the year, the Corporation reclassified comparative figures for presentation adjustments. [2] The 2011 and 2010 figures have not been adjusted to reflect current year reclassifications and new and revised IFRS adopted on January 1, 2013. POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 119 BOARD OF DIRECTORS MARC A . BIBEAU [1] President and Chief Executive Officer, Beauward Shopping Centres Ltd. ANDRÉ DESMARAIS, O.C., O.Q. [4] Co-Chairman of the Corporation and Deputy Chairman, President and Co-Chief Executive Officer, Power Corporation of Canada PAUL DESMARAIS, JR., O.C., O.Q. [4] Co-Chairman of the Corporation and Chairman and Co-Chief Executive Officer, Power Corporation of Canada GÉRALD FRÈRE [2, 3] Managing Director, Frère-Bourgeois S.A. ANTHONY R. GRAHAM, LL.D. [4] President, Wittington Investments, Limited ROBERT GRATTON* Deputy Chairman, Power Corporation of Canada V. PETER HARDER, LL.D. [2, 3] Senior Policy Adviser, Dentons Canada LLP J. DAVID A . JACKSON, LL.B. Senior Counsel, Blake, Cassels & Graydon LLP R. JEFFREY ORR President and Chief Executive Officer of the Corporation LOUISE ROY, O.C., O.Q. Invited Fellow and Chair of the Board, Centre interuniversitaire de recherche en analyse des organisations RAYMOND ROYER, O.C., O.Q., FCPA , FCA [1, 2, 3, 4] Company Director EMŐKE J.E. SZATHMÁRY, C.M., O.M., PH.D., FRSC [1] 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 AUDIT COMMIT TEE [2] MEMBER OF THE COMPENSATION COMMIT TEE [3] MEMBER OF THE REL ATED PART Y AND CONDUC T RE VIE W COMMIT TEE [4] MEMBER OF THE GOVERNANCE AND NOMINATING COMMIT TEE * NOT STANDING FOR RE-ELEC TION 120 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 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 MICHEL PLESSIS-BÉLAIR, FCPA , FCA Vice-Chairman HENRI-PAUL ROUSSEAU, PH.D. Vice-Chairman AMAURY DE SEZE Vice-Chairman GREGORY D. TRETIAK, FCA Executive Vice-President and Chief Financial Officer ARNAUD VIAL Senior Vice-President JOCELYN LEFEBVRE, CPA , C. A . Managing Director, Power Financial Europe B.V. DENIS LE VASSEUR, CPA , C. A . Vice-President and Controller STÉPHANE LEMAY Vice-President, General Counsel and Secretary RICHARD PAN Vice-President LUC RENY, CFA Vice-President ISABELLE MORIN, CPA , C. A . Treasurer POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT 121 CORPORATE INFORMATION Additional copies of this Annual Report, as well as copies of the annual report of Power Corporation of Canada, are available from the Secretary: POWER FINANCIAL CORPORATION 751 Victoria Square Montréal, Québec Canada H2Y 2J3 or Suite 2600, Richardson Building 1 Lombard Place Winnipeg, Manitoba Canada R3B 0X5 STOCK LISTINGS Shares of Power Financial Corporation are listed on the Toronto Stock Exchange: COMMON SHARES: PWF FIRST PREFERRED SHARES: Series A: PWF.PR.A Series D: PWF.PR.E Series E: PWF.PR.F Series F: PWF.PR.G Series H: PWF.PR.H Series I: PWF.PR.I Series K: PWF.PR.K WEBSITE www.powerfinancial.com Series L: PWF.PR.L Series O: PWF.PR.O Series P: PWF.PR.P Series R: PWF.PR.R Series S: PWF.PR.S Series T: PWF.PR.T The trademarks contained in this repor t 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. 122 POWER FINANCIAL CORPORATION n 2013 ANNUAL REPORT TRANSFER AGENT AND REGISTRAR Computershare Investor Services Inc. Offices in: Montréal, Québec; Toronto, Ontario www.computershare.com SHAREHOLDER SERVICES 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, 8th 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 Si vous préférez recevoir ce rapport annuel en français, veuillez vous adresser au secrétaire : CORPORATION FINANCIÈRE POWER 751, square Victoria Montréal (Québec) Canada H2Y 2J3 1 Lombard Place Winnipeg (Manitoba) Canada R3B 0X5 ou Bureau 2600, Richardson Building DESIGN : W W W. ARD OISE .COM A D A N A C N I D E T N I R P