Power Financial Corp Annual Report 2014

Plain-text annual report

2 0 1 4 A N N U A L R E P O R T P O W E R F I N A N C I A L C O R P O R A T I O N 2014 Annual Report This Annual Report is intended to provide shareholders and other interested persons 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. Copies of the Corporation’s continuous disclosure documents can be obtained from the Corporation’s website at www.powerﬁnancial.com, from www.sedar.com, or from the Office of the Secretary at the addresses shown at the end of this report. Readers should also review the note further in this report, in the section entitled Review of Financial Performance, concerning the use of Forward-Looking Statements, which applies to the entirety of this Annual Report. In addition, selected information concerning the business, operations, ﬁnancial condition, ﬁnancial performance, priorities, ongoing objectives, strategies and outlook of Power Financial Corporation’s subsidiaries and associates is derived from public information published by such subsidiaries and associates and is provided here for the convenience of the shareholders of Power Financial Corporation. For further information concerning such subsidiaries and associates, shareholders and other interested persons should consult the websites of, and other publicly available information published by, such subsidiaries and associates. All ﬁgures mentioned in this report are as of December 31, 2014 unless otherwise noted. NON-IFRS FINANCIAL MEASURES AND PRESENTATION In analyzing the ﬁnancial results of the Corporation and consistent with the presentation in previous years, net earnings attributable to common shareholders are presented in the section Results of Power Financial Corporation in the Review of Financial Performance and are comprised of: FINANCIAL HIGHLIGHTS FOR THE YEARS ENDED DECEMBER 31 [IN MILLIONS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS] 2014 2013 Revenues 41,775 28,830 Operating earningsŠ[1] – attributable to common shareholders Operating earningsŠ[1] – per common share Net earnings – attributable to common shareholders Net earnings – per common share Dividends declared – per common share 2,105 2.96 2,136 3.00 1.40 1,708 2.40 1,896 2.67 1.40 • operating earnings attributable to common shareholders; and Consolidated assets 373,843 341,682 • other items or non-operating earnings, which include the after-tax impact of any item that in management’s judgment would make the period-over-period comparison of results from operations less meaningful. Other items also include the Corporation’s share of any such item presented in a comparable manner by a subsidiary or a jointly controlled corporation or associate. Management uses these ﬁnancial measures in its presentation and analysis of the ﬁnancial performance of Power Financial, and believes that they provide additional meaningful information to readers in their analysis of the results of the Corporation. Operating earnings, as deﬁned by the Corporation, assist the reader in comparing the current period’s results to those of previous periods as items that are not part of ongoing activities are excluded from this non-IFRS measure. 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 Consolidated assets and assets under management Shareholders’ equity Total equity Book value per common share Common shares outstanding (in millions) 709,406 639,161 17,019 28,902 20.29 711.7 15,993 26,934 18.61 711.2 [¢1] Non-IFRS ﬁnancial measures. Please refer to the reconciliation of non-IFRS ﬁnancial measures to ﬁnancial measures in accordance with IFRS in the Review of Financial Performance. TABLE OF CONTENTS GROUP ORGANIZATION CHART 2 DIRECTORS’ REPORT TO SHAREHOLDERS 4 IFRS, see the Results of Power Financial Corporation – Earnings RESPONSIBLE MANAGEMENT 10 Summary – Condensed Supplementary Statements of Earnings section further in this report. ABBREVIATIONS The following abbreviations are used throughout this report: Power Financial Corporation (Power Financial or the Corporation); Great-West Life & Annuity Insurance Company (Great-West Life & Annuity or Great-West Financial); Great-West 2014 AT A GLANCE 12 GREAT-WEST LIFECO 18 IGM FINANCIAL 20 PARGESA GROUP 22 Lifeco Inc. (Great-West Lifeco or Lifeco); Groupe Bruxelles Lambert REVIEW OF FINANCIAL PERFORMANCE 24 (GBL); IGM Financial Inc. (IGM Financial or IGM); Investment Planning Counsel Inc. (Investment Planning Counsel); Investors Group Inc. (Investors Group); Irish Life Group Limited (Irish Life); Lafarge SA (Lafarge); London Life Insurance Company (London Life); Mackenzie Financial Corporation (Mackenzie or Mackenzie Investments); Pargesa Holding SA (Pargesa); CONSOLIDATED FINANCIAL STATEMENTS AND NOTES 44 FIVE-YEAR FINANCIAL SUMMARY 113 BOARD OF DIRECTORS 114 Parjointco N.V. (Parjointco); Power Corporation of Canada (Power OFFICERS 115 Corporation); Putnam Investments, LLC (Putnam Investments or Putnam); 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. CORPORATE INFORMATION 116 THIS IS POWER FINANCIAL THROUGH GREAT-WEST LIFECO AND IGM FINANCIAL $709 BILLION of assets under management $1.2 TRILLION of assets under administration 24,000 employees and 11,600 financial advisors $2.1 BILLION of net earnings attributable to common shareholders 25 MILLION customers and retirement plan participants $41.8 BILLION of revenue 15.1% return on equity [1] THROUGH THE PARGESA GROUP Significant shareholdings in six leading European-based multinationals [1] Return on equity is calculated using operating earnings. POWER FINANCIAL CORPORATION 2014 ANNUAL REPORT 1 GROUP ORGANIZATION CHART POWER FINANCIAL CORPORATION 67.2% GREAT-WEST LIFECO 4.0% 2014 operating and net earnings attributable to common shareholders $2,546 MILLION 2014 return on shareholders’ equity 15.7% Total assets under administration $1,063 BILLION 100% 100% [1] 100% 100% 100% 100% GREAT-WEST PUTNAM GREAT-WEST LONDON LIFE CANADA LIFE IRISH LIFE FINANCIAL INVESTMENTS LIFE 2 POWER FINANCIAL CORPORATION 2014 ANNUAL REPORT 58.8% IGM FINANCIAL 3.7% 2014 net earnings available to common shareholders $753 MILLION 2014 return on shareholders’ equity 17.8% 2014 operating earnings available to common shareholders $826 MILLION Total assets under management $142 BILLION 100% 100% 97.1% INVESTORS MACKENZIE GROUP INVESTMENTS INVESTMENT PLANNING COUNSEL PARGESA[2] 2014 net earnings SF637 MILLION 2014 operating earnings SF339 MILLION Net asset value SF8.9 BILLION 50.0% [3] GROUPE BRUXELLES LAMBERT Percentages denote participating equity interest as at December 31, 2014. Return on shareholders’ equity is calculated using operating earnings. Operating earnings is a non-IFRS financial measure. [1] Denotes voting interest. [2] Through its wholly owned subsidiary, Power Financial Europe B.V., Power Financial held a 50% interest in Parjointco. Parjointco held a voting interest of 75.4% and an equity interest of 55.5% in Pargesa. [3] Representing 52% of the voting rights. POWER FINANCIAL CORPORATION 2014 ANNUAL REPORT 3 DIRECTORS’ REPORT TO SHAREHOLDERS Power Financial reported the highest earnings in its history in 2014, driven by strong financial results reported by its subsidiaries. The record earnings resulted from increased business volumes, higher market levels and the benefits of acquisition activity. Great-West Lifeco substantially completed the integration of Irish Life in 2014. Irish Life has surpassed the synergy, profitability and market share goals established at the time of the acquisition in 2013. Great-West Lifeco also acquired J.P. Morgan’s U.S.-based Retirement Plan Services business in 2014, and then combined it with the existing retirement businesses of Great-West Financial and Putnam Investments to create Empower Retirement. Empower is now the second-largest defined contribution retirement provider in the United States and serves over seven million Americans in 401(k) and similar retirement plans. At IGM Financial, Investors Group’s consultant-driven financial planning model continued to deliver high value to its clients in 2014, as evidenced by its outstanding client satisfaction scores. The consultant network continues to grow, now surpassing 5,000 consultants in number, the largest ever. These factors contributed to strong sales of mutual funds and other products and low redemption rates, resulting in a record level of client assets under management. 4 POWER FINANCIAL CORPORATION 2014 ANNUAL REPORT Mackenzie Investments, also part of IGM Financial, continued to invest in a number of key initiatives in 2014 to execute on its new investor-focused vision and strategy. The product line-up was revitalized, pricing was simplified and significant talent was added to an already strong investment team. During 2014, Lafarge, one of the principal investments held by Pargesa, announced plans to merge with Holcim to create LafargeHolcim, the most advanced group in the building materials industry worldwide. LafargeHolcim will operate in 90 countries upon closing of the transaction. The companies in our group benefit from strong balance sheets, enabling them to honour the long-term commitments they have made to clients and to invest from a position of strength in the people, products and technology to serve our clients in the future. At Power Financial, we continue to develop our active governance model, guiding the growth and development of our subsidiary companies through our participation on their boards of directors, as a long-term, committed owner. Our companies also have a long and proud history of contributing to the well-being of the communities in which they operate. The principles underlying our approach in this area are outlined later in this report under “Responsible Management.” FINANCIAL RESULTS NET EARNINGS ATTRIBUTABLE TO COMMON SHAREHOLDERS (in millions of Canadian dollars) 1,468 1,722 1,618 1,896 2,136 2010 2011 2012 2013 2014 OPERATING EARNINGS ATTRIBUTABLE TO COMMON SHAREHOLDERS (in millions of Canadian dollars) 1,625 1,729 1,678 1,708 2,105 2010 2011 2012 2013 2014 Power Financial’s operating earnings attributable to common shareholders for the year ended December 31, 2014 were $2,105 million or $2.96 per share, compared with $1,708 million or $2.40 per share in 2013. Other items represented a contribution of $31 million in 2014, compared with $188 million in 2013. Net earnings attributable to common shareholders were $2,136 million or $3.00 per share, compared with $1,896 million or $2.67 per share in 2013. Dividends declared by Power Financial totalled $1.40 per common share in 2014, unchanged from 2013. POWER FINANCIAL CORPORATION 2014 ANNUAL REPORT 5 DIRECTORS’ REPORT TO SHAREHOLDERS RESULTS OF GROUP COMPANIES G R E AT- W E S T L I F E C O Great-West Lifeco’s operating earnings attributable to common shareholders were $2.5 billion or $2.549 per share in 2014, compared with $2.1 billion or $2.108 per share in 2013. Net earnings attributable to common shareholders were $2.5 billion or $2.549 per common share, compared with $2.3 billion or $2.340 per common share a year ago. Great-West Lifeco maintained a strong return on equity (ROE) of 15.7 per cent, based on both operating and net earnings for the twelve months ended December 31, 2014. The Minimum Continuing Capital and Surplus Requirements (MCCSR) ratio for Great-West Life was 224 per cent on a consolidated basis at December 31, 2014. This measure of capital strength is slightly higher than the upper end of Great-West Life’s target operating range of 175-215 per cent. In 2014, Great-West Lifeco’s companies grew organically and through acquisitions in their target segments, while investing in initiatives that will strengthen the businesses and position them for growth in the years to come. Through their continued focus on growth, Great-West Lifeco achieved a major milestone in 2014—over $1 trillion in assets under administration. I G M F I N A N C I A L Operating earnings available to common shareholders, excluding other items, were $826 million or $3.27 per share in 2014, compared with $764 million or $3.02 per share in 2013. Net earnings available to common shareholders were $753 million or $2.98 per share in 2014, compared with $762 million or $3.02 per share in 2013. Total assets under management at December 31, 2014 totalled $142 billion, compared with $132 billion at December 31, 2013, an increase of 7.7 per cent. IGM Financial continues to build its business through its extensive network of distribution opportunities, delivering high-quality advice and innovative, flexible solutions for investors. The company's investment in technology and operations continues to help it manage its resources effectively and develop long-term growth in the business. 6 POWER FINANCIAL CORPORATION 2014 ANNUAL REPORT PA R G E S A Pargesa’s operating earnings were SF339 million in 2014, compared with SF251 million in 2013. Including non-operating earnings consisting primarily of gains on the partial disposals by GBL of its interests in Total and in Suez Environnement, Pargesa’s net earnings in 2014 were SF637 million, compared with SF394 million in 2013. In addition to its strategic holdings, GBL is developing an incubator-type portfolio comprised of: interests of smaller size in a limited number of listed and unlisted companies — these investments would be smaller commitments than the strategic holdings — and investments in private equity and other funds where GBL acts as an anchor investor. Albert Frère has announced that he will step down as Director and CEO of GBL and will not seek another term as Vice-Chairman and Executive Director of Pargesa. Mr. Frère has worked in partnership with Power Corporation and Power Financial since 1981 and has been a key player in the growth and success of Pargesa and GBL for more than three decades. Power Financial would like to acknowledge and thank Albert Frère for his exceptional contribution to the group. GOVERNANCE The companies in our group benefit from strong balance sheets, enabling them to honour the long-term commitments they have made to clients and to invest from a position of strength in the people, products and technology to serve our clients in the future. In March 2015, the Corporation’s Board of Directors adopted a Board and Senior Management Diversity Policy, expressing its belief in increased diversity on boards and in business in general. The Board recognizes that gender diversity is a significant aspect of diversity and acknowledges the important role of women in contributing to diversity of perspective in the boardroom and in senior management roles. As part of its ongoing commitment to effective governance, the Corporation has enhanced its Board assessment process by implementing a formal Board effectiveness survey, which is completed by each of the Directors. The survey assists the Board and its committees in assessing their overall performance and in continuing to improve their deliberations and decision-making process. POWER FINANCIAL CORPORATION 2014 ANNUAL REPORT 7 DIRECTORS’ REPORT TO SHAREHOLDERS CANADA’S RETIREMENT SYSTEM – THE CRISIS THAT WASN’T! The vast majority of Canadians are on track to sustain their standard of living in retirement. A recent study by the global consulting firm McKinsey & Company concludes that 83 per cent of Canadians are on track and well prepared. McKinsey’s work is based upon the most comprehensive survey and analysis of Canadians’ financial affairs ever done. And yet, numerous surveys also show that a majority of Canadians believe they will not have enough income in retirement. There are a number of possible reasons for the major gap between perception and reality. These include lingering fear created by the financial crisis, pension plans reporting funding challenges due to persistent low interest rates, and the financial services industry’s call to Canadians for more savings. Many groups in society are advocating for universal solutions to the "pension crisis," such as an increase in the benefits of the Canada Pension Plan, or the creation of an Ontario Retirement Pension Plan. These universal pension proposals, while well intentioned, may have some serious negative consequences. By forcing everyone to save more, they reduce today’s standard of living, hurting in particular lower- and middle-income Canadians, whose future consumption in retirement is already well provided for through existing programs. To be clear, there are issues to be addressed in the Canadian retirement system. While our balanced system has resulted in Canada having one of the strongest retirement systems in the world, there are still a number of groups in Canadian society who are not faring well. The research shows that to be effective the solutions need to be specific and targeted. There are three areas where focus could materially reduce the number of people ill prepared for retirement: facilitating low-cost workplace savings plans for Canadians who work at smaller employers; addressing anomalies in existing government programs that are punitive to single people in old age; and creating collective solutions to help Canadians manage the financial challenge of outliving their individual savings. Fact-based and targeted solutions to Canada’s specific retirement challenges will leave the country in the best financial position to tackle other significant challenges yet to be addressed, such as funding future health care costs for an ever-aging Canadian population. 8 POWER FINANCIAL CORPORATION 2014 ANNUAL REPORT THE POWER FINANCIAL GROUP In March of 2015, Power Financial announced that it was increasing the quarterly dividend payable to its common shareholders by 6.4 per cent to $0.3725 per share. This was the first dividend increase by the Corporation since the start of the financial crisis in the fall of 2008. Record earnings in 2014, recent dividend increases by the Corporation’s principal subsidiaries and positive momentum in the underlying businesses all contributed to the Board’s decision to increase the dividend. Our financial services businesses are focused upon providing financial security and peace of mind to millions of people through various investment, retirement and insurance solutions. These are provided to our clients through one-on-one relationships with their financial advisors and through workplace programs. Excellence and innovation in products and services and value to the customer are critical factors in meeting client needs. Financial strength and the ability to honour long-term commitments are equally important. The need for these products and services is expected to continue to grow in the future. The strategies being pursued by our group companies to serve these growing markets are focused upon organic growth, based upon delivering ever-improving client outcomes and experiences. Acquisitions are expected to continue to complement these strategies as opportunities arise. Power Financial and its subsidiaries are committed to creating long-term value for shareholders based upon the success of our clients, our employees and our business partners, while contributing positively to the communities in which we operate. Your Directors wish to express gratitude, on behalf of all shareholders, for the important contribution of the management and employees of our Corporation and its associated companies to the successful results achieved in 2014. On behalf of the Board of Directors, signed, R. Jeffrey Orr President and signed, signed, Paul Desmarais, Jr., o.c., o.q. André Desmarais, o.c., o.q. Executive Co-Chairman Executive Co-Chairman Chief Executive Officer of the Board of the Board March 18, 2015 POWER FINANCIAL CORPORATION 2014 ANNUAL REPORT 9 RESPONSIBLE MANAGEMENT Corporate Social Responsibility (CSR) is fundamental to the way we and our group companies do business – what we refer to as responsible management. Responsible management is a core tenet of our business philosophy, enabling us to build a resilient and sustainable business through our role as an investor, employer and contributor to the communities where we operate. This approach has earned us the conﬁdence of our various stakeholders. UNITED NATIONS GLOBAL COMPACT We further strengthened our commitment to responsible management by becoming a signatory to the United Nations Global Compact (UNGC) in 2014. The UNGC is a voluntary strategic policy initiative for businesses committed to establishing a consistent approach to corporate social responsibility within ten universally accepted principles in the areas of human rights, labour, environment and anti-corruption. ENTRENCHING OUR CSR COMMITMENTS Over the past year, we made solid progress in strengthening our CSR commitments, developing broader relationships with our stakeholders, and ensuring transparent communication on our CSR performance. CREATING VALUE THROUGH ACTIVE OWNERSHIP Our active ownership approach enables us to ensure our investments are managed Our CSR commitments are now ﬁrmly embedded in our Code of consistent with our responsible management Business Conduct and Ethics and CSR Statement. In 2014, all of our philosophy, including our Code of Business employees received training on our Code of Business Conduct and Conduct and Ethics, our CSR Statement and Ethics and acknowledged their compliance with the Code. our commitment to the UNGC. The Governance and Nominating Committee of the Board continues In 2014, our executives continued to engage to provide oversight on the implementation and performance of our regularly with the senior management of our CSR initiatives, through the leadership of the Vice-President and portfolio companies through their respective General Counsel. 10 POWER FINANCIAL CORPORATION(cid:18) 2014 ANNUAL REPORT boards of directors, including on CSR matters when relevant. We also engaged with our group companies to share knowledge and best practices on CSR issues that impact our business. Many of our group companies also continued to enhance their CSR commitments, strategic programs, and communications with their stakeholders. INVESTING IN SUSTAINABLE COMPANIES As long-term investors, we invest in quality companies with sustainable franchises, with attractive growth prospects, and that are managed in a responsible manner. We integrate environmental, social and governance factors into our investment analysis process, which serve to mitigate risk and identify possible growth opportunities. A majority of our investments are in companies operating in the financial services sector. These companies have their own responsible investment approaches, including commitments that align with the United Nations-supported Principles for Responsible Investment. EMPOWERING OUR PEOPLE As an employer and investor, we believe the hallmark of great, value-creating companies is their ability to attract and retain a talented and diverse workforce. Our group companies are committed to building teams of truly exceptional people by actively supporting a culture of development and performance and by creating flexible, balanced workplaces that recognize the value of diversity and personal well-being. FINANCIAL SECURITY AND INCLUSION Our financial services companies represent a positive force in society, offering financial security through life and health insurance, retirement savings programs and a suite of investment vehicles, including socially In 2014, we implemented a new performance and career responsible investment funds. These management program at Power Financial and provided services are making a difference for a our employees with access to an Employee and Family Assistance Program. broad spectrum of society in all age and income groups – including those with lower incomes. STRENGTHENING RELATIONSHIPS Engaging with key stakeholders is an integral part of our responsible management approach. It enables us to promote understanding and trust, and lets us stay connected to those who have an interest in our business. We take the necessary time to understand and consider our stakeholders’ views in order to build strong relationships. We also continue to strengthen our relationships within the communities where we operate. Through our parent company, Power Corporation, we invest in the areas of community development, arts and culture, the environment, education, and health. Over the past year, Power Corporation has continued to update its community investment microsite, www.powercorporationcommunity.com, which showcases some of the exceptional work being done by the organizations we support. Our officers and employees are also very active in both charitable giving and volunteering, and sit on the boards of a number of non-profit organizations they support. IMPROVING ENVIRONMENTAL PERFORMANCE As a holding company, we have a limited direct environmental impact. Our head office has no production, manufacturing or service operations. Despite this limited impact, our leased head office building has an environmental management system driven through the Building Owners and Managers Association (BOMA) Building and Environmental Standards (BESt®) benchmarks and supported by our environmental policy. Our environmental management programs focus on resource conservation, energy efficiency and waste management. In 2014, for the third year in a row, our efforts on energy and carbon management were recognized through the Carbon Disclosure Project. POWER FINANCIAL CORPORATION 2014 ANNUAL REPORT 11 2014 AT A GLANCE M A C K E N Z I E I N V E S T M E N T S For Power Financial, 2014 was a year characterized by Mackenzie Investments launched LIVE IT™ (talkliveit.com), a new framework for continued growth and progress. investment conversations based on the The companies in our group consolidated their market reach, introduced new products, won numerous awards, helped in six concerns that investors said matter most to them: Longevity, Income, Volatility, Estate, Inﬂation, and Taxes — creating the LIVE IT acronym. Investors can use LIVE IT resources to guide conversations with their the community and broke new advisor, helping them to better deﬁne their ground with social media. ﬁnancial aspirations and ﬁnd the solutions to get them there. G R E AT- W E S T F I N A N C I A L & P U T N A M I N V E S T M E N T S A NEW ERA IN RETIREMENT SERVICES In 2014, three highly complementary retirement businesses the retirement industry in America. At year-end, the newly — Great-West Financial, Putnam Investments and J.P. Morgan combined organization emerged as the second-largest Retirement Plan Services — came together to create retirement services provider in the United States, with Empower Retirement. Empower’s goal is simple: to transform over seven million participants and US$415 billion in plan assets. OVER 7 MILLION participants US$415 BILLION in plan assets I R I S H L I F E G R E AT- W E S T L I F E UNIQUE CAMPAIGN MARKS 75 YEARS CONNECTING WITH CUSTOMERS DIGITALLY Irish Life, Ireland’s largest life insurance and Over one million group insurance pension company, celebrated 75 years of looking plan members connect to Great-West after the ﬁnancial well-being of Irish citizens with Life through its GroupNet and GroupNet a national advertising campaign supporting its Mobile portals. integrated business. The company continues to add features that make it The campaign featured a series of uniquely-Irish more convenient and efficient to access services. In humorous and insightful facts about Irish life, 2014, this included an innovative way for plan members highlighting the fact that after 75 years, Irish Life to easily ﬁnd out the amount of dental, vision and is the company that knows Irish people best. paramedical beneﬁt dollars they’ve used and the amount they have remaining through text message, mobile or online. PENSIONS • INVESTMENTS • LIFE INSURANCE We know Irish life. We are Irish Life. We know Irish life. We are Irish Life. We know Irish life. We are Irish Life. Facts researched for Irish Life 2014. Irish Life Assurance plc is regulated by the Central Bank of Ireland. PENSIONS • INVESTMENTS • LIFE INSURANCE We know Irish life. We are Irish Life. Facts researched for Irish Life 2014. Irish Life Assurance plc is regulated by the Central Bank of Ireland. PENSIONS • INVESTMENTS • LIFE INSURANCE We know Irish life. We are Irish Life. Facts researched for Irish Life 2014. Irish Life Assurance plc is regulated by the Central Bank of Ireland. POWER FINANCIAL CORPORATION(cid:18) 2014 ANNUAL REPORT 13 2014 AT A GLANCE P U T N A M I N V E S T M E N T S DRIVING LONG-TERM INVESTMENT PERFORMANCE 0n the investment front, Barron’s/Lipper named Putnam one of the best mutual fund families — No. 6 out of 56 — for the ﬁve-year period ending December 31, 2014, based on investment performance across asset classes. Since 2009, Putnam has consistently been recognized as a top fund family — across multiple time periods — in this prestigious annual survey. G R E AT- W E S T F I N A N C I A L FOCUS ON FINANCIAL LITERACY Great-West Financial combines its dollars in matching funds for their volunteer work, ﬁnancial expertise and employees’ fundraising and charitable giving in communities passions to create meaningful around the United States. community partnerships. The company’s signature ﬁnancial literacy initiative contributed more than US$1.1 million in 2014 to train 8,500 teachers and provide programs for over 300,000 students in the state of Colorado. The ﬁrm also reinforced its employees’ generosity with over a half-million 14 POWER FINANCIAL CORPORATION(cid:18) 2014 ANNUAL REPORT P U T N A M I N V E S T M E N T S M A C K E N Z I E I N V E S T M E N T S MARKETPLACE MOMENTUM CONTINUES Putnam’s growing body of strong mutual fund performance is increasingly attracting attention in the marketplace. The ﬁrm experienced notable net inﬂows of US$5.9 billion into its mutual funds in 2014, building upon a solid tally of US$3.7 billion in net sales from the previous year. Financial advisors and their clients gravitated toward an array of Putnam mutual funds that seek to address a range of challenges — and opportunities — presented in today’s ﬁnancial markets. FUELLING THE PASSION OF CANADA’S WINTER ATHLETES Mackenzie Investments launched two major sponsorships in 2014: a four- year sponsorship of Snow Sports Canada, touching seven premier national sport organizations; and a ﬁve-year partnership with Alpine Ontario, the sport organization and promoter of competitive ski racing in Ontario. The funding will help the organizations develop high-performance teams by providing elite coaches, high-calibre training facilities, technology and innovation; enhance youth participation; and provide ﬁnancial support for less established athletes. G R E AT- W E S T L I F E P U T N A M I N V E S T M E N T S ONE OF CANADA’S TOP 100 EMPLOYERS A LEADER IN CUSTOMER SERVICE A workplace where people can perform at their best underpins Great-West Life’s ability to advance their goals as an organization — meeting clients’ needs and becoming their trusted partner in helping them to realize their own goals. Putnam has long been dedicated to providing the highest level of customer service to clients, a commitment that has only strengthened over time. In late 2014, DALBAR, a leading ﬁnancial services market research and consulting The company was very pleased to be recognized as ﬁrm, honored Putnam for mutual fund service quality for one of Canada’s Top 100 Employers. The recognition the 25th consecutive year. Additionally, Putnam has been affirmed Great-West Life's focus on workplace the sole recipient of DALBAR’s Total Client Experience health and wellness, professional development and Award for the past four years. support for staff volunteerism. POWER FINANCIAL CORPORATION(cid:18) 2014 ANNUAL REPORT 15 client survey 2014 AT A GLANCE I N V E S T O R S G R O U P HIGH MARKS IN NEW CLIENT SURVEY Investors Group enhanced its client feedback loop with a new client experience survey, emailed to every new client after three months and to every existing client annually. In 2014, 96 per cent of new clients and 92 per cent of existing clients responding said they were satisﬁed with the service they receive from their Investors Group consultant, with similar high marks for ﬁnancial planning and goal setting. The survey complements the company’s Client Satisfaction Survey, which has been measuring client sentiment for over 15 years. G R E AT- W E S T L I F E & I G M F I N A N C I A L RECOGNIZED FOR ENVIRONMENTAL LEADERSHIP The Carbon Disclosure Project, an international, not-for-proﬁt initiative, helps companies disclose and reduce their environmental footprint. Great-West Life scored a ranking of 98B while IGM Financial was awarded a score of 96B. These scores distinguished both companies, earning them a spot on the CDP’s Canada 200 Climate Disclosure Leadership Index. The scores reﬂect the companies’ transparency, measurement and continuous improvement as cornerstones of their environmental approach. In both instances the scores were well above industry averages, as the two companies have long-standing commitments to responsible management and environmental performance. Power Financial also participated in the CDP and was awarded a score of 91B. 16 POWER FINANCIAL CORPORATION(cid:18) 2014 ANNUAL REPORT A S E G R A P MERGER TO CREATE LAFARGEHOLCIM In April 2014, Lafarge and Holcim announced their plans to combine the two companies to create LafargeHolcim, the most advanced and innovative group in the building materials industry operating in 90 countries, which should provide superior value creation for its shareholders. Pargesa subsidiary Groupe Bruxelles Lambert, which currently holds a 21.1 per cent interest in Lafarge, would own in the order of 10 per cent in the new entity following the exchange offer to be launched by Holcim once all regulatory approvals have been granted. P U T N A M I N V E S T M E N T S SOCIAL MEDIA INNOVATION In recent years, Putnam has expanded its outreach to clients, advisors, consultants and other stakeholders with social media by building out a robust presence on Twitter, YouTube and Facebook. The ﬁrm has been widely recognized for developing and adopting best practices in social media. In 2014, Putnam was ranked the No. 1 social media leader in the asset management industry, based on the ﬁrm’s innovative work across social media platforms. I N V E S T O R S G R O U P & M A C K E N Z I E I N V E S T M E N T S G R E AT- W E S T F I N A N C I A L WORKING TOWARDS A MORE SUSTAINABLE GLOBAL FINANCIAL SYSTEM SCORES WITH ADVISORS Great-West Financial’s focus on quality In July 2014, Investors Group and service and strong relationships received Mackenzie Investments became top marks in a distinguished industry survey. signatories to the United Nations-supported Principles for Responsible The company placed ﬁrst in six categories of Investment (PRI). The PRI is a set of six aspirational principles — PLANADVISER’s 2014 Retirement Plan Adviser a framework for integrating environmental, social and governance factors Survey, tying for the most No. 1 ﬁnishes. The into the investment analysis and decision-making process for mainstream ﬁrm was voted best in overall perception, investment managers. In becoming signatories, the two companies join with a number of the world’s largest investment managers committed to developing a stronger global ﬁnancial system. value for the price, wholesalers, fee structure for advisers, and overall service for both micro plans and small plans. In six additional categories, Great-West Financial placed in the top three providers. POWER FINANCIAL CORPORATION(cid:18) 2014 ANNUAL REPORT 17 GREAT-WEST LIFECO Total assets under administration $1,063 BILLION 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 over $1 trillion in total assets under administration. GREAT-WEST LIFECO GREAT-WEST LIFE 100% GREAT-WEST FINANCIAL 100% PUTNAM INVESTMENTS 100%[1] LONDON LIFE 100% CANADA LIFE 100% IRISH LIFE 100% [1] Denotes voting interest. 18 POWER FINANCIAL CORPORATION 2014 ANNUAL REPORT 2014 operating earnings attributable to common shareholders $2,546 MILLION 2014 return on shareholders’ equity [2] 15.7% [2] Return on shareholders’ equity is calculated using operating earnings. CANADA Great-West Life is a leading Canadian insurer, with interests in life insurance, health insurance, investment, savings and retirement income and reinsurance businesses, primarily in Canada and Europe. In Canada, Great-West Life and its subsidiaries, London Life and Canada Life, offer a broad portfolio of financial and benefit plan solutions and serve the financial security needs of more than 12 million people. EUROPE Canada Life and its Irish Life subsidiary in Europe provide a broad 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. UNITED STATES Empower Retirement is the second-largest retirement services provider in the U.S. by customers. Empower serves all segments of the employer-sponsored retirement plan market: small, mid-size and large corporate clients, government plans, non-profit entities and private-label record-keeping clients. It also offers individual retirement accounts and advisory services. Great-West Financial® provides life insurance, annuities, executive benefits products and investment services. Empower Retirement and Great-West Financial® are marks of Great- West Life & Annuity Insurance Company. UNITED STATES • EUROPE • ASIA Putnam Investments is a U.S.-based global asset manager, offering investment management services across a range of asset classes, including fixed income, equity—both U.S. and global—global asset allocation and alternatives, including absolute return, risk parity and hedge funds. Putnam, including its subsidiary PanAgora Asset Management, Inc., distributes services through financial advisors, institutional investors and retirement plan sponsors via its offices and strategic alliances in North America, Europe, and Asia. $161 billion Assets under administration $1.2 billion 2014 net earnings More than $2 billion in life insurance claims paid out to support more than 40,000 families More than 50 million claims representing more than $4 billion in health and dental benefits paid to plan members $205 billion Total assets under administration $12.4 billion 2014 insurance and annuities sales $19.4 billion Annual premiums and deposits 1 million customers in Ireland US$441 billion Total assets under administration Nearly 7.7 million Retirement, insurance and annuity customers 2nd-largest defined contribution record keeper in the U.S. No. 3 in sales of executive benefits markets life insurance to financial institutions US$158 billion Assets under management 200+ investment professionals 100+ mutual funds available 75+ years of investment experience 150+ institutional mandates 168,000 advisors distribute Putnam products GREAT-WEST LIFECO NET EARNINGS ATTRIBUTABLE TO COMMON SHAREHOLDERS (in millions of Canadian dollars) OPERATING EARNINGS ATTRIBUTABLE TO COMMON SHAREHOLDERS (in millions of Canadian dollars) TOTAL ASSETS UNDER ADMINISTRATION (in billions of Canadian dollars) 1,615 2,022 1,806 2,278 2,546 1,819 1,898 1,946 2,052 2,546 487 502 546 758 1,063 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 POWER FINANCIAL CORPORATION 2014 ANNUAL REPORT 19 IGM FINANCIAL Total assets under management $142 BILLION IGM Financial Inc. is one of Canada’s premier financial services companies with $142 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. IGM FINANCIAL INVESTORS GROUP 100% MACKENZIE INVESTMENTS 100% INVESTMENT PLANNING COUNSEL 97.1% 2014 operating earnings available to common shareholders $826 MILLION 2014 return on shareholders’ equity [1] 17.8% [1] Return on shareholders’ equity is calculated using operating earnings. 20 POWER FINANCIAL CORPORATION 2014 ANNUAL REPORT 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 5,000 consultants to nearly one million Canadians. Mackenzie Investments 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. Investment Planning Counsel is an integrated financial services company focused on providing Canadians with high-quality financial products, services, and advice. The company is dedicated to providing independent financial planners with the tools, products, and support they need to build a better business. $73.5 billion Total assets under management $7.5 billion Mutual fund sales 110 offices across Canada 5,145 consultants $70.9 billion Total assets under managemant $7.1 billion Mutual fund sales Investment products offered through 30,000 independent financial advisors 74% of Mackenzie Funds rated 3, 4 or 5 Star by Morningstar $3.9 billion Assets under management in Counsel Portfolio Services $22.7 billion Assets under administration Partners with almost 900 advisors across the country IGM FINANCIAL NET EARNINGS AVAILABLE TO COMMON SHAREHOLDERS (in millions of Canadian dollars) OPERATING EARNINGS AVAILABLE TO COMMON SHAREHOLDERS (in millions of Canadian dollars) TOTAL ASSETS UNDER MANAGEMENT (in billions of Canadian dollars) 731 901 759 762 753 759 833 746 764 826 129 119 121 132 142 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 POWER FINANCIAL CORPORATION 2014 ANNUAL REPORT 21 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 55.5 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 global companies based in Europe. PARGESA 50.0%[1] GROUPE BRUXELLES LAMBERT 2014 operating earnings SF339 MILLION IMERYS 56.5% LAFARGE 21.1% TOTAL 3.0% SGS 15.0% PERNOD RICARD 7.5% GDF SUEZ 2.4% Net asset value SF8.9 BILLION [1] Representing 52% of the voting rights. 22 POWER FINANCIAL CORPORATION 2014 ANNUAL REPORT Value of investment €2,614 million Capital/voting rights 56.5%¹/¹71.9% Imerys is the world leader in specialty minerals. The company extracts, transforms, develops and combines 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 in the consumer goods, industrial equipment and construction ﬁelds. KEY 2014 FINANCIAL DATA Market capitalization Turnover Operating earnings 4,623 3,688 495 Lafarge is a global leader in construction materials, including cement, aggregates and concrete. The group has two strategic priorities: high-growth cement markets and innovation, particularly in the areas of urbanization and sustainable construction. The planned merger between Lafarge and Holcim is expected to be completed in July 2015, once all regulatory approvals have been granted. Value of investment €3,518 million Capital/voting rights 21.1%¹/¹29.3% KEY 2014 FINANCIAL DATA Market capitalization Turnover Operating earnings 16,700 12,843 1,881 Value of investment €3,052 million Capital/voting rights 3.0%¹/¹2.7% Total is one of the leading global oil and gas groups. The company operates in more than 130 countries and covers every oil industry segment, from upstream to downstream. Total is also a major player in chemicals and is committed to the development of renewable energies. KEY 2014 FINANCIAL DATA Market capitalization Turnover (US$ million) Operating earnings (US$ million) 101,374 236,122 14,247 Based in Geneva, Switzerland, SGS is the world leader in inspection, veriﬁcation, testing and certiﬁcation. With more than 84,000 employees, SGS operates a network of more than 1,650 offices and laboratories in more than 150 countries. Value of investment €1,995 million Capital/voting rights 15.0%¹/¹15.0% KEY 2014 FINANCIAL DATA Market capitalization (SF million) Turnover (SF million) Operating earnings (SF million) 15,997 5,883 947 Value of investment €1,835 million Capital/voting rights 7.5%¹/¹6.9% Since its inception in 1975, Pernod Ricard has achieved signiﬁcant organic growth and 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. KEY 2014 FINANCIAL DATA Market capitalization Turnover Operating earnings [1] June 30, 2014 year-end 24,488 7,945 2,056 [1] [1] Created from the merger between Suez and Gaz de France in 2008, GDF Suez covers the whole energy chain, in electricity, natural gas and services. Its acquisition of International Power in 2011 strengthens its leading position in the European and international energy market. Key 2014 ﬁnancial data in millions of euros, unless otherwise indicated. Value of investment €1,002 million [2] Capital/voting rights 2.4%¹/¹2.4% KEY 2014 FINANCIAL DATA Market capitalization Turnover Operating earnings 47,318 74,686 7,161 [2] Value capped at the exchangeable bond’s conversion price POWER FINANCIAL CORPORATION(cid:18) 2014 ANNUAL REPORT 23 REVIEW OF FINANCIAL PERFORMANCE All tabular amounts are in millions of Canadian dollars, unless otherwise noted. M A R C H 1 8 , 2 0 1 5 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 on the Corpo ration’s website at www.powerﬁnancial.com, at www.sedar.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, changes in accounting policies and methods used to report ﬁnancial condition other than statements of historical fact, are forward-looking statements based (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 on the inside front cover of this 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, 2014 (the 2014 Consolidated Financial Statements or the Financial Statements); International Financial Reporting Standards (IFRS). 24 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT OVERVIEW Power Financial, a subsidiar y of Power Corporation, is a diversified PARGESA AND GBL management and holding company with substantial interests in the ﬁnancial Power Financial Europe B.V., a wholly owned subsidiary of Power Financial, services sector in Canada, the United States, Europe and Asia, through its and the Frère Group of Belgium each hold a 50% interest in Parjointco, which, controlling interests in Lifeco and IGM. Power Financial also holds, together as at December 31, 2014, held a 55.5% interest in Pargesa, representing 75.4% with the Frère Group of Belgium, a controlling interest in Pargesa, a holding of the voting rights in that company. company which focuses on a limited number of signiﬁcant and strategic core holdings, held through its subsidiary, GBL. Lifeco (TSX: GWO) and IGM (TSX: IGM) are public companies listed on the Toronto Stock Exchange. Pargesa is a public company listed on the Swiss Stock Exchange (SIX: PARG). LIFECO Lifeco is an international ﬁnancial services holding company with subsidiaries offering life insurance, health insurance, retirement and investment services and engaged in the asset management and reinsurance businesses. As at December 31, 2014, Power Financial and IGM held 67.2% and 4.0%, respectively, of Lifeco’s common shares, representing approximately 65.0% of the voting rights attached to all outstanding Lifeco voting shares. On August 29, 2014, Great-West Financial announced it had completed the acquisition of J.P. Morgan Retirement Plan Services (RPS) large-market recordkeeping business, expanding the Great-West Financial footprint in the U.S. retirement services business. As part of this acquisition, a new combined brand – Empower Retirement – was launched to consolidate and support the retirement services businesses of Great-West Financial, RPS and Putnam. Total assets under administration of Lifeco grew to approximately $1.1 trillion as at December 31, 2014, up 40.2% from December 31, 2013. This includes $207 billion of assets under administration related to the RPS acquisition and strong organic growth in all geographies. Lifeco continued the integration of Irish Life through 2014. While focused on integration, Irish Life exceeded sales targets and increased its market share. In 2014, Irish Life contributed $261 million, excluding restructuring costs, to Lifeco’s net earnings. Since the acquisition of Irish Life, Lifeco has disclosed it has achieved €40.8 million in annualized synergies. IGM FINANCIAL IGM is a ﬁnancial services company which serves the ﬁnancial needs of Canadians through its principal subsidiaries, each operating distinctly within the advice segment of the ﬁnancial services market. As at December 31, 2014, Power Financial and Great-West Life, a subsidiary of Lifeco, held 58.8% and 3.7%, respectively, of IGM’s common shares. BASIS OF PRESENTATION Pargesa is a holding company, which at December 31, 2014, held a 50% interest in GBL, representing 52% of the voting rights in that company. GBL, a Belgian holding company, is listed on the Brussels Stock Exchange (EBR: GBLB). As at December 31, 2014, GBL’s portfolio was comprised of investments in: Imerys—mineral-based specialties for industry (EPA: NK); Lafarge—cement, aggregates and concrete (EPA: LG); Total—oil, gas and alternative energies (EPA: FP); SGS—testing, inspection and certiﬁcation (SIX:SGSN); Pernod Ricard—wines and spirits (EPA: RI); GDF Suez—electricity, natural gas, and energy and environmental services (EPA: GSZ); and Suez Environnement— water and waste management services (EPA: SEV). On April 7, 2014, Holcim and Lafarge announced their intention to combine their companies through a merger of equals, unanimously approved by their respective boards of directors and which could create the most advanced group in the building materials industry. This operation could lead to enhanced performance through incremental synergies totalling more than €1.4 billion on a full run-rate basis phased in over three years with one third in year one. As Lafarge’s largest shareholder, GBL, with a 21.1% shareholding, supports this merger and has committed to contribute all its Lafarge shares to the public exchange offer, which will be initiated by Holcim after the regulatory authorizations have been received. GBL would hold 10% in the new entity. Lafarge announced on March 16, 2015 that the board of Holcim has decided not to pursue the execution of the Combination Agreement under the terms approved by the boards of directors of Lafarge and Holcim and concluded on July 7, 2014 and challenged the ﬁnancial terms and governance structure of the proposed merger of equals. Lafarge also announced that its board of directors remains committed to the project and that it intends to see it implemented. The board of Lafarge said it is willing to explore the possibility of a revision of the parity, in line with recent market conditions, but it will not accept any other modiﬁcation of the terms of the existing agreements. Additional information on GBL is also available on GBL’s website (www.gbl.be). The 2014 Consolidated Financial Statements of the Corporation have been > Power Financial’s proﬁt or loss includes its share of Pargesa’s proﬁt or prepared in accordance with IFRS and are presented in Canadian dollars. loss; and Lifeco and IGM are controlled by Power Financial and their financial > Power Financial’s other comprehensive income includes its share of statements are consolidated with those of Power Financial. Consolidated Pargesa’s other comprehensive income. financial statements present, as a single economic entity, the assets, liabilities, revenues, expenses and cash ﬂows of the parent company and its operating subsidiaries (consolidated ﬁnancial statements represent the ﬁnancial results of Power Financial (parent) and Lifeco and IGM (its operating subsidiaries) and the elimination of 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. The equity method is a method of accounting whereby: > The investment is initially recognized at cost and adjusted thereafter for post-acquisition changes in Power Financial’s share of Pargesa’s net assets (shareholders’ equity); Pargesa consolidates its subsidiary GBL. GBL’s portfolio consists primarily of investments in Imerys, Lafarge, Total, SGS, Pernod Ricard, GDF Suez, and Suez Environnement. GBL’s ﬁnancial statements are consolidated with Pargesa’s ﬁnancial statements. > GBL holds a 56.5% controlling interest in Imerys and consolidates the ﬁnancial statements of Imerys. > Lafarge, over which GBL has signiﬁcant inﬂuence (holding a 21.1% equity interest), is accounted for using the equity method. > Portfolio investments in which GBL holds less than a 20% equity interest (consisting of: Total, SGS, Pernod Ricard, GDF Suez and Suez Environnement), are classified for accounting purposes as available-for-sale investments. POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT 25 REVIEW OF FINANCIAL PERFORMANCE The following table summarizes the accounting presentation for the Corporation’s holdings: DEGREE OF CONTROL BASIS OF ACCOUNTING The Corporation has a controlling interest in the entity (a subsidiary) > Consolidation EARNINGS AND OTHER COMPREHENSIVE INCOME > Consolidated with non-controlling interests IMPAIRMENT TESTING IMPAIRMENT REVERSAL > Goodwill and indeﬁnite life intangible assets are tested annually for impairment > Impairment of goodwill cannot be reversed > Impairment of intangible assets 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 > Corporation’s share > Entire investment is tested > Reversed if there is evidence of earnings and other comprehensive income for impairment the investment has recovered its value Portfolio investments > Available for sale (AFS) > Earnings consist of dividends received and gains or losses on disposals > The investments are marked to market through other comprehensive income > Earnings are reduced by impairment charges, if any > Impairment testing is done at the individual investment level > Cannot be reversed even if there is a subsequent recovery of value > A signiﬁcant or prolonged decline in the value of the investment results in an impairment charge > A stock price decrease subsequent to an impairment leads to a further impairment This summary of accounting should be read in conjunction with the following notes to the Corporation’s 2014 Consolidated Financial Statements: Basis of presentation and summary of signiﬁcant accounting policies, Investments, Investments in jointly controlled corporations and associates, Goodwill and intangible assets, and Non-controlling interests. N O N - I F R S F I N A N C I A L M E A S U R E S A N D P R E S E N TAT I O N Operating earnings attributable to common shareholders and operating earnings per share are non-IFRS financial measures that do not have a In analyzing the ﬁnancial results of the Corporation and consistent with standard meaning and may not be comparable to similar measures used by the presentation in previous years, net earnings attributable to common other entities. For a reconciliation of these non-IFRS measures to results shareholders are presented in the section “Results of Power Financial reported in accordance with IFRS, see the “Results of Power Financial Corporation” and are comprised of: Corporation – Earnings Summary – Condensed Supplementary Statements > operating earnings attributable to common shareholders; and of Earnings” section below. > other items or non-operating earnings, which include the after-tax impact of any item that in management’s judgment would make the period-over- period comparison of results from operations less meaningful. Other items also include the Corporation’s share of any such item presented in a comparable manner by a subsidiary or a jointly controlled corporation or associate. Management uses these ﬁnancial measures in its presentation and analysis of the ﬁnancial performance of Power Financial, and believes that they provide additional meaningful information to readers in their analysis of the results of the Corporation. Operating earnings, as deﬁned by the Corporation, assist the reader in comparing the current period’s results to those of previous periods as items that are not part of ongoing activities are excluded from this non-IFRS measure. RESULTS OF POWER FINANCIAL CORPORATION In this review of financial per formance, a non-consolidated basis of presentation is also used by the Corporation to present and analyze its results, financial position and cash flows. In this basis of presentation, Power Financial’s interests in Lifeco and IGM are accounted for using the equity method. Presentation on a non-consolidated basis is a non-IFRS presentation. However it is useful to the reader as it presents the parent’s corporate operations apart from those of its operating subsidiaries, thereby reﬂecting the individual respective contributions to the consolidated results. Reconciliations of the non-IFRS basis of presentation with the presentation in accordance with IFRS are included elsewhere in this review of ﬁnancial performance as appropriate. E A R N I N G S S U M M A RY — C O N D E N S E D S U P P L E M E N TA R Y S TAT E M E N T S O F E A R N I N G S The following table is a reconciliation of non-IFRS ﬁnancial measures: operating earnings, non-operating earnings, operating earnings per share and non-operating earnings per share with ﬁnancial measures presented in accordance with IFRS: net earnings and net earnings per share. In this section, the contributions from Lifeco and IGM, which represent most of the earnings of Power Financial, are accounted for using the equity method. 26 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT N O N - C O N S O L I DAT E D B A S I S T WELVE MONTHS ENDED DECEMBER 31 Contribution to operating earnings from: Lifeco IGM Pargesa Results from corporate operations Dividends on perpetual preferred shares Operating earnings (attributable to common shareholders) Other items (non-operating) [1] Lifeco IGM Pargesa Net earnings (attributable to common shareholders) Earnings per share (attributable to common shareholders) Operating earnings Non-operating earnings Net earnings [1] See “Other Items” below 2014 1,710 488 112 2,310 (73) (132) 2,105 (1) (43) 75 31 2,136 2.96 0.04 3.00 2013 1,391 446 76 1,913 (74) (131) 1,708 151 (1) 38 188 1,896 2.40 0.27 2.67 NET EARNINGS (ATTRIBUTABLE TO COMMON SHAREHOLDERS) CONTRIBUTION TO OPERATING EARNINGS — LIFECO, IGM AND PARGESA Net earnings attributable to common shareholders for the twelve-month Power Financial’s share of operating earnings from Lifeco, IGM and Pargesa period ended December 31, 2014 were $2,136 million or $3.00 per share, increased by 20.8% for the year ended December 31, 2014, compared with the compared with $1,896 million or $2.67 per share in the corresponding period same period in 2013, from $1,913 million to $2,310 million. in 2013, an increase of 12.4% on a per share basis. Lifeco OPERATING EARNINGS (ATTRIBUTABLE TO COMMON SHAREHOLDERS) Operating earnings attributable to common shareholders for the twelve- month period ended December 31, 2014 were $2,105 million or $2.96 per share, compared with $1,708 million or $2.40 per share in the corresponding period in 2013, an increase of 23.3% on a per share basis. Lifeco’s contribution to Power Financial’s operating earnings for the twelve- month period ended December 31, 2014, was $1,710 million, compared with $1,391 million for the corresponding period in 2013. > Lifeco reported operating earnings attributable to common shareholders of $2,546 million or $2.549 per share for the twelve-month period ended December 31, 2014, compared with $2,052 million or $2.108 per share in the corresponding period in 2013, an increase of 20.9% on a per share basis. The year ended December 31, 2014 includes twelve months of Irish Life results while the comparative period includes Irish Life results from the date of acquisition by Lifeco, being, July 18, 2013. > Summary of Lifeco’s operating segment results: T WELVE MONTHS ENDED DECEMBER 31 Operating earnings (attributable to Lifeco common shareholders) Canada Europe United States Lifeco Corporate 2014 1,228 1,038 306 (26) 2,546 2013 1,148 701 276 (73) 2,052 > Operating earnings for the twelve-month period ended December 31, 2014 > The acquisition of Irish Life in the third quarter of 2013 resulted in include $30 million (after tax) of acquisition and restructuring costs related signiﬁcant growth in the Europe segment. For the twelve-month period to the integration of Irish Life and RPS. For the twelve-month period ended ended December 31, 2014, Irish Life contributed $261 million (excluding December 31, 2013, operating earnings include costs related to the Irish Life restructuring costs) to Lifeco’s earnings, compared with $85 million in the acquisition and restructuring of $97 million (after tax). corresponding period in 2013. POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT 27 REVIEW OF FINANCIAL PERFORMANCE > During the quarter ended December 31, 2014, the average currency IGM Financial translation rates of the U.S. dollar and British pound increased, while the IGM’s contribution to Power Financial’s operating earnings was $488 million average currency translation rates of the euro declined as compared to for the twelve-month period ended December 31, 2014, compared with the fourth quarter of 2013. The overall impact of currency movement on $446 million for the corresponding period in 2013. Lifeco’s net earnings was an increase of $114 million for the twelve-month period ended December 31, 2014 compared to translation rates a year ago. > IGM reported operating earnings available to common shareholders of $826 million or $3.27 per share for the twelve-month period ended December 31, 2014, compared with $764 million or $3.02 per share in the same period in 2013, an increase of 8.3% on a per share basis. > Operating earnings before interest and taxes (a non-IFRS measure) of IGM’s segments and operating earnings available to IGM common shareholders were as follows: T WELVE MONTHS ENDED DECEMBER 31 Investors Group Mackenzie Corporate and other Operating earnings (before interest and taxes) Interest expense, income taxes, preferred share dividends and other Operating earnings (available to IGM common shareholders) 2014 777 246 133 1,156 (330) 826 2013 718 251 110 1,079 (315) 764 > Total assets under management were $141.9 billion as at December 31, 2014, compared with $131.8 billion as at December 31, 2013. The average daily mutual fund assets under management were as follows: IN BILLIONS OF DOLL ARS Q4 Q3 Q2 2014 Q1 Q4 Q3 Q2 2013 Q1 Average daily mutual fund assets 124.6 126.2 123.6 119.7 114.6 110.2 108.4 106.9 Pargesa Pargesa’s contribution to Power Financial’s operating earnings was $112 million for the twelve-month period ended December 31, 2014, compared with $76 million in the corresponding period in 2013. The components of Pargesa’s operating earnings were: T WELVE MONTHS ENDED DECEMBER 31 IN MILLIONS OF SWISS FRANCS Contribution from principal holdings Consolidated Imerys Equity method Lafarge Non-consolidated Total SGS Pernod Ricard GDF Suez Suez Environnement Other holdings and operating earnings (loss) from holding companies Operating earnings Power Financial’s share (in millions of Canadian dollars) 2014 113 55 97 40 20 35 2 362 (23) 339 112 2013 110 72 121 − 21 75 15 414 (163) 251 76 A signiﬁcant portion of Pargesa’s earnings consists of dividends received The changes in dividends from non-consolidated holdings reﬂect decreases from Total (approved for payment in the second, third and fourth quarters), in Pargesa’s ownership of Total (from 3.6% in 2013 to 3.0% in 2014), GDF Suez SGS (approved for payment in the ﬁrst quarter), Pernod Ricard (approved (from 5.1% in 2013 to 2.4% in 2014) and Suez Environnement (from 7.2% in 2013 for payment in the second and fourth quarters), and GDF Suez (approved to 1.1% in 2014) and the acquisition of an interest in SGS in June 2013. for payment in the second and third quarters). Pargesa records dividends as earnings in the period they are approved. Operating earnings for the twelve-month period ended December 31, 2014 include Pargesa’s share of a charge recorded by GBL in the amount of SF61 million, compared with SF83 million in the corresponding period in 2013. 28 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT > These amounts relate to call options embedded in bonds exchangeable marked to market adjustment on the call options mentioned above, was for Suez Environnement shares (issued in 2012) and GDF Suez shares recorded in operating earnings. The remaining portion, SF74 million, which (issued in 2013) and in bonds issued by GBL in 2013 which are convertible represents the economic gain measured at the exchange price set at the time for GBL shares. of the issuance of the exchangeable bonds in 2012, has been recognized as > The charge is the result of the rise in the price of the respective shares non-operating earnings. underlying the bonds. This rise in the share price of Suez Environnement and GDF Suez is reﬂected in other comprehensive income and will be recorded in earnings at the time the shares are exchanged. Operating earnings for the twelve-month period ended December 31, 2014, RESULTS FROM CORPORATE OPERATIONS OF POWER FINANCIAL Results from corporate operations include interest on cash and cash equivalents, operating expenses, financing charges, depreciation and also included Pargesa’s share of contribution from private equity and other income taxes. investment funds, primarily held by GBL, for an amount of SF51 million. In 2014, holders of the Suez Environnement bonds exercised their right to exchange approximately 85% of the bonds for shares of Suez Environnement. Pargesa’s share of the gain recorded by GBL on this exchange was SF129 million (including a positive foreign currency impact of SF40 million). A portion of this gain, SF55 million, representing the reversal of the cumulative negative Corporate operations represented a net charge of $73 million in the twelve- month period ended December 31, 2014, compared with a net charge of $74 million in the corresponding period in 2013. Results from corporate operations in 2013 include a charge of $18 million related to the six-month equity put options on the S&P 500 purchased by the Corporation. OTHER ITEMS (NON- OPERATING) The following table presents the Corporation’s share of Lifeco, IGM and Pargesa’s Other Items: T WELVE MONTHS ENDED DECEMBER 31 Lifeco Litigation provision IGM Restructuring and other charges Distribution to clients Pargesa Gain on partial disposal of Total Gain on partial exchange of Suez Environnement Impairment charges on GDF Suez Gain on partial disposal of GDF Suez Other (charge) income 2014 − (8) (36) 70 17 − − (12) 31 2013 156 (6) − 38 − (13) 15 (2) 188 Other items in 2014 are comprised of the Corporation’s share of: Other items in 2013 are comprised of the Corporation’s share of: IGM Financial Lifeco > Restructuring and other charges: recorded by IGM in the second quarter > A recovery recorded by Lifeco in the fourth quarter relating to a decision primarily reﬂecting severance and other costs associated with Mackenzie’s of the Court of Appeal for Ontario on February 3, 2014 in regards to the cost rationalization activities as well as senior management changes involvement of the participating accounts of Lifeco subsidiaries London announced and implemented during the second quarter, for an amount of Life and Great-West Life in the ﬁnancing of the London Insurance Group $8 million. These costs represent the continuation of efforts undertaken acquisition in 1997, for an amount of $156 million. in the fourth quarter of 2013. IGM Financial > Distribution to clients: reported by IGM in the fourth quarter of $36 million. > After-tax restructuring and other charges recorded by IGM in the fourth In the third quarter of 2012, Investors Group introduced investment quarter of $6 million. solutions for clients with household account balances in excess of $500,000. Pargesa At December 31, 2014, an accrual was recorded related to these lower fee investment solutions. This amount primarily reﬂects distributions to clients who did not transfer to these lower priced solutions when eligible. Pargesa > Gain on partial disposal of Total: in the ﬁrst, second, third and fourth quarters of 2014, GBL disposed of 0.6% of its interest for gains of $26 million, $17 million, $2 million and $25 million, respectively. > Gain on partial exchange of Suez Environnement: a gain recorded by GBL in the second quarter resulting from the delivery of Suez Environnement shares pursuant to the exercise of exchange rights by certain holders of Suez Environnement’s exchangeable bonds of $17 million, as discussed above. > An impairment charge of $13 million recorded by GBL in the ﬁrst quarter on its investment in GDF Suez. > A gain of $15 million recorded by GBL in the second quarter on the disposal of 2.7% of its interest in GDF Suez. > A gain of $38 million recorded by GBL in the fourth quarter on the disposal of 0.4% of its interest in Total. POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT 29 REVIEW OF FINANCIAL PERFORMANCE FINANCIAL POSITION C O N S O L I DAT E D B A L A N C E S H E E T S (C O N D E N S E D) The condensed balance sheet of Lifeco and IGM, and Power Financial’s non-consolidated balance sheet are presented below: ASSETS Cash and cash equivalents Investments Investments in Lifeco and IGM Investment in Parjointco Investments in jointly controlled corporations and associates Funds held by ceding insurers Reinsurance assets Other assets Intangible assets Goodwill Interest on account of segregated fund policyholders Total assets LIABILITIES Insurance and investment contract liabilities Obligations to securitization entities Debentures and debt instruments 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 POWER FINANCIAL CONSOLIDATED BAL ANCE SHEETS LIFECO IGM CONSOLIDATION ELIMINATIONS AND RECLASSIFICATIONS DECEMBER 31, 2014 DECEMBER 31, 2013 [1] 2,498 143,265 356 − 237 12,154 5,151 8,602 3,625 5,855 174,966 1,216 7,108 794 − − − − 770 1,872 2,657 − (511) 438 (15,492) − − − − (89) − 637 − 3,989 4,344 150,842 134,910 − 2,440 237 − 2,437 227 12,154 10,832 5,151 9,418 5,497 9,149 5,070 8,697 5,281 9,105 174,966 160,779 POWER FINANCIAL 786 31 14,342 2,440 − − − 135 − − − 17,734 356,709 14,417 (15,017) 373,843 341,682 − − 250 465 − 715 2,580 14,439 − 17,019 17,734 146,055 − 5,355 8,436 174,966 334,812 2,514 16,740 2,643 21,897 356,709 − 6,754 1,325 1,497 − 9,576 150 4,691 − 4,841 14,417 − − (43) (119) 146,055 132,063 6,754 6,887 10,279 5,572 7,275 9,059 − 174,966 160,779 (162) 344,941 314,748 (2,664) (21,431) 9,240 (14,855) 2,580 14,439 11,883 28,902 2,755 13,238 10,941 26,934 (15,017) 373,843 341,682 [1] Comparative ﬁgures have been restated as described in Note 33 to the Corporation’s 2014 Consolidated Financial Statements. Total assets of the Corporation increased to $373.8 billion at December 31, 2014, Liabilities increased to $344.9 billion at December 31, 2014, compared with compared with $341.7 billion at December 31, 2013. $314.7 billion at December 31, 2013, mainly due to the following, as disclosed > Investments at December 31, 2014 were $150.8 billion, a $15.9 billion increase by Lifeco: from December 31, 2013, primarily related to Lifeco. > Insurance and investment contract liabilities increased by $14.0 billion, > Interest on account of segregated fund policyholders increased by $14.2 billion, primarily as a result of market value gains and investment income as well as positive currency movements. See also the discussion primarily due to the impact of new business, an increase in fair value adjustments driven by declining interest rates and currency movements as a result of a strengthening of the U.S. dollar and British pound against on liabilities below. the Canadian dollar. > Insurance and investment contract liabilities on account of segregated fund policyholders increased by $14.2 billion, primarily due to the combined impact of market value gains and investment income of $14.0 billion as well as the impact of currency movements of $0.8 billion, partially offset by net withdrawals of $0.1 billion. 30 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT N O N - C O N S O L I DAT E D B A L A N C E S H E E T S In the non-consolidated basis of presentation, Lifeco and IGM are presented by the Corporation using the equity method. These non-consolidated balance sheets, which are not in accordance with IFRS, enhance the review of ﬁnancial performance and assist the reader by identifying changes in Power Financial’s non-consolidated balance sheets, which include 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 2014 2013 [2] 786 31 14,342 2,440 135 17,734 250 465 715 2,580 14,439 17,019 17,734 925 27 13,165 2,437 120 16,674 250 431 681 2,755 13,238 15,993 16,674 [1] In these non-consolidated balance sheets, cash equivalents include $511 million ($454 million at December 31, 2013) of ﬁxed income securities with maturities of more than 90 days. In the 2014 Consolidated Financial Statements, this amount is classiﬁed in investments. [2] Comparative ﬁgures have been restated as described in Note 33 to the Corporation’s 2014 Consolidated Financial Statements. Cash and cash equivalents held by Power Financial amounted to $786 million Flows” section below for details). The fourth quarter dividend declared by the at December 31, 2014, compared with $925 million at the end of December 2013. Corporation and paid on January 30, 2015, amounted to $282 million. Dividends This decrease in cash and cash equivalents is mainly due to the redemption declared in the fourth quarter by IGM and received on January 30, 2015 by the of the First Preferred Shares, Series M, for an amount of $175 million in the Corporation amounted to $83 million. ﬁrst quarter of 2014 (see also the “Non-consolidated Statements of Cash The carrying value of Power Financial’s investments in Lifeco, IGM and Parjointco, at equity, increased to $16,782 million at December 31, 2014, compared with $15,602 million at December 31, 2013: Carrying value, at the beginning of the year Share of operating earnings Share of other items Share of other comprehensive income Dividends Other, including effect of change in ownership Carrying value, at December 31, 2014 LIFECO IGM PARJOINTCO TOTAL 10,452 1,710 (1) 196 (824) 15 2,713 488 (43) (27) (322) (15) 2,437 112 75 (97) (75) (12) 15,602 2,310 31 72 (1,221) (12) 11,548 2,794 2,440 16,782 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT 31 REVIEW OF FINANCIAL PERFORMANCE S H A R E H O L D E R S ’ E Q U I T Y PERPETUAL PREFERRED SHARES 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 $14,439 million at December 31, 2014, compared with $13,238 million at December 31, 2013. This $1,201 million increase was primarily due to: > A $1,079 million increase in retained earnings, reflecting mainly net earnings of $2,268 million, less dividends declared of $1,128 million and other decreases of $61 million mainly due to changes in the level of ownership of their subsidiaries. > An increase in reserves (other comprehensive income and amounts related to share-based compensation) of $100 million, consisting of: > In the twelve-month period ended December 31, 2014, 550,000 common shares were issued by the Corporation (2,069,600 common shares in the corresponding period of 2013) pursuant to the Corporation’s Employee Stock Option Plan. As a result of the above, the book value per common share of the Corporation was $20.29 at December 31, 2014, compared with $18.61 at the end of 2013. OUTSTANDING NUMBER OF COMMON SHARES As of the date hereof, there were 7 13,238,680 common shares of the Corporation outstanding, compared with 711,173,680 as at December 31, 2013. As of the date hereof, options were outstanding to purchase up to an aggregate of 7,418,589 common shares of the Corporation under the Corporation’s Employee Stock Option Plan. The Corporation ﬁled a short-form base shelf prospectus dated November 24, 2014, pursuant to which, for a period of 25 months thereafter, the Corporation may issue up to an aggregate of $3 billion of First Preferred Shares, common > Positive foreign currency translation adjustments of $403 million. shares, subscription receipts and unsecured debt securities, or any > An increase of $61 million related to the Corporation and its subsidiaries’ combination thereof. This ﬁling provides the Corporation with the ﬂexibility available-for-sale investments and cash ﬂow hedges. to access debt and equity markets on a timely basis. > A net increase of $47 million related to share-based compensation of the Corporation and its subsidiaries. > A decrease of $300 million due to actuarial losses related to pension plans of the Corporation and of its subsidiaries. > A decrease of $111 million mainly related to the Corporation’s share of other comprehensive income of investments in Pargesa and other associates. CASH FLOWS C O N S O L I DAT E D S TAT E M E N T S O F C A S H F LOW S (C O N D E N S E D) The condensed cash ﬂow of Lifeco and IGM, and Power Financial’s non-consolidated cash ﬂow are presented below: 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 POWER FINANCIAL LIFECO IGM CONSOLIDATION ELIMINATIONS AND RECLASSIFICATIONS 2014 2013 POWER FINANCIAL CONSOLIDATED CASH FLOWS 1,162 (1,286) (15) − (139) 925 786 5,443 (1,685) (4,129) 78 (293) 2,791 2,498 741 625 (1,232) − 134 1,082 1,216 (1,210) 1,210 (57) − (57) (454) (511) 6,136 (1,136) (5,433) 78 (355) 4,344 3,989 5,651 618 (5,428) 190 1,031 3,313 4,344 On a consolidated basis, cash and cash equivalents decreased by $355 million Cash ﬂows from investing activities resulted in a net outﬂow of $5,433 million in the twelve-month period ended December 31, 2014, compared with an in the twelve-month period ended December 31, 2014, compared with a net increase of $1,031 million in the corresponding period of 2013. outﬂow of $5,428 million in the corresponding period of 2013. Operating activities produced a net inﬂow of $6,136 million in the twelve- The Corporation increased its level of ﬁxed income securities with maturities month period ended December 31, 2014, compared with a net inflow of of more than 90 days, resulting in a net outﬂow of $57 million, compared with $5,651 million in the corresponding period of 2013. a net inﬂow of $171 million in the corresponding period of 2013. Cash ﬂows from ﬁnancing activities, which include dividends paid on the common and preferred shares of the Corporation, as well as dividends paid by subsidiaries to non-controlling interests, represented a net outﬂow of $1,136 million in the twelve-month period ended December 31, 2014, compared with a net inﬂow of $618 million in the corresponding period of 2013. 32 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT N O N - C O N S O L I DAT E D S TAT E M E N T S O F C A S H F LOW S As Power Financial is a holding company, corporate cash ﬂows from operating activities, before payment of preferred and common share dividends, are primarily comprised of dividends received from Lifeco, IGM and Parjointco and income from investments, less operating expenses, ﬁnancing charges, and income taxes. The following non-consolidated cash ﬂows statement of the Corporation, which is not presented in accordance with IFRS, has been prepared to assist the reader in isolating the cash ﬂows of Power Financial, the parent company. T WELVE MONTHS ENDED DECEMBER 31 OPERATING ACTIVITIES Net earnings before dividends on perpetual preferred shares Earnings from Lifeco, IGM and Parjointco not received in cash Other FINANCING ACTIVITIES Dividends paid on preferred shares Dividends paid on common shares Issuance of preferred shares Repurchase of preferred shares Issuance of common shares Share issue costs INVESTING ACTIVITIES Acquisition of Lifeco common shares Purchase of investment Other Decrease in cash and cash equivalents Cash and cash equivalents, at the beginning of the year Cash and cash equivalents, at December 31 2014 2,268 (1,123) 17 1,162 (132) (996) − (175) 17 − (1,286) − − (15) (15) (139) 925 786 2013 2,027 (910) (11) 1,106 (128) (995) 500 − 45 (14) (592) (545) (26) (2) (573) (59) 984 925 On a non-consolidated basis, cash and cash equivalents decreased by The Corporation’s ﬁnancing activities during the twelve-month period ended $139 million in the twelve-month period ended December 31, 2014, compared December 31, 2014 were a net outﬂow of $1,286 million, compared with a net with a decrease of $59 million in the corresponding period in 2013. outﬂow of $592 million in the corresponding period in 2013, and included: Operating activities produced net inﬂow of $1,162 million in the twelve-month > Dividends paid on common and preferred shares by the Corporation of period ended December 31, 2014, compared with a net inﬂow of $1,106 million $1,128 million, compared with $1,123 million in the corresponding period in the corresponding period in 2013. > Dividends declared by Lifeco during the twelve-month period ended December 31, 2014 on its common shares were $1.23 per share, same as of 2013. In the twelve-month period ended December 31, 2014, dividends declared on the Corporation’s common shares were $1.40 per share, the same as in the corresponding period of 2013. in the corresponding period of 2013. In the twelve-month period ended > Issuance of common shares of the Corporation for $17 million pursuant to December 31, 2014, the Corporation recorded dividends from Lifeco of the Corporation’s Employee Stock Option Plan, compared with an issuance $824 million, compared with $810 million in the corresponding period of for $45 million in the corresponding period of 2013. 2013. On February 12, 2015, Lifeco announced an increase of its quarterly dividend from $0.3075 to $0.3260 per share, payable March 31, 2015. > The Corporation repurchased the Series M preferred shares for $175 million, compared with an issuance of $500 million in the corresponding period > Dividends declared by IGM during the twelve-month period ended of 2013. The Corporation’s investing activities during the twelve-month period ended December 31, 2014 represented a net outﬂow of $15 million, compared with a net outﬂow of $573 million in the corresponding period of 2013. December 31, 2014 on its common shares were $2.175 per share, compared with $2.15 per share in the corresponding period of 2013. In the twelve- month period ended December 31, 2014, the Corporation recorded dividends from IGM of $322 million, compared with $318 million in the corresponding period of 2013. On February 13, 2015, IGM declared a quarterly dividend of $0.5625 per share on its common share, payable April 30, 2015. > Pargesa declares and pays an annual dividend in the second quarter ending June 30. The dividend paid by Pargesa to Parjointco in 2014 was SF2.64 per bearer share, compared with SF2.57 in 2013. The Corporation received dividends of SF62 million from Parjointco in 2014 (SF59 million in 2013). At its upcoming annual meeting in May, the board of directors of Pargesa will propose a 2014 dividend of SF2.27 per bearer share, to be paid on May 11, 2015. POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT 33 REVIEW OF FINANCIAL PERFORMANCE CAPITAL MANAGEMENT As a holding company, Power Financial’s objectives in managing its capital common shares, perpetual preferred shares and debentures. The boards of are to: directors of public subsidiaries are responsible for their respective company’s > provide attractive long-term returns to shareholders of the Corporation; capital management. > provide sufficient ﬁnancial ﬂexibility to pursue its growth strategy and invest in its group companies as it determines to be appropriate; and > maintain an appropriate credit rating to ensure stable access to the capital markets. The Corporation manages its capital taking into consideration the risk The Corporation is a long-term investor. The majority of the Corporation’s capital is permanent, matching the long-term nature of its investments. The capital structure of the Corporation consists of preferred shares, debentures, common shareholders’ equity, and non-controlling interests. The Corporation views perpetual preferred shares as a permanent and cost-effective source of capital consistent with its strategy of maintaining a relatively low level characteristics and liquidity of its holdings. In order to maintain or adjust its of debt. capital structure, the Corporation may adjust the amount of dividends paid to shareholders, return capital to shareholders or issue capital. The Board of Directors of the Corporation is responsible for capital management. Management of the Corporation is responsible for establishing capital management procedures and for implementing and monitoring its capital plans. The Board of Directors of the Corporation reviews and approves In the following table, consolidated capitalization reﬂects the consolidation of the Corporation’s majority owned subsidiaries. The Corporation’s consolidated capitalization includes the debentures and debt instruments of its consolidated subsidiaries. Debentures and debt instruments issued by Lifeco and IGM are non-recourse to the Corporation. Perpetual preferred shares and total equity account for 81% of consolidated capitalization at capital transactions such as the issuance, redemption and repurchase of December 31, 2014. 2014 2013 DEBENTURES AND DEBT INSTRUMENTS Power Financial Lifeco IGM Consolidating eliminations PREFERRED SHARES Power Financial Lifeco IGM EQUITY Common shareholders’ equity Non-controlling interests [1] 250 5,355 1,325 (43) 6,887 2,580 2,514 150 5,244 14,439 9,219 23,658 35,789 250 5,740 1,325 (40) 7,275 2,755 2,314 150 5,219 13,238 8,477 21,715 34,209 [1] Represents the equity non-controlling interests of the Corporation’s subsidiaries and excludes Lifeco and IGM preferred shares which are shown as preferred shares. The Corporation is not subject to externally imposed regulatory capital of a speciﬁc security for a particular investor. The ratings also may not reﬂect requirements. Certain of the Corporation’s major operating subsidiaries the potential impact of all risks on the value of securities and are subject to (Lifeco and IGM) are subject to regulatory capital requirements. revision or withdrawal at any time by the rating organization. R AT I N G S The current rating by Standard & Poor’s (S&P) of the Corporation’s debenture is “A+” with a stable outlook. Dominion Bond Rating Service’s (DBRS) current rating on the Corporation’s debenture is “AA (Low)” with a stable rating trend. Credit ratings are intended to provide investors with an independent measure of the credit quality of the securities of a corporation and are indicators of the likelihood of payment and the capacity of a corporation to meet its obligations in accordance with the terms of each obligation. Descriptions of the rating categories for each of the agencies set forth below have been obtained from the respective rating agencies’ websites. These ratings are not a recommendation to buy, sell or hold the securities of the Corporation and do not address market price or other factors that might determine suitability The “A+” rating assigned to the Corporation’s debenture by S&P is the ﬁfth highest of the 22 ratings used for long-term debt. A long-term debenture rated “A+” is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories, however, the obligor’s capacity to meet its ﬁnancial commitment on the obligation is still strong. The “AA (Low)” rating assigned to Power Financial’s debenture by DBRS is the fourth highest of the 26 ratings used for long-term debt. Long-term debt rated “AA” by DBRS is of superior credit quality, and the capacity for the payment of ﬁnancial obligations is considered high. In many cases they differ from long- term debt rated “AAA” only to a small degree and are unlikely to be signiﬁcantly vulnerable to future events. 34 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT RISK MANAGEMENT There are certain risks inherent in an investment in the securities of the F I N A N C I A L I N S T R U M E N T S R I S K Corporation and in the activities of the Corporation, including the following Power Financial has established policies, guidelines or procedures designed risks and others discussed elsewhere in this review of ﬁnancial performance, to identify, measure, monitor and mitigate material risks associated with which investors should carefully consider before investing in securities of ﬁnancial instruments. The key risks related to ﬁnancial instruments are the Corporation. This description of risks does not include all possible risks, liquidity risk, credit risk and market risk. and there may be other risks of which the Corporation is not currently aware. > Liquidity risk is the risk that the Corporation will not be able to meet all Power Financial is a holding company that holds substantial interests in the cash outﬂow obligations as they come due. ﬁnancial services sector through its controlling interest in each of Lifeco and IGM. As a result, the Corporation bears the risks associated with being a signiﬁcant shareholder of these holdings and operating companies. The respective boards of directors of Lifeco and IGM are responsible for the risk oversight function. The risk committee of the board directors of Lifeco is responsible for risk oversight, and the board of directors of IGM provides oversight and carries out its risk management mandate through various committes. Officers of the Corporation are members of these boards and committees of these boards and consequently in their role as directors they participate in the risk oversight function at the operating companies. Pargesa, > Credit risk is the potential for financial loss to the Corporation 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 equity price risk. > Currency risk relates to the Corporation operating in different currencies and converting non-Canadian earnings at different points in time at different foreign exchange levels when adverse changes in foreign a holding company, is also subject to risk due to the nature of its activities and currency exchange rates occur. also those of its direct subsidiary GBL. These risks relate to credit, liquidity > Interest rate risk is the risk that the fair value of future cash ﬂows of a and market risk as described in Pargesa’s consolidated ﬁnancial statements ﬁnancial instrument will ﬂuctuate because of changes in the market for the year ended December 31, 2014. interest rates. The Corporation believes that a prudent approach to risk is achieved through > Equity price risk is the uncertainty associated with the valuation of a governance model that focuses on the active oversight of its investments. assets arising from changes in equity markets. The Board of Directors of the Corporation has overall responsibility for monitoring management’s implementation and maintenance of policies and LIQUIDITY RISK controls to manage the risks associated with the Corporation’s business as As a holding company, Power Financial’s ability to meet its obligations, a holding company. The Board of Directors provides oversight and carries out its risk management mandate primarily through the following committees: > The Audit Committee addresses risks related to ﬁnancial reporting. including payment of interest, other operating expenses and dividends, and to complete current or desirable future enhancement opportunities or acquisitions generally depends upon dividends from its principal subsidiaries (Lifeco and IGM) and Pargesa, and its ability to raise additional capital. Dividends to shareholders of Power Financial will be dependent on the > The Compensation Committee considers risk associated with the operating performance, proﬁtability, ﬁnancial position and creditworthiness Corporation’s compensation policies and practices. > The Governance and Nominating Committee oversees the Corporation’s approach to appropriately address potential risk s related to governance matters. > The Related Party and Conduct Review Committee oversees the risks related to transactions with related parties of the Corporation. The share price of Power Financial and its subsidiaries (Lifeco and IGM) may be volatile and subject to ﬂuctuations in response to numerous factors beyond Power Financial’s control. Economic conditions may adversely affect Power Financial and its subsidiaries, including ﬂuctuations in foreign exchange, inﬂation and interest rates, as well as monetary policies, business investment and the health of capital markets in Canada, the United States, Europe and Asia. In recent years, financial markets have experienced signiﬁcant price and volume ﬂuctuations that have affected the market prices of equity securities held by the Corporation and its subsidiaries and that have often been unrelated to the operating performance, underlying asset values or prospects of such companies. 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 subsidiaries’ operations could be adversely impacted and the trading price of Power Financial’s securities may be adversely affected. of the subsidiaries of Power Financial and on their ability to pay dividends to Power Financial. The ability of Lifeco and IGM, which are also holding companies, to meet their obligations and pay dividends is dependent upon receipt of dividends 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. Power Financial regularly reviews its liquidity requirements and seeks to maintain a sufficient level of liquidity to meet its operating expenses, ﬁnancing charges and payment of preferred share dividends for a reasonable period of time. 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 can be no assurance that debt or equity ﬁnancing will be available, or, together with internally generated funds, will be sufficient to meet or satisfy Power Financial’s objectives or requirements or, if the foregoing are available to Power Financial, that they will be on terms acceptable to Power Financial. The inability of Power Financial to access sufficient capital on acceptable terms could have a material adverse effect on Power Financial’s business, prospects, dividend paying capability and ﬁnancial condition, and further enhancement opportunities or acquisitions. Power Financial’s management of liquidity risk have not changed materially since December 31, 2013. POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT 35 REVIEW OF FINANCIAL PERFORMANCE CREDIT RISK MARKET RISK Fixed income securities and derivatives are subject to credit risk. a) Currency risk Power Financial mitigates credit risk on its fixed income securities by Power Financial’s ﬁnancial instruments are comprised of cash and cash adhering to an investment policy that outlines credit risk parameters and equivalents, ﬁxed income securities and long-term debt. In managing its concentration limits. Fixed income securities, which are included in investments and in cash and cash equivalents, consist primarily of bonds, bankers’ acceptances and highly liquid temporary deposits with Canadian chartered banks and banks in jurisdictions where Power Financial operates as well as bonds and short- term securities of, or guaranteed by, the Canadian and U.S. government. Power Financial regularly reviews the credit ratings of its counterparties. 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, 2014, approximately 90% of Power Financial’s cash and cash equivalents and ﬁxed income securities were denominated in Canadian dollars or in foreign currencies with currency The maximum exposure to credit risk on these ﬁnancial instruments is their hedges in place. carrying value. Derivatives continue to be utilized on a basis consistent with the risk management guidelines of Power Financial and are monitored by the Corporation for effectiveness as economic hedges even if speciﬁc hedge 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. Foreign currency translation gains and losses from Pargesa are recorded in other comprehensive income. accounting requirements are not met. Power Financial regularly reviews the b) Interest rate risk credit ratings of derivative ﬁnancial instrument counterparties. Derivative Power Financial’s ﬁnancial instruments are cash and cash equivalents, ﬁxed contracts are over-the-counter with counterparties that are highly rated income securities and long-term debt that do not have signiﬁcant exposure ﬁnancial institutions. to interest rate risk. Power Financial’s exposure to and management of credit risk related to c) Equity price risk ﬁxed income securities and derivatives have not changed materially since Power Financial’s ﬁnancial instruments are cash and cash equivalents, ﬁxed December 31, 2013. income securities and long-term debt that do not have exposure to equity price risk. Pargesa indirectly holds substantial investments classified as available for sale; unrealized gains and losses on these investments are recorded in other comprehensive income until realized. These investments are reviewed periodically to determine whether there is objective evidence of an impairment in value. OFF-BALANCE SHEET ARRANGEMENTS G UA R A N T E E S C O N T I N G E N T L I A B I L I T I E S In the normal course of their operations, the Corporation and its subsidiaries The Corporation and its subsidiaries are from time to time subject to legal may enter into certain agreements, the nature of which precludes the actions, including arbitrations and class actions, arising in the normal course possibility of making a reasonable estimate of the maximum potential of business. It is inherently difficult to predict the outcome of any of these amount the Corporation or subsidiary could be required to pay third parties, proceedings with certainty, and it is possible that an adverse resolution as some of these agreements do not specify a maximum amount and the could have a material adverse effect on the consolidated ﬁnancial position of amounts are dependent on the outcome of future contingent events, the the Corporation. However, based on information presently known, it is not nature and likelihood of which cannot be determined. expected that any of the existing legal actions, either individually or in the aggregate, will have a material adverse effect on the consolidated ﬁnancial L E T T E R S O F C R E D I T position of the Corporation. In the normal course of Lifeco’s reinsurance business, Lifeco provides letters of credit to other parties or beneﬁciaries. A beneﬁciary will typically hold a letter of credit as collateral in order to secure statutory credit for insurance and investment contract liabilities ceded to or amounts due from Lifeco. Lifeco may be required to seek collateral alternatives if it is unable to renew existing letters of credit’s maturity. (See also Note 31 to the Corporation’s 2014 Consolidated Financial Statements.) 36 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT COMMITMENTS AND CONTRACTUAL OBLIGATIONS PAYMENTS DUE BY PERIOD Debentures and debt instruments [1] Deposits and certiﬁcates Obligations to securitization entities Operating leases [2] Purchase obligations [3] Pension contributions [4] Contractual commitments [5] Total Power Financial [6] Lifeco IGM Total TOTAL 6,887 223 6,754 713 180 204 591 LESS THAN 1 YEAR 596 212 1–5 YEARS 1,005 8 1,249 5,468 165 71 204 591 428 93 − − MORE THAN 5 YEARS 5,286 3 37 120 16 − − 15,552 3,088 7,002 5,462 267 6,750 8,535 15,552 8 1,540 1,540 3,088 6 848 6,148 7,002 253 4,362 847 5,462 [1] Please refer to Note 14 to the Corporation’s 2014 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 over the period of use. [3] Purchase obligations are commitments of Lifeco to acquire goods and services, essentially related to information services. [4] Pension contributions include post-retirement beneﬁts and are subject to change, as contribution decisions are affected by many factors including market performance, regulatory requirements and management’s ability to change funding policy. Funding estimates beyond one year are excluded due to variability on the assumptions required to project the timing of future contributions. [5] Represents commitments by Lifeco. These contractual commitments are essentially commitments to 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. [6] Includes debenture of the Corporation of $250 million. Lifeco uses letters of credit in the normal course of business; refer to Note 31 to the Corporation’s 2014 Consolidated Financial Statements. TRANSACTIONS WITH RELATED PARTIES In the normal course of business, Great-West Life enters into various On November 14, 2013, the Board of Directors approved a loss consolidation transactions with related companies which include providing insurance program with IGM. This program allows Power Financial to generate beneﬁts to other companies within the Power Financial group of companies. sufficient taxable income to use its non-capital losses. At the same time, Such transactions are at market terms and conditions and are reviewed by the IGM incurs tax deductions, which are used to reduce its taxable income. appropriate Related Party and Conduct Review Committee. On Januar y 6, 2015, the Corporation increased its loss consolidation Lifeco provides reinsurance, asset management and administrative services for employee beneﬁt plans relating to pension and other post-employment beneﬁts for employees of Power Financial, and Lifeco and its subsidiaries. Such transactions are at market terms and conditions and are reviewed by the appropriate Related Party and Conduct Review Committee. 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. These transactions are at market terms and conditions. transactions with IGM. The increase was put in place to ensure that non- capital losses of Power Financial, which would otherwise expire in 2015, will be utilized. The Corporation acquired $330 million of 4.50% secured debentures of IGM. As sole consideration for the debentures, a wholly owned subsidiary of Power Financial issued $330 million of 4.51% preferred shares to IGM. The Corporation has legally enforceable rights to settle these ﬁnancial instruments on a net basis and the Corporation intends to exercise these rights. POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT 37 REVIEW OF FINANCIAL PERFORMANCE FINANCIAL INSTRUMENTS FA I R VA LU E O F F I N A N C I A L I N S T R U M E N T S payable, interest payable, income tax payable and certain other ﬁnancial The following table presents the carrying amounts and fair value of the liabilities. Fair value represents the amount that would be exchanged in an Corporation’s ﬁnancial assets and ﬁnancial liabilities. The table distinguishes arm’s-length transaction between willing parties and is best evidenced by between those ﬁnancial instruments recorded at fair value and those recorded a quoted market price, if one exists. Fair values represent management’s at amortized cost. The table excludes fair value information for ﬁnancial estimates and are generally calculated using market information and at a assets and ﬁnancial liabilities not measured at the fair value if the carrying speciﬁc point in time and may not reﬂect future fair values. The calculations amount is a reasonable approximation of fair value. are subjective in nature, involve uncertainties and matters of signiﬁcant The excluded items are cash and cash equivalents, dividends, interest and accounts receivable, income tax receivable, loans to policyholders, certain other ﬁnancial assets, accounts payable, repurchase agreements, dividends judgment (please refer to Note 26 to the Corporation’s 2014 Consolidated Financial Statements). CARRYING VALUE 2014 FAIR VALUE CARRYING VALUE 2013 FAIR VALUE 79,957 10,501 79,957 10,501 70,104 8,370 70,104 8,370 366 366 324 324 6,697 60 4,613 693 421 6,697 60 4,613 693 421 7,297 117 4,288 654 396 7,297 117 4,288 654 396 103,308 103,308 91,550 91,550 13,178 14,659 11,855 12,672 27,199 29,016 24,591 25,212 560 560 632 632 40,937 44,235 37,078 38,516 144,245 147,543 128,628 130,066 857 1,225 16 2,098 6,754 6,887 162 223 14,026 16,124 857 1,225 16 2,098 6,859 8,065 220 225 15,369 17,467 889 779 20 889 779 20 1,688 1,688 5,572 7,275 163 187 13,197 14,885 5,671 8,066 205 188 14,130 15,818 AS AT DECEMBER 31 FINANCIAL ASSETS Financial assets recorded at fair value Bonds Fair value through proﬁt or loss Available for sale Mortgage 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 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 Obligation to securitization entities Debentures and debt instruments Capital trust debentures Deposits and certiﬁcates Total ﬁnancial liabilities [1] Fair value of some investments cannot be reliably measured, therefore the investments are held at cost. 38 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT D E R I VAT I V E F I N A N C I A L I N S T R U M E N T S > demonstrating the effectiveness of the hedging relationships; and In the course of their activities, the Corporation and its subsidiaries use > monitoring the hedging relationship. derivative ﬁnancial instruments. When using such derivatives, they only act as limited end-users and not as market-makers in such derivatives. The use of derivatives is monitored and reviewed on a regular basis by senior management of the Corporation and by senior management of its subsidiaries. The Corporation and its subsidiaries have each established operating policies, guidelines or procedures 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; 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). (See Note 21 to the Corporation’s 2014 Consolidated Financial Statements and the “Risk Management” section of this Review of Financial Performance for more information.) There were no major changes to the Corporation and its subsidiaries’ policies and procedures with respect to the use of derivative instruments in the twelve- month period ended December 31, 2014. The following table provides a summary of the Corporation and its subsidiaries’ derivatives portfolio at December 31: Power Financial Lifeco IGM 2014 2013 NOTIONAL 8 15,460 2,621 18,089 MA XIMUM CREDIT RISK TOTAL FAIR VALUE 1 652 40 693 1 (543) 10 (532) NOTIONAL 3,549 21,582 3,428 28,559 MA XIMUM CREDIT RISK TOTAL FAIR VALUE 4 593 57 654 4 (151) 22 (125) There has been a decrease in the notional amount outstanding and an equity put options on the S&P 500 outstanding as of December 31, 2013. See increase in the exposure to credit risk that represents the market value Note 25 to the Corporation’s 2014 Consolidated Financial Statements for of those instruments, which are in a gain position. The decrease in the more information on the type of derivative ﬁnancial instruments used by the notional amount for the Corporation and Lifeco is mainly due to six-month Corporation and its subsidiaries. SUMMARY OF CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS In the preparation of the financial statements, management of the I N S U R A N C E A N D I N V E S TM ENT CO NTR AC T LIA B I LITI E S Corporation and management of its subsidiaries – Lifeco and IGM – are Insurance and investment contract liabilities represent the amounts required to make estimates and assumptions that affect the reported required, in addition to future premiums and investment income, to provide amounts of assets, liabilities, net earnings and related disclosures. for future beneﬁt payments, policyholder dividends, commission and policy Signiﬁcant judgments made by the management of the Corporation and administrative expenses for all insurance and annuity policies in force the management of its subsidiaries and key sources of estimation uncertainty with Lifeco. The Appointed Actuaries of Lifeco’s subsidiary companies are concern: the entities to be consolidated, insurance and investment contract responsible for determining the amount of the liabilities to make appropriate liabilities, fair value measurement, investment impairment, goodwill and provisions for Lifeco’s obligations to policyholders. The Appointed Actuaries intangible assets, income taxes, employee future beneﬁts and deferred determine the insurance and investment contract liabilities using generally selling commissions. These are described in the notes to the 2014 Consolidated accepted actuarial practices, according to the standards established by the Financial Statements. There were no changes in the Corporation’s critical Canadian Institute of Actuaries. The valuation of insurance contracts uses the accounting estimates and judgments in the twelve-month period ended Canadian Asset Liability Method (CALM). This method involves the projection December 31, 2014. C O N S O L I DAT I O N Management of the Corporation consolidates all subsidiaries and entities in which it is determined that the Corporation has control. Control is evaluated according to the ability of the Corporation to direct the activities of the subsidiary or other structured entities 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. 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. In the computation of insurance contract liabilities, valuation assumptions have been made regarding rates of mortality and morbidity, investment returns, levels of operating expenses, rates of policy termination and rates of utilization of elective policy options or provisions. The valuation assumptions use best estimates of future experience together with a margin for adverse deviation. These margins are necessary to provide for possibilities of mis- estimation 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. Additional details regarding these estimates can be found in Note 12 to the Corporation’s 2014 Consolidated Financial Statements. POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT 39 REVIEW OF FINANCIAL PERFORMANCE FA I R VA LU E M E A S U R E M E N T I N V E S T M E N T I M PA I R M E N T Financial instrument carrying values necessarily reﬂect the prevailing market Investments are reviewed regularly on an individual basis to determine liquidity and the liquidity premiums embedded in the market pricing methods impairment status. The Corporation and its subsidiaries consider various the Corporation and its subsidiaries rely upon. The following is a description factors in the impairment evaluation process, including, but not limited to, of the methodologies used to determine fair value. the ﬁnancial condition of the issuer, speciﬁc adverse conditions affecting a) Bonds at fair value through proﬁt or loss and available for sale Fair values for bonds classified at fair value through profit or loss or an industry or region, decline in fair value not related to interest rates, bankruptcy or defaults, and delinquency in payments of interest or principal. available for sale are determined with reference to quoted market bid Investments are deemed to be impaired when there is no longer reasonable prices primarily provided by third-party independent pricing sources. The assurance of collection. The fair value of an investment is not a deﬁnitive Corporation and its subsidiaries maximize the use of observable inputs and indicator of impairment, as it may be signiﬁcantly inﬂuenced by other factors, minimize the use of unobservable inputs when measuring fair value. The including the remaining term to maturity and liquidity of the asset. However, Corporation and its subsidiaries obtain quoted prices in active markets, market price is taken into consideration when evaluating impairment. 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. For impaired mortgage loans, and bonds classiﬁed as loans and receivables, provisions are established or impairments recorded to adjust the carrying value to the net realizable amount. Wherever possible the fair value of collateral underlying the loans or observable market price is used to establish The Corporation and its subsidiaries estimate the fair value of bonds net realizable value. For impaired available-for-sale bonds, the accumulated not traded in active markets by referring to actively traded securities loss recorded in other comprehensive income is reclassiﬁed to net investment with similar attributes, dealer quotations, matrix pricing methodology, income. Impairments on available-for-sale debt instruments are reversed if discounted cash ﬂow analyses and/or internal valuation models. This there is objective evidence that a permanent recovery has occurred. All gains methodology considers such factors as the issuer’s industry, the security’s and losses on bonds, mortgage loans and shares classiﬁed or designated as fair rating, term, coupon rate and position in the capital structure of the issuer, value through proﬁt or loss are already recorded in net earnings, therefore, a as well as yield curves, credit curves, prepayment rates and other relevant reduction due to impairment of these assets will be recorded in net earnings. factors. For bonds that are not traded in active markets, valuations are As well, when determined to be impaired, interest is no longer accrued and adjusted to reﬂect illiquidity, and such adjustments are generally based on previous interest accruals are reversed. Impairment losses on available-for- available market evidence. In the absence of such evidence, management’s sale shares are recorded if the loss is signiﬁcant or prolonged and subsequent best estimate is used. losses are recorded in net earnings. b) Shares at fair value through proﬁt or loss and available for sale Fair value movement on the assets supporting insurance contract liabilities Fair values for publicly traded shares are generally determined by the last is a major factor in the movement of insurance contract liabilities. Changes bid price for the security from the exchange where it is principally traded. in the fair value of bonds designated or classified as fair value through Fair values for shares for which there is no active market are determined proﬁt or loss that support insurance contract liabilities are largely offset by by discounting expected future cash flows. The Corporation and its corresponding changes in the fair value of liabilities, except when the bond subsidiaries maximize the use of observable inputs and minimize the use has been deemed impaired. 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 sheets dates to measure shares at fair value in its fair value through proﬁt or loss and available-for-sale portfolios. c) Mortgage loans and bonds classiﬁed as loans and receivables For disclosure purposes only, fair values for bonds, and mortgage loans, classiﬁed as loans and receivables, are determined by discounting expected future cash ﬂows using current market rates. Valuation inputs typically include benchmark yields and risk-adjusted spreads based on current lending activities and market activity. d) Investment properties Fair values for investment properties are determined using independent qualiﬁed appraisal services and include Lifeco management 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 G O O DW I L L A N D I N TA N G I B L E S I M PA I R M E N T T E S T I N G 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, the Corporation would be required to reverse the impairment charge or a portion thereof. Goodwill and indeﬁnite life intangible assets have been allocated to groups of cash generating units (CGU), representing the lowest level that the assets are monitored for internal reporting purposes. Goodwill and indeﬁnite life intangible assets are 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 value to its recoverable amount. An impairment loss is recognized for the amount by which the asset’s carrying the use of estimates including future cash ﬂows (such as future leasing amount exceeds its recoverable amount. assumptions, rental rates, capital and operating expenditures) and The recoverable amount is the higher of the asset’s fair value less cost of discount, reversionary and overall capitalization rates applicable to disposal or value in use, which is calculated using the present value of the asset based on current market conditions. Investment properties estimated future cash ﬂows expected to be generated. under construction are valued at fair value if such values can be reliably determined; otherwise, they are recorded at cost. 40 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT I N C O M E TA X E S PENSION PLANS AND OTHER POST-EMPLOYMENT BENEFITS The income tax expense for the period represents the sum of current income The Corporation and its subsidiaries maintain funded deﬁned beneﬁt pension tax and deferred income tax. Income tax is recognized as an expense or plans for certain employees and advisors, unfunded supplementary employee income in the statements of earnings except to the extent that it relates to retirement plans for certain employees, and unfunded post-employment items that are not recognized in the statements of earnings (whether in other health, dental and life insurance beneﬁts to eligible employees, advisors comprehensive income or directly in equity), in which case the income tax is and their dependants. The Corporation’s subsidiaries also maintain deﬁned also recognized in other comprehensive income or directly in equity. contribution pension plans for eligible employees and advisors. The deﬁned beneﬁt pension plans provide pensions based on length of service and ﬁnal CURRENT INCOME TAX average earnings. Current income tax is based on taxable income for the year. Current tax liabilities (assets) for the current and prior periods are measured at the amount expected to be paid to (recovered from) the taxation authorities using the rates that have been enacted or substantively enacted at the balance sheet date. Current tax assets and current tax liabilities are offset, if a legally enforceable right exists to offset the recognized amounts and the entity intends either to settle on a net basis, or to realize the assets and settle the liabilities simultaneously. A provision for tax uncertainties which meets 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, 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 deﬁned beneﬁts 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. 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. Net interest costs, current service costs, past service costs and curtailment gains or losses are included in operating and administrative expenses. Remeasurements arising from deﬁned beneﬁt plans represent actuarial gains and losses, and the actual return on plan assets, less interest calculated at the discount rate and changes in the asset ceiling. Remeasurements are recognized immediately through other comprehensive income and are not reclassiﬁed to net earnings. if a legally enforceable right exists to net current tax assets against current The accrued beneﬁt asset (liability) represents the plan surplus (deﬁcit). tax liabilities and the deferred taxes relate to the same taxable entity and the Payments to the deﬁned contribution plans are expensed as incurred. 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 arising on investments in the subsidiaries, jointly controlled corporations and associates, except where the group controls the timing of the reversal of the temporary differences and it is probable that the temporary differences will not reverse in the foreseeable future. D E F E R R E D S E L L I N G C O M M I S S I O N S Commissions paid by IGM 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, 2014, there were no indications of impairment to deferred selling commissions. POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT 41 REVIEW OF FINANCIAL PERFORMANCE CHANGES IN ACCOUNTING POLICIES On January 1, 2014, the Corporation and its subsidiaries adopted the following amendments and interpretation: IAS 32, Financial Instruments: Presentation, IAS 36, Impairment of Assets, IAS 39, Financial Instruments: Recognition and Measurement and IFRIC 21, Levies. The adoption of these amendments and interpretation did not have a signiﬁcant impact on the Corporation’s ﬁnancial statements. FUTURE ACCOUNTING CHANGES The Corporation and its subsidiaries continuously monitor the potential > Classiﬁcation and measurement: this phase requires that ﬁnancial assets changes proposed by the International Accounting Standards Board (IASB) be classiﬁed at either amortized cost or fair value on the basis of the entity’s and analyze the effect that changes in the standards may have on their business model for managing the ﬁnancial assets and the contractual cash consolidated ﬁnancial statements when they become effective. ﬂow characteristics of the ﬁnancial assets. I F R S 4 — I N S U R A N C E C O N T R AC T S In June 2013, the IASB issued a revised IFRS 4, Insurance Contracts exposure draft proposing changes to the accounting standard for insurance contracts. The IASB continues to deliberate the proposals in this exposure draft. The proposed standard differs signiﬁcantly from Lifeco’s current accounting and > Impairment methodology: this phase replaces the current incurred loss model for impairment of ﬁnancial assets with an expected loss model. > Hedge accounting: this phase replaces the current rule-based hedge accounting requirements in IAS 39 with guidance that more closely aligns the accounting with an entity’s risk management activities. actuarial practices under the Canadian Asset Liability Method (CALM) and is The standard will be effective January 1, 2018. The Corporation and its expected to produce more volatile ﬁnancial results. subsidiaries are evaluating the impact of the adoption of this standard. Lifeco is actively monitoring developments in this area; it will continue to measure insurance contract liabilities under current accounting and actuarial policies, including CALM, until a new IFRS for insurance contract measurement is issued and effective. I F R S 9 — F I N A N C I A L I N S T R U M E N T S In July 2014, the IASB issued a ﬁnal version of IFRS 9, Financial Instruments to replace IAS 39, Financial Instruments: Recognition and Measurement, the current standard for accounting for ﬁnancial instruments. The standard was IFRS 15 — REVENUE FROM CONTR ACTS WITH CUSTOMERS In May 2014, the IASB issued IFRS 15 – Revenue from Contracts with Customers, which provides a single model for entities to use in accounting for revenue arising from contracts with customers. The model requires an entity to recognize revenue as the goods or services are transferred to customers in an amount that reﬂects the expected consideration. The revenue recognition requirements in IFRS 15 do not apply to the revenue arising from insurance contracts, leases and ﬁnancial instruments. completed in three separate phases: The standard will be effective January 1, 2017. The Corporation and its subsidiaries are evaluating the impact of the adoption of this standard. DISCLOSURE CONTROLS AND PROCEDURES Based on their evaluations as of December 31, 2014, the Chief Executive Officer and Chief Financial Officer have concluded that the Corporation’s disclosure controls and procedures were effective as at December 31, 2014. INTERNAL CONTROL OVER FINANCIAL REPORTING The Corporation’s internal control over ﬁnancial reporting is designed to The Corporation’s management, under the supervision of the Chief Executive provide reasonable assurance regarding the reliability of ﬁnancial reporting Officer and the Chief Financial Officer, has evaluated the effectiveness of the and that the preparation of ﬁnancial statements for external purposes is Corporation’s internal control over ﬁnancial reporting as at December 31, in accordance with IFRS. The Corporation’s management is responsible 2014, based on the Internal Control – Integrated Framework (COSO 2013 for establishing and maintaining effective internal control over ﬁnancial Framework) published by The Committee of Sponsoring Organizations of reporting. All internal control systems have inherent limitations and may the Treadway Commission. The Corporation transitioned to the COSO 2013 become ineffective because of changes in conditions. Therefore, even those Framework during 2014. Based on such evaluation, the Chief Executive Officer systems determined to be effective can provide only reasonable assurance and the Chief Financial Officer have concluded that the Corporation’s internal with respect to ﬁnancial statement preparation and presentation. control over ﬁnancial reporting was effective as at December 31, 2014. There have been no changes in the Corporation’s internal control over ﬁnancial reporting during the three-month period ended December 31, 2014 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over ﬁnancial reporting. 42 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT SELECTED ANNUAL INFORMATION FOR THE YEARS ENDED DECEMBER 31 Total revenue [1] Operating earnings attributable to common shareholders [2, 3] per share – basic Net earnings attributable to common shareholders [2] per share – basic per share – diluted Consolidated assets [1, 2] Total ﬁnancial liabilities [1, 2] Debentures and debt instruments Shareholders’ equity [1] Book value per share [1] 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 O Series P Series R [4] Series S [5] Series T [6] 2014 41,775 2,105 2.96 2,136 3.00 3.00 373,843 16,124 6,887 17,019 20.29 711.7 1.4000 0.5250 1.3750 1.3125 1.4750 1.4375 1.5000 1.2375 1.2750 1.4500 1.1000 1.3750 1.2000 1.1902 2013 28,830 1,708 2.40 1,896 2.67 2.63 341,682 14,885 7,275 15,993 18.61 711.2 1.4000 0.5250 1.3750 1.3125 1.4750 1.4375 1.5000 1.2375 1.2750 1.4500 1.1000 1.3750 1.1006 2012 32,934 1,678 2.37 1,618 2.29 2.27 268,428 12,138 5,817 13,451 15.79 709.1 1.4000 0.5250 1.3750 1.3125 1.4750 1.4375 1.5000 1.2375 1.2750 1.4500 1.1000 1.2837 [1] Comparative ﬁgures have been restated as described in Note 33 to the Corporation’s 2014 Consolidated Financial Statements. [2] The 2012 ﬁgures have been restated for the retroactive impact of new and revised IFRS standards during 2013, most notably IAS 19R, Employee Beneﬁts and IFRS 10, Consolidated Financial Statements. [3] Operating earnings and operating earnings per share are non-IFRS ﬁnancial measures. For a deﬁnition of these non-IFRS ﬁnancial measures, please refer to the “Basis of Presentation – Non-IFRS Financial Measures and Presentation” section of this Review of Financial Performance. [4] Issued in February 2012. [5] Issued in February 2013. The ﬁrst dividend payment was made in April 30, 2013, in the amount of $0.2006 per share. [6] Issued in December 2013. The ﬁrst dividend payment was made on April 30, 2014 in the amount of $0.4027 per share. Regular annual dividend is $1.0500 per share. POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT 43 2014 2013 [NOTE 33] 3,989 4,344 103,636 27,565 7,317 4,613 7,711 150,842 12,154 5,151 2,677 986 693 6,032 1,707 5,497 9,149 174,966 373,843 90,329 24,915 8,046 4,288 7,332 134,910 10,832 5,070 2,664 925 654 5,907 1,211 5,281 9,105 160,779 341,682 145,198 131,174 857 6,754 6,887 1,225 7,293 1,761 174,966 344,941 2,580 743 13,164 532 17,019 11,883 28,902 889 5,572 7,275 779 7,061 1,219 160,779 314,748 2,755 721 12,085 432 15,993 10,941 26,934 373,843 341,682 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS DECEMBER 31 [IN MILLIONS OF CANADIAN DOLL ARS] ASSETS Cash and cash equivalents [Note 4] Investments [Note 5] Bonds Mortgage loans Shares Investment properties Loans to policyholders Funds held by ceding insurers [Note 6] Reinsurance assets [Note 12] Investments in jointly controlled corporations and associates [Note 7] Owner-occupied properties and capital assets [Note 8] Derivative ﬁnancial instruments [Note 25] Other assets [Note 9] Deferred tax assets [Note 16] Intangible assets [Note 10] Goodwill [Note 10] Investments on account of segregated fund policyholders [Note 11] Total assets LIABILITIES Insurance contract liabilities [Note 12] Investment contract liabilities [Note 12] Obligation to securitization entities [Note 13] Debentures and debt instruments [Note 14] Derivative ﬁnancial instruments [Note 25] Other liabilities [Note 15] Deferred tax liabilities [Note 16] Insurance and investment contracts on account of segregated fund policyholders [Note 11] Total liabilities EQUITY Stated capital [Note 17] Perpetual preferred shares Common shares Retained earnings Reserves Total shareholders’ equity Non-controlling interests [Note 19] Total equity Total liabilities and equity Approved by the Board of Directors Signed, Raymond Royer Director 44 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT 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] 2014 2013 REVENUES Premium income Gross premiums written Ceded premiums Total net premiums Net investment income [Note 5] Regular net investment income Change in fair value through proﬁt or 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 22] Financing charges [Note 23] Total expenses Share of earnings of investments in jointly controlled corporations and associates [Note 7] Earnings before income taxes Income taxes [Note 16] Net earnings Attributable to Non-controlling interests [Note 19] Perpetual preferred shareholders Common shareholders Earnings per common share [Note 28] Net earnings attributable to common shareholders – Basic – Diluted 24,686 (3,464) 21,222 6,038 7,525 13,563 6,990 41,775 19,363 (1,928) 17,435 1,496 10,229 29,160 2,901 5,162 413 37,636 4,139 211 4,350 834 3,516 1,248 132 2,136 3,516 3.00 3.00 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 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT 45 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 associates 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 associates Total – items that will not be reclassiﬁed Other comprehensive income Total comprehensive income Attributable to Non-controlling interests Perpetual preferred shareholders Common shareholders 2014 3,516 313 (62) (52) 10 209 (110) 42 2 (1) (67) 543 35 578 (86) 634 (601) 150 (31) (482) 152 3,668 1,347 132 2,189 3,668 2013 [NOTE 33] 3,011 (156) 35 (70) 15 (176) (85) 33 2 (1) (51) 847 (52) 795 251 819 633 (174) 23 482 1,301 4,312 1,295 131 2,886 4,312 46 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY STATED CAPITAL RESERVES FOR THE YEAR ENDED DECEMBER 31, 2014 [IN MILLIONS OF CANADIAN DOLL ARS] PERPETUAL PREFERRED SHARES COMMON SHARES RETAINED EARNINGS SHARE-BASED COMPENSATION OTHER COMPREHENSIVE INCOME [NOTE 27] Balance, beginning of year 2,755 721 12,085 95 Net earnings Other comprehensive income Total comprehensive income – – – Redemption of preferred shares (175) 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 FOR THE YEAR ENDED DECEMBER 31, 2013 [IN MILLIONS OF CANADIAN DOLL ARS] Balance, beginning of year Prior period adjustment [Note 33] Restated balance, beginning of year 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 – – – – – – 2,580 PERPETUAL PREFERRED SHARES 2,255 – 2,255 – – – 500 – – – – – – 2,755 – – – – – – – – 22 – 743 2,268 – 2,268 – (996) (132) – – – (61) 13,164 – – – – – – – 35 (11) 23 142 337 – 53 53 – – – – – – – 390 NON- CONTROLLING INTERESTS 10,941 1,248 99 1,347 – – – (693) 15 (4) TOTAL EQUIT Y 26,934 3,516 152 3,668 (175) (996) (132) (693) 50 7 277 239 11,883 28,902 TOTAL 432 – 53 53 – – – – 35 (11) 23 532 STATED CAPITAL RESERVES COMMON SHARES RETAINED EARNINGS SHARE-BASED COMPENSATION OTHER COMPREHENSIVE INCOME [NOTE 27] 664 – 664 – – – – – – – – 57 – 721 11,201 (119) 11,082 2,027 – 2,027 – (996) (131) – – – 103 12,085 110 – 110 – – – – – – – 11 (26) – 95 (667) 7 (660) – 990 990 – – – – – – 7 337 NON- CONTROLLING INTERESTS TOTAL TOTAL EQUIT Y (557) 10,102 23,665 7 (46) (158) (550) 10,056 23,507 – 990 990 – – – – 11 (26) 7 432 984 311 1,295 – – – (685) 4 (6) 3,011 1,301 4,312 500 (996) (131) (685) 15 25 277 387 10,941 26,934 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT 47 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 17] Issue of preferred shares by the Corporation Redemption of preferred shares by the Corporation [Note 17] Issue of common shares by subsidiaries Issue of preferred shares by subsidiaries Repurchase of common shares by subsidiaries Redemption of preferred shares by subsidiaries Issue of euro-denominated debentures Changes in debt instruments Change in obligations related to assets sold under repurchase agreements Change in obligations to securitization entities Other INVESTMENT ACTIVITIES Bond sales and maturities Mortgage loan repayments Sale of shares Change in loans to policyholders Business acquisitions, net of cash and cash equivalents acquired 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 48 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT 2014 4,350 (660) 9,726 428 (34) (160) (7,525) 11 6,136 (691) (132) (996) (1,819) 17 – (175) 44 200 (175) – – (446) – 1,185 33 (1,136) 27,263 2,525 3,171 73 (43) (31,462) (4,703) (2,156) (101) (5,433) 78 (355) 4,344 3,989 5,479 533 2013 3,689 (426) (567) 269 (99) 321 2,974 (510) 5,651 (685) (128) (995) (1,808) 45 500 – 742 – (122) (230) 659 183 (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 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ALL TABULAR AMOUNTS ARE IN MILLIONS OF CANADIAN DOLLARS, UNLESS OTHERWISE NOTED. NOTE 1 CORPORATE INFORMATION Power Financial Corporation (Power Financial or the Corporation) is a publicly The Consolidated Financial Statements of Power Financial for the year ended listed company (TSX: PWF) incorporated and domiciled in Canada whose December 31, 2014 were approved by its Board of Directors on March 18, 2015. registered address is 751 Victoria Square, Montréal, Québec, Canada, H2Y 2J3. The Corporation is controlled by Power Corporation of Canada. Power Financial is a diversiﬁed international management and holding company that holds interests, directly or indirectly, in companies in the ﬁnancial services sector in Canada, the United States, Europe and Asia. Through its investment in Pargesa Holding SA, Power Financial also has substantial holdings based in Europe. NOTE 2 BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The financial statements of Power Financial at December 31, 2014 have Jointly controlled corporations are entities in which unanimous consent is been prepared in accordance with International Financial Reporting required for decisions relating to relevant activities. Associates are entities Standards (IFRS). Effective January 1, 2014, the Corporation adopted the guidance in the following amendments and interpretations: IAS 32, Financial Instrument: Presentation, IAS 36, Impairment of Assets, IAS 39, Financial Instruments: Recognition and Measurement and IFRIC 21, Levies. The adoption of the amendments and interpretations did not have a signiﬁcant impact on the Corporation’s ﬁnancial statements. B A S I S O F P R E S E N TAT I O N 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 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 associates are accounted for using the equity method. Under the equity method, the share of net earnings, other comprehensive income and the changes in equity of the jointly controlled corporations and associates are recognized in the statements of earnings, statements of comprehensive income and statements of changes in equity, respectively. The Corporation holds a 50% (2013 – 50%) interest in Parjointco N.V., a jointly controlled corporation that is considered to be a joint venture. Parjointco holds a 55.5% (2013 – 55.6%) equity interest in Pargesa Holding SA. Accordingly, the Corporation accounts for its investment in Parjointco using which means that the Corporation has power over the entity, it is exposed, or the equity method. 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: The following abbreviations are used throughout this report: Power Corporation of Canada (Power Corporation); Great-West Life & Annuity Insurance Company (Great-West Financial or Great-West Life & Annuity); Great-West Lifeco Inc. (Lifeco); IGM Financial Inc. (IGM or IGM Financial); 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 > Great-West Lifeco Inc., a public company (direct interest of 67.2% (2013 – Life); International Financial Reporting Standards (IFRS). 67.0%)), 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 Life Group Limited and Putnam Investments, LLC. > IGM Financial Inc., a public company (direct interest of 58.8% (2013 – 58.6%)), whose major operating subsidiary companies are Investors Group Inc. and Mackenzie Financial Corporation. > The Great-West Life Assurance Company holds 3.7% (2013 – 3.6%) of the common shares of IGM Financial Inc., and IGM Financial Inc. holds 4.0% (2013 – 4.0%) of the common shares of Great-West Lifeco Inc. These financial statements of Power Financial 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 based upon the publicly disclosed consolidated ﬁnancial statements of Great-West Lifeco Inc. and IGM Financial Inc., both as at and for the year ended December 31, 2014, and the comparative year. The notes to Power Financial’s ﬁnancial statements are based upon the notes to the ﬁnancial statements of Great-West Lifeco Inc. and IGM Financial Inc. U S E O F S I G N I F I C A N T J U D G M E N T S , E S T I M AT E S A N D A S S U M P T I O N S In the preparation of the financial statements, management of the 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: > Management consolidates all subsidiaries and entities which it is determined that the Corporation has control. Control is evaluated according to the ability of the Corporation to direct the activities of the subsidiary or 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. > The actuarial assumptions made by management of Lifeco, include policyholder behaviour, mortality and morbidity of policyholders, which are used in the valuation of insurance and investment contract liabilities in accordance with the Canadian Asset Liability Method (Note 12). POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT 49 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) > Management of Lifeco uses judgment to evaluate the classification > The results reﬂect judgments of management of the Corporation and its of insurance and reinsurance contracts to determine whether these subsidiaries regarding the impact of prevailing global credit, equity and arrangements should be accounted for as insurance, investment or foreign exchange market conditions. service contracts. > The actuarial assumptions used in determining the expense and deﬁned beneﬁt obligations for the Corporation and its subsidiaries’ pension plans and other post-employment beneﬁts. Management of the Corporation and its subsidiaries review previous experience of its plan members and market conditions, including interest rates and inﬂation rates, in evaluating the assumptions used in determining the expense (Note 24). > Management of the Corporation and of its subsidiaries evaluate the synergies and future beneﬁts for initial recognition and measurement R E V E N U E R E C O G N I T I O N Interest income is accounted for on an accrual basis using the effective interest method for bonds and mortgage loans. Dividend income is recognized when the right to receive payment is established. This is the ex-dividend date for listed stocks and usually the notiﬁcation date or date when the shareholders have approved the dividend for private equity instruments. Interest income and dividend income are recorded in net investment income in the Consolidated Statements of Earnings (statements of earnings). of goodwill and intangible assets, as well as testing for impairment. The LIFECO determination of the carrying value and recoverable amount of the cash Premiums for all types of insurance contracts and contracts with limited generating units (to which goodwill and intangible assets are assigned mortality or morbidity risk are generally recognized as revenue when due to) relies upon the use of forecasts of future ﬁnancial results and other key and collection is reasonably assured. assumptions (Note 10). Investment property income includes rents earned from tenants under lease > Cash generating units for which goodwill has been assigned to, have been agreements and property tax and operating cost recoveries. Rental income determined by management of the Corporation and of its subsidiaries leases with contractual rent increases and rent-free periods are recognized as the lowest level at which goodwill is monitored for internal reporting on a straight-line basis over the term of the lease. purposes. Management of the Corporation and of its subsidiaries use judgment in determining the lowest level of monitoring (Note 10). Fee income primarily includes fees earned from the management of segregated fund assets, proprietary mutual fund assets, fees earned on > The Corporation and its subsidiaries operate within various tax jurisdictions administrative services only for Group health contracts and fees earned where signiﬁcant management judgments and estimates are required from management services. Fee income is recognized when the service is when interpreting the relevant tax laws, regulations and legislation in the performed, the amount is collectible and can be reasonably estimated. determination of the Corporation and of its subsidiaries’ tax provisions and the carrying amounts of its tax assets and liabilities (Note 16). Lifeco has sub-advisor arrangements where Lifeco retains the primary obligation with the client. As a result, fee income earned is reported on a gross > In the determination of the fair value of financial instruments, basis, with the corresponding sub-advisor expense recorded in operating and management of the Corporation and its subsidiaries exercise judgment in administrative expenses. the determination of fair value inputs, particularly those items categorized within Level 3 of the fair value hierarchy including the signiﬁcant observable IGM FINANCIAL inputs used in measuring investment properties (Note 26). Management fees are based on the net asset value of the investment fund > Legal and other provisions are recognized resulting from a past event which, in the judgment of management of the Corporation and its subsidiaries, has resulted in a probable outﬂow of economic resources which would be passed onto a third party to settle the obligation. Management of the Corporation and its subsidiaries use judgment to evaluate the possible outcomes and risks and determine the best estimate of the provision at the balance sheet date (Note 30). > Management of Lifeco uses independent qualified appraisal services or other 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 investment fund and securities transactions are recognized on a trade- date basis. Distribution fees derived from insurance and other ﬁnancial services transactions are recognized on an accrual basis. These management, administration and distribution fees are included in fee income in the statements of earnings. which include judgments and estimates. These appraisals are adjusted by C A S H A N D C A S H E Q U I VA L E N T S applying management judgments and estimates for material changes in property cash ﬂows, capital expenditures or general market conditions in determining the fair value of investment properties (Note 5). Cash and cash equivalents include cash, current operating accounts, overnight bank and term deposits with original maturities of three months or less, and ﬁxed income securities with an original term to maturity of three > The determination by IGM’s management of whether securitized months or less. mortgages are derecognized is based on the extent to which the risk and rewards of ownership are transferred (Note 13). I N V E S T M E N T S > The determination by IGM’s management of the estimated useful lives of deferred selling commissions (Note 10). > In the consolidated statements of cash ﬂows, purchases and sales of portfolio investments are recorded within investment activities due to the long-term nature of these investing activities. Investments include bonds, mortgage 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, or non-ﬁnancial instruments based on management’s intention relating to the purpose and nature of the instruments or the characteristics of the investments. The Corporation and its subsidiaries currently have not > Management of Lifeco uses judgments, such as the risks and beneﬁts classiﬁed any investments as held to maturity. associated with the transaction that are used in determining whether Lifeco retains the primar y obligation with a client in sub-advisor arrangements. Where Lifeco retains the risks and beneﬁts, revenue and Investments in bonds (including ﬁxed income securities), mortgage loans 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 expenses are recorded on a gross basis. and are recorded on a trade-date basis. 50 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT NOTE 2 BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) A ﬁnancial asset is designated as fair value through proﬁt or loss on initial curves, prepayment rates and other relevant factors. For bonds that are not recognition if it eliminates or signiﬁcantly reduces an accounting mismatch. traded in active markets, valuations are adjusted to reﬂect illiquidity, and such For Lifeco, changes in the fair value of ﬁnancial assets designated as fair adjustments are generally based on available market evidence. In the absence value through proﬁt or loss are generally offset by changes in insurance of such evidence, management’s best estimate is used. contract liabilities, since the measurement of insurance contract liabilities is determined with reference to the assets supporting the liabilities. 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 A ﬁnancial asset is classiﬁed as fair value through proﬁt or loss on initial security from the exchange where it is principally traded. Fair values for shares recognition if it is part of a portfolio that is actively traded for the purpose of for which there is no active market are determined by discounting expected earning investment income. Fair value through proﬁt or loss investments are recognized at fair value on the balance sheets with realized and unrealized gains and losses reported in the statements of earnings. Available-for-sale investments are recognized at fair value on the balance sheets with unrealized gains and losses recorded in other comprehensive income. Realized gains and losses are reclassiﬁed from 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 and its subsidiaries obtain quoted prices in active markets, when available, for identical assets at the balance sheets dates to measure shares at fair value in its fair value through proﬁt or loss and available-for-sale portfolios. other comprehensive income and recorded in the statements of earnings Mortgage loans and bonds classiﬁed as loans and receivables For disclosure when the available-for-sale investment is sold or impaired. purposes only, fair values for bonds and mortgage loans, classiﬁed as loans Investments in mortgage 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. Impairments and realized gains and losses on the sale of investments classified as loans and receivables, are determined by discounting expected future cash ﬂows using current market rates. Valuation inputs typically include benchmark yields and risk-adjusted spreads based on current lending activities and market activity. and receivables are recorded in net investment income in the statements Investment properties Fair values for investment properties are determined of earnings. Investment properties are real estate held to earn rental income or for capital appreciation. Investment properties are initially measured at cost and subsequently carried at fair value on the balance sheets. All changes in fair value are recorded as net investment income in the statements of earnings. Properties held to earn rental income or for capital appreciation that have an insigniﬁcant portion that is owner occupied or where there is no intent to occupy on a long-term basis are classiﬁed as investment properties. Properties that do not meet these criteria are classiﬁed as owner-occupied properties. Property that is leased that would otherwise be classiﬁed as using independent qualiﬁed appraisal services and include adjustments by Lifeco management 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. investment property if owned is also included within investment properties. Impairment Investments are reviewed regularly on an individual basis to Loans to policyholders of Lifeco are classiﬁed as loans and receivables. Loans to policyholders are shown at their unpaid principal balance and are fully secured by the cash surrender values of the policies. The carrying value of loans to policyholders approximates fair value. 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 fair value. Bonds at fair value through proﬁt or loss and available for sale Fair values for bonds classiﬁed at 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 such factors as the issuer’s industry, the security’s rating, term, coupon rate and position in the capital structure of the issuer, as well as yield curves, credit 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. Investments are deemed to be impaired when there is no longer reasonable assurance of collection. 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. For impaired mortgage loans, and bonds classiﬁed as loans and receivables, provisions are established or impairments recorded to adjust the carrying value to the net realizable amount. Wherever possible, the fair value of collateral underlying the loans or observable market price is used to establish net realizable value. For impaired available-for-sale bonds, the accumulated loss recorded in other comprehensive income is reclassiﬁed to net investment income. Impairments on available-for-sale debt instruments are reversed if there is objective evidence that a permanent recovery has occurred. All gains and losses on bonds, mortgage loans and shares 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, interest is no longer accrued and previous interest accruals are reversed. Impairment losses on available-for- sale shares are recorded if the loss is signiﬁcant or prolonged and subsequent losses are recorded in net earnings. POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT 51 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Fair value movement on the assets supporting insurance contract liabilities process, including, but not limited to, collectability of amounts due under the is a major factor in the movement of insurance contract liabilities. Changes terms of the contract. The carrying amount of a reinsurance asset is adjusted in the fair value of bonds designated or classified as fair value through through an allowance account with any impairment loss being recorded in proﬁt or loss that support insurance contract liabilities are largely offset by the statements of earnings. corresponding changes in the fair value of liabilities, except when the bond has been deemed impaired. Any gains or losses on buying reinsurance are recognized in the statement of earnings immediately at the date of purchase in accordance with the Securities lending Lifeco engages in securities lending through its securities Canadian Asset Liability Method. custodians as lending agents. Loaned securities are not derecognized, and continue to be reported within investments, as Lifeco retains substantial risks and rewards and economic beneﬁts related to the loaned securities. 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. T R A N S AC T I O N C O S T S Transaction costs are expensed as incurred for ﬁnancial instruments classiﬁed or designated as fair value through profit or loss. Transaction costs for ﬁnancial assets classiﬁed as available for sale or loans and receivables are added to the value of the instrument at acquisition, and taken into net earnings using the effective interest rate method for those allocated to loans and 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 rate method. OW N E R - O C C U P I E D P R O P E R T I E S A N D C A P I TA L A S S E T S Owner-occupied properties and capital assets are carried at cost less accumulated depreciation and impairments. Depreciation is charged to write off the cost of assets, using the straight-line method, over their estimated useful lives, on the following bases: > Building, owner-occupied properties > Equipment, furniture and ﬁxtures > Other capital assets 10–50 years 3–17 years 3–10 years F U N D S H E L D BY C E D I N G I N S U R E R S / F U N D S H E L D U N D E R R E I N S U R A N C E C O N T R AC T S 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 Funds held by ceding insurers are assets that would normally be paid to amount may not be recoverable. Lifeco but are withheld by the cedant to reduce potential credit risk. Under certain forms of reinsurance contracts it is customary for the cedant to OT H E R A S S E T S retain amounts on a funds-withheld basis supporting the insurance contract liabilities ceded. For the funds-withheld assets where the underlying asset portfolio is managed by Lifeco, the credit risk is retained by Lifeco. The funds- withheld balance where Lifeco assumes the credit risk is measured at the fair Other assets include accounts receivable, prepaid expenses, deferred acquisition costs and miscellaneous other assets which are measured at amortized cost. Deferred acquisition costs relating to investment contracts are recognized as assets if the costs are incremental and incurred due to the value of the underlying asset portfolio. See Note 6 for funds held by ceding contract being issued. insurers that are managed by Lifeco. Other funds held by ceding insurers are general obligations of the cedant and serve as collateral for insurance contract liabilities assumed from cedants. Funds-withheld assets on these contracts do not have ﬁxed maturity dates, their release generally being dependent on the run-off of the corresponding insurance contract liabilities. On the liability side, funds held under reinsurance contracts consist mainly of amounts retained by Lifeco from ceded business written on a funds-withheld basis. Lifeco withholds assets related to ceded insurance contract liabilities in order to reduce credit risk. R E I N S U R A N C E C O N T R AC T S Lifeco, in the normal course of business, is a user of reinsurance in order to limit the potential for losses arising from certain exposures and a provider of reinsurance. Assumed reinsurance refers to the acceptance of B U S I N E S S C O M B I N AT I O N S , G O O DW I L L A N D I N TA N G I B L E A S S E T S Business combinations are accounted for using the acquisition method. Goodwill represents the excess of purchase consideration over the fair value of net assets acquired. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Intangible assets comprise ﬁnite life and indeﬁnite life intangible assets. Finite life intangible assets include the value of technology and software, customer contract-related and deferred selling commissions. 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 on the following basis: i) technology and software (5 to 10 years) certain insurance risks by Lifeco underwritten by another company. Ceded and ii) customer contract-related (9 to 20 years). reinsurance refers to the transfer of insurance risk, along with the respective Commissions paid by IGM on the sale of certain mutual funds are deferred and premiums, to one or more reinsurers who will share the risks. To the extent amortized over their estimated useful lives, not exceeding a period of seven that assuming reinsurers are unable to meet their obligations, Lifeco remains years. Commissions paid on the sale of deposits are deferred and amortized liable to its policyholders for the portion reinsured. Consequently, allowances over their estimated useful lives, not exceeding a period of ﬁve years. When are made for reinsurance contracts which are deemed uncollectible. a client redeems units in mutual funds that are subject to a deferred sales Reinsurance contracts are insurance contracts and undergo the classiﬁcation as described within the Insurance and Investment Contract Liabilities section of this note. 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 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 investment fund units or shares 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 impairment. Lifeco considers various factors in the impairment evaluation in relation to its carrying value. 52 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT NOTE 2 BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Indeﬁnite life intangible assets include brands, trademarks and trade names, Investment contracts are contracts that carry ﬁnancial risk, which is the some customer contracts, the shareholders’ portion of acquired future risk of a possible future change in one or more of the following: interest rate, participating account profit and mutual fund management contracts. commodity price, foreign exchange rate, or credit rating. Refer to Note 21 for Amounts are classiﬁed as indeﬁnite life intangible assets when based on a discussion on risk management. 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 stability and competitive position. Measurement Insurance contract liabilities represent the amounts required, in addition to future premiums and investment income, to provide for future beneﬁt payments, policyholder dividends, commission and policy administrative expenses for all insurance and annuity policies in force with Lifeco. The Appointed Actuaries of Lifeco’s subsidiary companies are Impairment testing Goodwill and indeﬁnite life intangible assets are tested responsible for determining the amount of the liabilities to make appropriate for impairment annually or more frequently if events indicate that impairment provisions for Lifeco’s obligations to policyholders. The Appointed Actuaries may have occurred. Intangible assets that were previously impaired are determine the liabilities for insurance and investment contracts using reviewed at each reporting date for evidence of reversal. In the event that generally accepted actuarial practices, according to the standards established certain conditions have been met, the Corporation would be required to by the Canadian Institute of Actuaries. The valuation uses the Canadian Asset reverse the impairment charge or a portion thereof. Liability Method. This method involves the projection of future events in order Goodwill and indeﬁnite life intangible assets have been allocated to groups of cash generating units (CGU), representing the lowest level that the assets 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. are monitored for internal reporting purposes. Goodwill and indeﬁnite life In the computation of insurance contract liabilities, valuation assumptions intangible assets are tested for impairment by comparing the carrying value have been made regarding rates of mortality/morbidity, investment of the groups of CGU to the recoverable amount to which the goodwill has returns, levels of operating expenses, rates of policy termination and been allocated. Intangible assets are tested for impairment by comparing the rates of utilization of elective policy options or provisions. The valuation asset’s carrying amount to its recoverable amount. assumptions use best estimates of future experience together with 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 of disposal or value in use, which is calculated using the present value of estimated future cash ﬂows expected to be generated. S E G R E G AT E D F U N D S a margin for adverse deviation. These margins are necessary to provide for possibilities of misestimation and/or future deterioration in the best estimate assumptions and provide reasonable assurance that insurance contract liabilities cover a range of possible outcomes. Margins are reviewed periodically for continued appropriateness. Investment contract liabilities are measured at fair value through proﬁt and loss, except for certain annuity products measured at amortized cost. Segregated fund assets and liabilities arise from contracts where all ﬁnancial risks associated with the related assets are borne by policyholders and are D E R E C O G N I T I O N O F S E C U R I T I Z E D M O R TG AG E S presented separately in the balance sheets. The assets and liabilities are IGM enters into transactions where it transfers ﬁnancial assets recognized set equal to the fair value of the underlying asset portfolio. Investment on its balance sheets. The determination of whether the ﬁnancial assets income and changes in fair value of the segregated fund assets are offset by are derecognized is based on the extent to which the risks and rewards of corresponding changes in the segregated fund liabilities. ownership are transferred. I N S U R A N C E A N D I N V E S TM ENT CO NTR AC T LIA B I LITI E S Contract classiﬁcation When signiﬁcant insurance risk exists, Lifeco’s products are classified at contract inception as insurance contracts, in accordance with IFRS 4, Insurance Contracts (IFRS 4). 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. Refer to Note 12 for a discussion of insurance risk. In the absence of signiﬁcant insurance risk, the contract is classiﬁed as an investment contract or service contract. Investment contracts with discretionary participating features are accounted for in accordance with IFRS 4 and investment contracts without discretionary participating features are accounted for in accordance with IAS 39, Financial Instruments: Recognition and Measurement. Lifeco has not classified any contracts as investment contracts with discretionary participating features. Investment contracts may be reclassified as insurance contracts after 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. OT H E R F I N A N C I A L L I A B I L I T I E S 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. 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 inception if insurance risk becomes signiﬁcant. A contract that is classiﬁed as an insurance contract at contract inception remains as such until all rights to exceed 20 years. and obligations under the contract are extinguished or expire. POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT 53 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) R E P U R C H A S E AG R E E M E N T S Current income tax Current income tax is based on taxable income for Lifeco enters into repurchase agreements with third-party broker-dealers in the year. Current tax liabilities (assets) for the current and prior periods are which Lifeco sells securities and agrees to repurchase substantially similar measured at the amount expected to be paid to (recovered from) the taxation securities at a speciﬁed date and price. As substantially all of the risks and authorities using the rates that have been enacted or substantively enacted rewards of ownership of assets are retained, Lifeco does not derecognize at the balance sheet date. Current tax assets and current tax liabilities are the assets. Lifeco accounts for certain forward-settling to-be-announced “TBA” security transactions as derivatives as it does not regularly accept delivery of such securities when issued. P E N S I O N P L A N S A N D OT H E R P O S T- E M P LOY M E N T B E N E F I T S The Corporation and its subsidiaries maintain funded deﬁned beneﬁt pension plans for certain employees and advisors, unfunded supplementary employee retirement plans for certain employees, and unfunded post-employment health, dental and life insurance beneﬁts to eligible employees, advisors and their dependants. The Corporation’s subsidiaries also maintain deﬁned contribution pension plans for eligible employees and advisors. offset, if a legally enforceable right exists to offset the recognized amounts and the entity intends either to settle on a net basis, or to realize the assets and settle the liabilities simultaneously. A provision for tax uncertainties which meets 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 The deﬁned beneﬁt pension plans provide pensions based on length of service unused tax attributes can be utilized. and ﬁnal average earnings. Deferred tax assets and liabilities are measured at the tax rates expected to The cost of the deﬁned beneﬁt plans earned by eligible employees and advisors apply in the year when the asset is realized or the liability is settled, based on is actuarially determined using the projected unit credit method prorated tax rates and tax laws that have been enacted or substantively enacted at the on service, based upon management of the Corporation and its subsidiaries’ balance sheet date. Deferred tax assets and deferred tax liabilities are offset, assumptions about discount rates, compensation increases, retirement ages if a legally enforceable right exists to net current tax assets against current of employees, mortality and expected health care costs. Any changes in these tax liabilities and the deferred taxes relate to the same taxable entity and the assumptions will impact the carrying amount of deﬁned beneﬁt obligations. same taxation authority. 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 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 The Corporation and its subsidiaries determine the net interest component each balance sheet date and are recognized to the extent that it has become of the pension expense for the period by applying the discount rate used to probable that future taxable proﬁts will allow the deferred tax asset to measure the accrued beneﬁt liability at the beginning of the annual period be recovered. to the net accrued beneﬁt liability. The discount rate used to value liabilities is determined using a yield curve of AA corporate debt securities. 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. Net interest costs, current service costs, past service costs and curtailment gains or losses are included in operating and administrative expenses. Deferred tax liabilities are recognized for taxable temporary differences arising on investments in the subsidiaries, jointly controlled corporations and associates, except where the group controls the timing of the reversal of the temporary differences and it is probable that the temporary differences will not reverse in the foreseeable future. Remeasurements arising from deﬁned beneﬁt plans represent actuarial D E R I VAT I V E F I N A N C I A L I N S T R U M E N T S gains and losses, and the actual return on plan assets, less interest calculated The Corporation and its subsidiaries use derivative products as risk at the discount rate and changes in the asset ceiling. Remeasurements are management instruments to hedge or manage asset, liability and capital recognized immediately through other comprehensive income and are not positions, including revenues. The Corporation and its subsidiaries’ policy reclassiﬁed to net earnings. guidelines prohibit the use of derivative instruments for speculative The accrued beneﬁt asset (liability) represents the plan surplus (deﬁcit) and trading purposes. is included in other assets or other liabilities. Payments to the deﬁned contribution plans are expensed as incurred. I N C O M E TA X E S 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 The income tax expense for the period represents the sum of current income and realized gains and losses are recorded in net investment income on the tax and deferred income tax. Income tax is recognized as an expense or statements of earnings. For derivatives designated as hedging instruments, income in the statements of earnings, except to the extent that it relates unrealized and realized gains and losses are recognized according to the to items that are not recognized in the statements of earnings (whether in nature of the hedged item. other comprehensive income or directly in equity), in which case the income tax is also recognized in other comprehensive income or directly in equity. 54 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT NOTE 2 BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Derivatives are valued using market transactions and other market evidence E Q U I T Y whenever possible, including market-based inputs to models, broker or dealer Financial instruments issued by Power Financial are classiﬁed as stated capital quotations or alternative pricing sources with reasonable levels of price if they represent a residual interest in the assets of the Corporation. Preferred transparency. When models are used, the selection of a particular model shares are classiﬁed as equity if they are non-redeemable, or retractable only to value a derivative depends on the contractual terms of, and speciﬁc risks at the Corporation’s option and any dividends are discretionary. Costs that are inherent in, the instrument, as well as the availability of pricing information directly attributable to the issue of share capital are recognized as a deduction in the market. The Corporation and its subsidiaries generally use similar from retained earnings, net of income tax. models to value similar instruments. Valuation models require a variety of inputs, including contractual terms, market prices and rates, yield curves, credit curves, measures of volatility, prepayment rates and correlations of such inputs. Reser ves are composed of share-based compensation and other comprehensive income. Share-based compensation reserves represent the vesting of share options less share options exercised. Other comprehensive income represents the total of the unrealized foreign exchange gains (losses) To qualify for hedge accounting, the relationship between the hedged on translation of foreign operations, the unrealized gains (losses) on available- item and the hedging instrument must meet several strict conditions on for-sale assets, the unrealized gains (losses) on cash ﬂow hedges, and the documentation, probability of occurrence, hedge effectiveness and reliability share of other comprehensive income of jointly controlled corporations of measurement. If these conditions are not met, then the relationship and associates. does not qualify for hedge accounting treatment and both the hedged item and the hedging instrument are reported independently, as if there was no Non-controlling interests represent the proportion of equity that is attributable to minority shareholders. hedging relationship. Where a hedging relationship exists, the Corporation and its subsidiaries S H A R E - B A S E D PAY M E N T S document all relationships between hedging instruments and hedged items, The fair value-based method of accounting is used for the valuation of as well as its risk management objectives and strategy for undertaking various compensation expense for options granted to employees. Compensation hedge transactions. This process includes linking derivatives that are used in expense is recognized as an increase to operating and administrative expenses hedging transactions to speciﬁc assets and liabilities on the balance sheets in the statements of earnings over the vesting period of the granted options, or to speciﬁc ﬁrm commitments or forecasted transactions. The Corporation with a corresponding increase in share-based compensation reserves. When and its subsidiaries also assess, both at the hedge’s inception and on an the stock options are exercised, the proceeds, together with the amount ongoing basis, whether derivatives that are used in hedging transactions are recorded in share-based compensation reserves, are added to the stated effective in offsetting changes in fair values or cash ﬂows of hedged items. capital of the entity issuing the corresponding shares. Hedge effectiveness is reviewed quarterly through correlation testing. The Corporation and its subsidiaries recognize a liability for cash-settled Fair value hedges For fair value hedges, changes in fair value of both the awards, including those granted under Performance Share Unit plans and hedging instrument and the hedged item are recorded in net investment the Deferred Share Unit plans. Compensation expense is recognized as income and consequently any ineffective portion of the hedge is recorded an increase to operating and administrative expenses in the statement of immediately in net investment income. Cash ﬂow hedges For cash ﬂow hedges, the effective portion of the change in fair value of the hedging instrument is recorded in other comprehensive income, while the ineffective portion is recognized immediately in net investment 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 is no longer expected to occur. Net investment hedges For net investment hedges, the effective portion of changes in the fair value of the hedging instrument is recorded in other comprehensive income while the ineffective portion is recognized immediately in net investment income. Hedge accounting is discontinued when the hedging no longer qualiﬁes for hedge accounting. E M B E D D E D D E R I VAT I V E S earnings, net of related hedges, and a liability is recognized on the balance sheets over the period, if any. The liability is remeasured at fair value at each reporting period with the change in the liability recorded in operating and administrative expenses. F O R E I G N C U R R E N C Y T R A N S L AT I O N 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. An embedded derivative is a component of a host contract that modiﬁes Translation of net investment in foreign operations Assets and liabilities the cash flows of the host contract in a manner similar to a derivative, are translated into Canadian dollars at the rate of exchange prevailing at according to a speciﬁed interest rate, ﬁnancial instrument price, foreign the balance sheet dates and all revenues and expenses are translated at an exchange rate, underlying index or other variable. Embedded derivatives are average of daily rates. Unrealized foreign currency translation gains and losses treated as separate contracts and are recorded at fair value if their economic on the Corporation’s net investment in its foreign operations and jointly characteristics and risks are not closely related to those of the host contract controlled corporations and associates are presented as a component of other and the host contract is not itself recorded at fair value through the statement comprehensive income. Unrealized foreign currency translation gains and of earnings. Embedded derivatives that meet the deﬁnition of an insurance losses are recognized in earnings when there has been a disposal of a foreign contract are accounted for and measured as an insurance contract. operation, jointly controlled corporation or associate. POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT 55 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) P O L I C Y H O L D E R B E N E F I T S F U T U R E AC C O U N T I N G C H A N G E S Policyholder beneﬁts include beneﬁts and claims on life insurance contracts, The Corporation and its subsidiaries continuously monitor the potential maturity payments, annuity payments and surrenders. Gross beneﬁts and changes proposed by the International Accounting Standards Board (IASB) claims for life insurance contracts include the cost of all claims arising during and analyze the effect that changes in the standards may have on their the year and settlement of claims. Death claims and surrenders are recorded consolidated ﬁnancial statements when they become effective. on the basis of notiﬁcations received. Maturities and annuity payments are recorded when due. L E A S E S Leases that do not transfer substantially all the risks and rewards of ownership are classiﬁed as operating leases. Payments made under operating leases, where the Corporation and its subsidiaries are the lessee, are charged to net earnings over the period of use. Where the Corporation and its subsidiaries are the lessor under an operating lease for its investment property, the assets subject to the lease arrangement are presented within the balance sheets. Income from these leases is IFRS 9 — FINANCIAL INSTRUMENTS In July 2014 the IASB issued a ﬁnal version of IFRS 9, Financial Instruments to replace IAS 39, Financial Instruments: Recognition and Measurements, the current standard for accounting for ﬁnancial instruments. The standard was completed in three separate phases: > Classiﬁcation and measurement: this phase requires that ﬁnancial assets be classiﬁed at either amortized cost or fair value on the basis of the entity’s business model for managing the ﬁnancial assets and the contractual cash ﬂow characteristics of the ﬁnancial assets. > Impairment methodology: this phase replaces the current incurred loss model for impairment of ﬁnancial assets with an expected loss model. recognized in the statements of earnings on a straight-line basis over the > Hedge accounting: this phase replaces the current rule-based hedge lease term. E A R N I N G S P E R C O M M O N S H A R E 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. accounting requirements in IAS 39 with guidance that more closely aligns the accounting with an entity’s risk management activities. The standard is effective January 1, 2018. The Corporation and its subsidiaries are evaluating the impact of the adoption of this standard. IFRS 15 — REVENUE FROM CONTRACTS WITH CUSTOMERS In May 2014, the IASB issued IFRS 15, Revenue from Contracts with Customers, which provides a single model for entities to use in accounting for revenue arising from contracts with customers. The model requires an entity to recognize revenue as the goods or services are transferred to customers in an amount that reﬂects the expected consideration. The revenue recognition requirements in IFRS 15 do not apply to the revenue arising from insurance contracts, leases and ﬁnancial instruments. The standard is effective January 1, 2017. The Corporation and its subsidiaries are evaluating the impact of the adoption of this standard. NOTE 3 BUSINESS ACQUISITIONS J . P. M O R G A N R E T I R E M E N T P L A N S E R V I C E S On August 29, 2014, Lifeco, through its wholly owned subsidiary Great-West Financial, completed the acquisition of all the voting equity interest in the J.P. Morgan Retirement Plan Services’ (RPS) large-market record-keeping business. The amounts assigned to the assets acquired, goodwill, liabilities assumed and contingent consideration on August 29, 2014 and reported as at December 31, 2014 are below: DECEMBER 31 Assets acquired and goodwill Other assets Intangible assets Goodwill Total assets acquired and goodwill Liabilities assumed and contingent consideration Other liabilities Contingent consideration Total liabilities assumed and contingent consideration 56 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT 2014 41 18 36 95 29 35 64 NOTE 3 BUSINESS ACQUISITIONS (CONTINUED) During the fourth quarter of 2014, Lifeco substantially completed its ﬁnancial statements has been adjusted in the fourth quarter of 2014, as a comprehensive evaluation of the fair value of the net assets acquired result of valuations received during the measurement period. Adjustments from RPS and the purchase price allocation. Initial goodwill of $55 million were made to the provisional amounts disclosed in the September 30, 2014 recognized upon the acquisition of RPS on August 29, 2014 in the Business interim condensed consolidated ﬁnancial statements for the recognition Acquisitions note to the September 30, 2014 interim condensed consolidated and measurement of intangible assets, contingent consideration and other liabilities. The following provides the change in the carrying value of the goodwill on the acquisition of RPS to December 31, 2014: Initial RPS goodwill, previously reported Recognition and measurement of intangible assets Adjustment to contingent consideration Adjustment to other liabilities Adjusted balance 55 (18) (2) 1 36 The goodwill represents the excess of the purchase price over the fair value The results of operations of RPS are included in the ﬁnancial statements from of the net assets acquired, representing the synergies or future economic the date of acquisition. beneﬁts arising from other assets acquired that are not individually identiﬁed and separately recognized in the acquisition of RPS. The goodwill is not deductible for tax purposes. Lifeco will ﬁnalize the purchase accounting in the ﬁrst six months of 2015. At the date of the acquisition, RPS was the named defendant in four pending lawsuits. Per the terms of the acquisition, Lifeco is indemniﬁed from any and all losses incurred in conjunction with the pending lawsuits. Due to Lifeco’s limited involvement with the pending legal proceedings, it is unable to make an estimate of the possible loss and related indemnity associated with these claims. I R I S H L I F E G R O U P L I M I T E D On July 18, 2013, Lifeco, through its wholly owned subsidiary Canada Life Limited, completed the acquisition of all of the shares of Irish Life. The Corporation presented the allocation of the purchase price to the amounts of assets acquired, goodwill and liabilities assumed in Note 4 to the December 31, 2013 ﬁnancial statements. During the three months ended June 30, 2014, Lifeco completed experience studies on certain insurance contract liabilities assumed on acquisition. There were no changes to the amounts reported in the Corporation’s December 31, 2013 consolidated audited ﬁnancial statements. NOTE 4 CASH AND CASH EQUIVALENTS DECEMBER 31 Cash Cash equivalents Cash and cash equivalents 2014 1,698 2,291 3,989 2013 1,930 2,414 4,344 At December 31, 2014, cash amounting to $142 million was restricted for use by the subsidiaries ($112 million at December 31, 2013). POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT 57 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 INVESTMENTS C A R RY I N G VA LU E S A N D FA I R VA LU E S Carrying values and estimated fair values of investments are as follows: DECEMBER 31 Bonds Designated as fair value through proﬁt or loss [1] Classiﬁed as fair value through proﬁt or loss [1] Available for sale Loans and receivables Mortgage loans Loans and receivables Designated as fair value through proﬁt or loss [1] Shares Designated as fair value through proﬁt or loss [1] Available for sale [2] Investment properties Loans to policyholders CARRYING VALUE 77,790 2,167 10,501 13,178 2014 FAIR VALUE 77,790 2,167 10,501 14,659 103,636 105,117 CARRYING VALUE 2013 FAIR VALUE 68,051 68,051 2,053 8,370 11,855 90,329 2,053 8,370 12,672 91,146 27,199 29,016 24,591 25,212 366 366 324 324 27,565 29,382 24,915 25,536 6,697 620 7,317 4,613 7,711 6,697 620 7,317 4,613 7,711 7,297 749 8,046 4,288 7,332 7,297 749 8,046 4,288 7,332 150,842 154,140 134,910 136,348 [1] A ﬁnancial asset is designated as fair value through proﬁt or loss on initial recognition if it eliminates or signiﬁcantly reduces an accounting mismatch. For Lifeco changes in the fair value of ﬁnancial assets designated as fair value through proﬁt or loss are generally offset by changes in insurance contract liabilities, since the measurement of insurance contract liabilities is determined with reference to the assets supporting the liabilities. A ﬁnancial asset is classiﬁed as fair value through proﬁt or loss on initial recognition if it is part of a portfolio that is actively traded for the purpose of earning investment income. [2] Fair value of certain shares available for sale cannot be reliably measured, therefore these investments are held at cost. B O N D S A N D M O R TG AG E S Carrying value of bonds and mortgages due over the current and non-current term is as follows: DECEMBER 31, 2014 Bonds Mortgage loans DECEMBER 31, 2013 Bonds Mortgage loans 1 YEAR OR LESS 1-5 YEARS OVER 5 YEARS TOTAL TERM TO MATURIT Y CARRYING VALUE 11,107 2,546 13,653 19,520 12,010 31,530 72,644 12,630 85,274 103,271 27,186 130,457 CARRYING VALUE 1 YEAR OR LESS 1-5 YEARS OVER 5 YEARS TOTAL TERM TO MATURIT Y 9,571 2,465 12,036 17,774 11,472 29,246 62,616 10,635 73,251 89,961 24,572 114,533 The table shown above excludes the carrying value of impaired bonds and mortgages, as the ultimate timing of collectability is uncertain. 58 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT NOTE 5 INVESTMENTS (CONTINUED) I M PA I R E D I N V E S T M E N T S A N D A L LOWA N C E F O R C R E D I T LO S S E S Carrying amount of impaired investments is as follows: DECEMBER 31 Impaired amounts by classiﬁcation Fair value through proﬁt or loss Available for sale Loans and receivables Total 2014 355 14 17 386 2013 384 19 36 439 The above carrying values for loans and receivables are net of allowances for credit losses of $19 million as at December 31, 2014 ($26 million as at December 31, 2013). The allowance for credit losses is supplemented by the provision for future credit losses included in insurance contract liabilities. N E T I N V E S T M E N T I N C O M E YEAR ENDED DECEMBER 31, 2014 Regular net investment income Investment income earned Net realized gains Net recovery (provision) for credit losses (loans and receivables) Other income (expenses) Changes in fair value through proﬁt or loss Net investment income YEAR ENDED DECEMBER 31, 2013 Regular net investment income Investment income earned Net realized gains Net recovery (provision) for credit losses (loans and receivables) Other income (expenses) Changes in fair value through proﬁt or loss Net investment income BONDS MORTGAGE LOANS SHARES INVESTMENT PROPERTIES OTHER TOTAL 4,115 65 (9) – 4,171 6,605 996 40 (8) (15) 1,013 2 10,776 1,015 239 11 – – 250 482 732 319 – – (75) 244 262 506 457 6,126 – – (97) 360 174 534 116 (17) (187) 6,038 7,525 13,563 BONDS MORTGAGE LOANS SHARES INVESTMENT PROPERTIES OTHER TOTAL 3,733 94 – – 3,827 (3,851) (24) 927 55 (2) (3) 977 3 980 242 8 – – 250 860 1,110 276 – – (68) 208 152 360 461 – – (88) 373 (138) 235 5,639 157 (2) (159) 5,635 (2,974) 2,661 Investment income earned comprises income from investments that Investment properties income includes rental income earned on investment are classiﬁed as available for sale, loans and receivables and classiﬁed or properties, ground rent income earned on leased and sub-leased land, fee designated as fair value through proﬁt or loss. Investment income from bonds recoveries, lease cancellation income, and interest and other investment and mortgage loans includes interest income and premium and discount income earned on investment properties. amortization. Income from shares includes dividends and distributions. I N V E S T M E N T P R O P E R T I E S The carrying value of investment properties and changes in the carrying value of investment properties are as follows: DECEMBER 31 Balance, beginning of year Business acquisitions Additions Change in fair value through proﬁt or loss Disposals Transferred to owner-occupied properties Foreign exchange rate changes and other Balance, end of year 2014 4,288 – 127 262 (98) (13) 47 2013 3,572 248 182 152 (82) – 216 4,613 4,288 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT 59 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 INVESTMENTS (CONTINUED) T R A N S F E R R E D F I N A N C I A L A S S E T S the collateral deposited with Lifeco’s lending agent is cash collateral of Lifeco engages in securities lending to generate additional income. Lifeco’s $16 million as at December 31, 2014 ($20 million as at December 31, 2013). In securities custodians are used as lending agents. Collateral, which exceeds the addition, the securities lending agent indemniﬁes Lifeco against borrower fair value of the loaned securities, is deposited by the borrower with Lifeco’s risk, meaning that the lending agent agrees contractually to replace securities lending agent and maintained by the lending agent until the underlying not returned due to a borrower default. As at December 31, 2014, Lifeco had security has been returned. The fair value of the loaned securities is monitored loaned securities (which are included in investments) having a fair value of on a daily basis by the lending agent, who obtains or refunds additional $5,890 million ($5,204 million as at December 31, 2013). collateral as the fair value of the loaned securities ﬂuctuates. Included in NOTE 6 FUNDS HELD BY CEDING INSURERS Included in funds held by ceding insurers of $12,154 million at December 31, 2014 During 2014, an indirect wholly owned reinsurance subsidiary of Lifeco entered ($10,832 million at December 31, 2013) are agreements with Standard Life into an agreement to assume by way of indemnity reinsurance a block of Assurance Limited (Standard Life) and a Dutch insurer. payout annuities. Under the agreement, Lifeco’s subsidiary is required to put During 2008, Canada Life International Re Limited (CLIRE), Lifeco’s indirect wholly owned Irish reinsurance subsidiary, signed an agreement with amounts on deposit with the counterparty and the subsidiary has assumed the credit risk on the portfolio of assets included in the amounts on deposit. Standard Life, a U.K.-based provider of life, pension and investment products, The amounts on deposit for both agreements are included in funds held by to assume by way of indemnity reinsurance a large block of payout annuities. ceding insurers on the balance sheets. Income and expenses arising from Under the agreement, CLIRE is required to put amounts on deposit with the agreements are included in net investment income on the statements Standard Life and CLIRE has assumed the credit risk on the portfolio of assets of earnings. included in the amounts on deposit. At December 31, 2014 Lifeco had amounts on deposit of $10,758 million ($9,848 million at December 31, 2013) for these two agreements. The details of the funds on deposit and related credit risk on the funds related to these agreements are as follows: CARRYING VALUES AND ESTIMATED FAIR VALUES DECEMBER 31 Cash and cash equivalents Bonds Other assets Supporting: Reinsurance liabilities Surplus CARRYING VALUE 200 2014 FAIR VALUE 200 10,397 10,397 161 161 10,758 10,758 10,386 10,386 372 372 10,758 10,758 CARRYING VALUE 70 9,619 159 9,848 9,402 446 9,848 FAIR VALUE BY HIERARCHY LEVEL The following presents the amounts on deposit for funds held by ceding insurers measured at fair value on a recurring basis by hierarchy level: DECEMBER 31 LEVEL 1 LEVEL 2 LEVEL 3 Cash and cash equivalents Bonds Total 200 – 200 – 10,397 10,397 – – – 2014 TOTAL 200 10,397 10,597 LEVEL 1 LEVEL 2 LEVEL 3 70 – 70 – 9,619 9,619 – – – 2013 FAIR VALUE 70 9,619 159 9,848 9,402 446 9,848 2013 TOTAL 70 9,619 9,689 60 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT NOTE 6 FUNDS HELD BY CEDING INSURERS (CONTINUED) CARRYING VALUE OF BONDS BY ISSUER AND INDUSTRY 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 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 Short-term bonds Total bonds ASSET QUALITY The following table provides details of the carrying value of the bond portfolio by credit rating: BOND PORTFOLIO BY CREDIT RATING DECEMBER 31 AAA AA A BBB BB and lower Total bonds 2014 49 16 25 1,923 548 167 260 107 1,944 1,087 110 168 862 174 389 778 231 1,411 130 18 10,397 2014 2,312 2,944 4,194 596 351 10,397 2013 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 2013 2,669 2,382 3,666 546 356 9,619 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT 61 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 INVESTMENTS IN JOINTLY CONTROLLED CORPORATIONS AND ASSOCIATES Investments in jointly controlled corporations and associates are composed Investments in jointly controlled corporations and associates also include principally of the Corporation’s 50% interest in Parjointco. As at December 31, Lifeco’s 30.4% investment (same as December 31, 2013), held through Irish Life, 2014, Parjointco held a 55.5% equity interest in Pargesa (55.6% as at in Allianz Ireland, an unlisted general insurance company operating in Ireland. December 31, 2013), representing 75.4% of the voting rights. Carrying values of the investments in jointly controlled corporations and associates are as follows: DECEMBER 31 PARJOINTCO OTHER TOTAL PARJOINTCO OTHER 2014 Carrying value, beginning of year Business acquisitions Share of earnings Share of other comprehensive income (loss) Dividends Other Carrying value, end of year 2,437 – 187 (97) (75) (12) 2,440 227 – 24 (20) (24) 30 237 2,664 2,121 – 211 (117) (99) 18 – 114 260 (63) 5 2,677 2,437 – 207 20 14 (15) 1 227 2013 TOTAL 2,121 207 134 274 (78) 6 2,664 The net asset value of the Corporation’s indirect interest in Pargesa is approximately $2,878 million as at December 31, 2014. The carrying value of the investment in Pargesa is $2,440 million, or $1,942 million excluding the unrealized net gains of its underlying investments. Pargesa’s ﬁnancial information as at and for the year ended December 31, 2014 can be obtained in its publicly available information. NOTE 8 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 OWNER- OCCUPIED PROPERTIES CAPITAL ASSETS 2013 TOTAL are as follows: DECEMBER 31 Cost, beginning of year Business acquisitions Additions Transferred from investment properties Disposal/retirements Change in foreign exchange rates and other OWNER- OCCUPIED PROPERTIES CAPITAL ASSETS 693 – 15 13 – 11 968 – 105 – (17) 6 2014 TOTAL 1,661 – 120 13 (17) 17 Cost, end of year 732 1,062 1,794 Accumulated amortization, beginning of year Amortization Impairment Disposal/retirements Change in foreign exchange rates and other Accumulated amortization, end of year Carrying value, end of year (52) (9) – – – (61) 671 (684) (72) – – 9 (747) 315 (736) (81) – – 9 (808) 986 607 49 23 – – 14 693 (43) (9) – – – (52) 641 The following table provides details of the carrying value of owner-occupied properties and capital assets by geographic location: DECEMBER 31 Canada United States Europe 2014 638 212 136 986 62 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT 907 1,514 30 85 – (66) 12 968 (680) (53) (2) 54 (3) (684) 284 79 108 – (66) 26 1,661 (723) (62) (2) 54 (3) (736) 925 2013 613 188 124 925 NOTE 9 OTHER ASSETS DECEMBER 31 Premiums in course of collection, accounts receivable and interest receivable Deferred acquisition costs Pension beneﬁts [Note 24] Income taxes receivable Trading account assets Finance leases receivable Prepaid expenses Other Total other assets of $4,811 million as at December 31, 2014 are to be realized within 12 months. NOTE 10 GOODWILL AND INTANGIBLE ASSETS G O O DW I L L The carrying value of goodwill and changes in the carrying value of goodwill are as follows: 2014 3,527 644 275 71 405 285 132 693 2013 3,435 687 408 199 376 – 115 687 6,032 5,907 DECEMBER 31 Balance, beginning of year Business acquisitions Changes in foreign exchange rates Balance, end of year I N TA N G I B L E A S S E T S 2014 2013 COST ACCUMUL ATED IMPAIRMENT CARRYING VALUE COST ACCUMUL ATED IMPAIRMENT CARRYING VALUE 10,058 51 83 (953) – (90) 9,105 9,563 51 (7) 395 100 10,192 (1,043) 9,149 10,058 (890) – (63) (953) 8,673 395 37 9,105 The carrying value of the intangible assets and changes in the carrying value of the intangible assets are as follows: INDEFINITE LIFE INTANGIBLE ASSETS DECEMBER 31, 2014 Cost, beginning of year Changes in foreign exchange rates Cost, end of year Accumulated impairment, beginning of year Changes in foreign exchange rates and other Accumulated impairment, end of year Carrying value, end of year SHAREHOLDERS’ PORTION OF ACQUIRED FUTURE PARTICIPATING ACCOUNT PROFIT BRANDS, TRADEMARKS AND TRADE NAMES MUTUAL FUND MANAGEMENT CONTRAC TS 354 – 354 – – – 1,178 28 1,206 (132) (8) (140) 741 – 741 – – – CUSTOMER CONTRAC T- REL ATED 2,398 194 2,592 (858) (81) (939) 1,653 354 1,066 741 TOTAL 4,671 222 4,893 (990) (89) (1,079) 3,814 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT 63 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 GOODWILL AND INTANGIBLE ASSETS (CONTINUED) DECEMBER 31, 2013 Cost, beginning of year Business acquisitions Additions Changes in foreign exchange rates Cost, end of year Accumulated impairment, beginning of year Impairment Changes in foreign exchange rates and other Accumulated impairment, end of year Carrying value, end of year FINITE LIFE INTANGIBLE ASSETS DECEMBER 31, 2014 Cost, beginning of year Business acquisitions Additions Disposal/redemption Changes in foreign exchange rates Other, including write-off of assets fully amortized SHAREHOLDERS’ PORTION OF ACQUIRED FUTURE PARTICIPATING ACCOUNT PROFIT CUSTOMER CONTRAC T- REL ATED 2,264 354 – – 134 2,398 (802) – (56) (858) – – – – – – – 1,540 354 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 CUSTOMER CONTRAC T- REL ATED TECHNOLOGY AND SOFT WARE DEFERRED SELLING COMMISSIONS OTHER TOTAL 1,379 221 3,132 707 18 – – 20 – 825 – 157 (16) 32 19 – 256 (69) – (219) – 1 – (1) – 221 (87) (11) – – – – 18 414 (85) 51 (200) 3,330 (1,532) (348) (7) 52 (31) 219 (98) 123 (1,647) 1,683 Cost, end of year 745 1,017 1,347 Accumulated amortization, beginning of year Amortization Impairment Disposal/redemption Changes in foreign exchange rates Other, including write-off of assets fully amortized Accumulated amortization, end of year Carrying value, end of year (280) (47) – – (11) – (338) 407 (474) (87) (7) 14 (20) – (574) 443 (691) (203) – 38 – 219 (637) 710 64 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT NOTE 10 GOODWILL AND INTANGIBLE ASSETS (CONTINUED) DECEMBER 31, 2013 Cost, beginning of year Business acquisitions Additions Disposal/redemption Changes 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 Changes in foreign exchange rates Other, including write-off of assets fully amortized Accumulated amortization, end of year Carrying value, end of year CUSTOMER CONTRAC T- REL ATED TECHNOLOGY AND SOFT WARE DEFERRED SELLING COMMISSIONS OTHER TOTAL 564 116 – – 27 – 707 (235) (39) – – (6) – (280) 427 680 – 115 (1) 18 13 825 (377) (82) (3) – (11) (1) (474) 351 1,448 213 2,905 – 237 (84) – (222) 1,379 (752) (210) – 49 – 222 (691) 688 – 2 (1) 7 – 221 (75) (11) – – (1) – (87) 134 116 354 (86) 52 (209) 3,132 (1,439) (342) (3) 49 (18) 221 (1,532) 1,600 The Corporation and its subsidiaries conducted their annual impairment testings of intangible assets which resulted in impairment charges of $7 million ($37 million in 2013) and have been recorded in operating and administrative expenses. A L LO C AT I O N TO C A S H G E N E R AT I N G U N I T S Goodwill and indeﬁnite life intangible assets have been assigned to cash generating units (CGUs) as follows: DECEMBER 31 LIFECO Canada Group Individual insurance / wealth management Europe Insurance and annuities Reinsurance United States Financial services Asset management IGM Investors Group Mackenzie Other and corporate GOODWILL INTANGIBLE ASSETS TOTAL GOODWILL INTANGIBLE ASSETS 2014 2013 TOTAL 1,156 3,028 1,950 1 180 – 1,443 1,251 140 9,149 – 973 1,156 4,001 1,142 3,028 – 973 1,142 4,001 221 2,171 1,970 226 2,196 – – 1,594 – 1,003 23 1 180 1,594 1,443 2,254 163 3,814 12,963 1 131 – 1,443 1,251 139 9,105 – – 1,456 – 1,003 23 1 131 1,456 1,443 2,254 162 3,681 12,786 No goodwill and intangible assets have been allocated across multiple CGUs. POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT 65 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 GOODWILL AND INTANGIBLE ASSETS (CONTINUED) R E C OV E R A B L E A M O U N T LIFECO For purposes of annual impairment testing, Lifeco allocates goodwill and indefinite life intangible assets to its CGUs. Any potential impairment of goodwill or indeﬁnite life intangible assets is identiﬁed by comparing the recoverable amount to its carrying value. The recoverable amount is determined as the higher of fair value less costs of disposal or value-in-use. In the case of goodwill and indeﬁnite life intangible assets, the higher of the two is the value-in-use method. Value-in-use is calculated by discounting management’s cash ﬂow projections approved by the board of directors of Lifeco covering the initial forecast period of 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. The discount rate is reﬂective of the country and product speciﬁc cash ﬂow risks and the terminal growth rate is estimated as the long-term average growth rate, including inﬂation of the markets in which Lifeco operates. Fair value is determined using a combination of commonly accepted valuation methodologies, namely comparable trading and transaction multiples. Comparable trading and transaction multiple methodologies calculate fair value by applying multiples observed in the market against historical and projected results approved by management of Lifeco. In the fourth quarter of 2014, Lifeco conducted its annual impairment testing of goodwill and intangible assets based on September 30, 2014 asset balances. It was determined that the recoverable amounts of goodwill and indeﬁnite life intangible assets were in excess of their carrying values and there was no evidence of impairment. For the year ended December 31, 2014 the ranges of key assumptions for the CGUs within the Canada, Europe and United States operating segments were as follows: % Canada Group Individual insurance / wealth management Europe Insurance and annuities Reinsurance United States Financial services Asset management EARNINGS GROW TH RATE DISCOUNT RATE (AFTER TA X) TERMINAL GROW TH RATE INCOME TA X RATE 4.0 – 23.0 (3.0) – 15.0 9.0 – 11.0 9.5 – 10.5 1.5 – 2.5 1.5 – 2.5 26.5 26.5 (10.0) – 16.0 9.5 – 14.0 1.5 – 3.5 12.5 – 20.0 (18.0) – 5.0 11.5 – 12.5 1.5 – 2.5 (11.0) – 10.0 9.5 – 10.5 1.5 – 2.5 2.0 – 15.0 11.0 – 13.0 3.0 N/A 39.9 39.9 Any reasonable possible change to these assumptions is unlikely to cause the CGUs’ carrying value to exceed its recoverable amount. IGM FINANCIAL This assessment may give regard to a variety of relevant considerations, IGM tests whether goodwill and indeﬁnite life intangible assets are impaired including expected growth, risk and capital market conditions, among other by assessing the carrying amounts with the recoverable amounts. The factors. The valuation multiples used in assessing fair value represent Level 2 recoverable amount of IGM’s CGUs is based on the best available evidence of fair value inputs. fair value less cost of disposal. Fair value is initially assessed with reference to valuation multiples of comparable publicly traded ﬁnancial institutions and precedent business acquisition transactions. These valuation multiples may include price-to-earnings or other conventionally used measures for investment managers or other ﬁnancial service providers (multiples of value to assets under management, revenues, or other measures of proﬁtability). The fair value less cost of disposal of IGM’s CGUs was compared with the carrying amount and it was determined there was no impairment. Changes in assumptions and estimates used in determining the recoverable amounts of CGUs can result in signiﬁcant adjustments to the valuation of the CGUs. Any reasonably possible change to these assumptions is unlikely to cause the CGUs’ carrying value to exceed its recoverable amount. 66 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT NOTE 11 SEGREGATED FUNDS AND OTHER STRUCTURED ENTITIES Lifeco offers segregated fund products in Canada, the U.S. and Europe that S E G R E G AT E D F U N D S A N D G UA R A N T E E E X P O S U R E 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 policyholder 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 are of these funds. legally separated from the general assets of Lifeco under the terms of the In Canada, Lifeco offers retail segregated fund products through Great-West policyholder agreement and cannot be used to settle obligations of Lifeco. In Life, London Life and Canada Life. These products provide guaranteed Europe, the assets of the funds are functionally and constructively segregated minimum death benefits and guaranteed minimum accumulation on from those of Lifeco. As a result of the legal and constructive arrangements maturity beneﬁts. of these funds, the assets and liabilities of these funds are presented as line items within the balance sheets titled investments on account of segregated fund policyholders and with an equal 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 $1,012 million at December 31, 2014 ($772 million at December 31, 2013). 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. The guaranteed minimum withdrawal beneﬁts products offered by Lifeco offer levels of death and maturity guarantees. At December 31, 2014, the amount of guaranteed minimum withdrawal beneﬁts products in force in Canada, the U.S., Ireland and Germany was $3,016 million ($2,674 million at December 31, 2013). Lifeco’s exposure to these guarantees is set out as follows: DECEMBER 31, 2014 Canada United States Europe Total DECEMBER 31, 2013 Canada United States Europe Total FAIR VALUE INCOME MATURIT Y DEATH TOTAL [1] INVESTMENT DEFICIENCY BY BENEFIT T YPE 28,958 10,014 9,301 48,273 – 1 351 352 30 – 36 66 97 43 72 212 97 44 422 563 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 [1] A policy can only receive a payout for one of the three trigger events (income election, maturity, or death). 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, 2014. 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 $10 million for the year ended December 31, 2014, with the majority arising in the Europe segment. POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT 67 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 11 SEGREGATED FUNDS AND OTHER STRUCTURED ENTITIES (CONTINUED) The following presents further details of the investments, determined in accordance with the relevant statutory reporting requirements of each region of Lifeco’s operations, on account of segregated fund policyholders: I N V E S T M E N T S O N AC C O U N T O F S E G R E G AT E D F U N D P O L I C Y H O L D E R S DECEMBER 31 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 2014 11,052 37,912 2,508 68,911 46,707 9,533 176,623 364 (3,033) 1,012 174,966 2013 11,374 34,405 2,427 62,882 41,555 8,284 160,927 380 (1,300) 772 160,779 I N S U R A N C E A N D I N V E S T M E N T C O N T R AC T S O N AC C O U N T O F S E G R E G AT E D F U N D P O L I C Y H O L D E R S YEARS 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 due to changes in foreign exchange rates Policyholder withdrawals Business acquisitions Segregated fund investment in General Fund [1] General fund investment in Segregated Fund [1] Net transfer from General Fund Non-controlling mutual fund interest Balance, end of year 2014 160,779 20,909 2,997 5,683 5,301 826 (21,057) – (382) (401) 71 240 14,187 174,966 2013 105,432 15,861 1,565 3,419 7,879 7,226 (17,141) 36,348 – – 67 123 55,347 160,779 [1] During the year, Lifeco reclassiﬁed certain amounts invested by the Segregated Funds into the General Fund of $382 million and amounts invested in the General Fund into the Segregated Funds of $401 million. I N V E S T M E N T I N C O M E O N AC C O U N T O F S E G R E G AT E D F U N D P O L I C Y H O L D E R S YEARS ENDED DECEMBER 31 Net investment income Net realized capital gains on investments Net unrealized capital gains on investments Unrealized gains due to changes in foreign exchange rates Total Change in insurance and investment contract liabilities on account of segregated fund policyholders Net 68 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT 2014 2,997 5,683 5,301 826 14,807 14,807 – 2013 1,565 3,419 7,879 7,226 20,089 20,089 – NOTE 11 SEGREGATED FUNDS AND OTHER STRUCTURED ENTITIES (CONTINUED) I N V E S T M E N T S O N AC C O U N T O F S E G R E G AT E D F U N D P O L I C Y H O L D E R S (by fair value hierarchy level) DECEMBER 31, 2014 LEVEL 1 LEVEL 2 LEVEL 3 TOTAL Investments on account of segregated fund policyholders [1] 112,189 54,942 10,390 177,521 [1] Excludes other liabilities, net of other assets, of $2,555 million. 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 2014 certain foreign equity holdings valued at $2,234 million have Level 2 assets include those assets where fair value is not available from been transferred from Level 1 to Level 2 ($1,780 million were transferred from normal market pricing sources and where Lifeco does not have visibility Level 2 to Level 1 at December 31, 2013), based on Lifeco’s ability to utilize through to the underlying assets. observable, quoted prices in active markets. 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 years ended December 31: DECEMBER 31 Balance, beginning of year Total gains included in segregated fund investment income Business acquisitions Purchases Sales Transfers into Level 3 Transfers out of Level 3 Balance, end of year 2014 9,298 782 – 919 (603) 4 (10) 10,390 2013 6,287 694 2,326 428 (440) 4 (1) 9,298 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 directive of each Fee and other income earned by Lifeco resulting from Lifeco’s interests in these individual fund. structured entities was $3,813 million for the year ended December 31, 2014 Some of these funds are managed by related parties of Lifeco and Lifeco ($3,068 million in 2013). receives management fees related to these services. Management fees Included within other assets at December 31, 2014 is $327 million ($306 million can be variable due to the performance of factors – such as markets or at December 31, 2013) of investments by Lifeco in bonds and stocks of industries – in which the fund invests. Fee income derived in connection Putnam-sponsored funds and $78 million ($70 million at December 31, 2013) with the management of investment funds generally increases or decreases of investments in stocks of sponsored unit trusts in Europe. in direct relationship with changes of assets under management, which is affected by prevailing market conditions, and the inﬂow and outﬂow of client assets. POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT 69 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 12 INSURANCE AND INVESTMENT CONTRACT LIABILITIES I N S U R A N C E A N D I N V E S T M E N T C O N T R AC T L I A B I L I T I E S DECEMBER 31, 2014 Insurance contract liabilities Investment contract liabilities DECEMBER 31, 2013 Insurance contract liabilities Investment contract liabilities GROSS LIABILIT Y 145,198 857 146,055 GROSS LIABILIT Y 131,174 889 132,063 REINSURANCE ASSETS 5,151 – 5,151 REINSURANCE ASSETS 5,070 – 5,070 NET 140,047 857 140,904 NET 126,104 889 126,993 CO M P O S I T I O N O F I N S U R A N C E A N D I N V E S T M E N T CO N T R AC T L I A B I L I T I E S A N D R E L AT E D S U P P O RT I N G A S S E TS The composition of insurance and investment contract liabilities of Lifeco is as follows: DECEMBER 31 Participating Canada United States Europe Non-participating Canada United States Europe GROSS LIABILIT Y REINSURANCE ASSETS 31,181 10,362 1,377 28,094 22,611 52,430 146,055 (156) 12 – 832 233 4,230 5,151 The composition of the assets supporting liabilities and equity of Lifeco is as follows: GROSS LIABILIT Y REINSURANCE ASSETS 2013 NET 29,107 9,337 1,247 25,898 19,038 47,436 (132) 29,239 11 – 9,326 1,247 521 238 4,432 5,070 25,377 18,800 43,004 126,993 140,904 132,063 DECEMBER 31, 2014 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 [1] INVESTMENT PROPERTIES OTHER TOTAL 13,856 5,080 968 18,991 18,678 30,723 9,998 4,874 7,810 278 38 3,941 3,330 3,702 690 757 103,168 20,546 4,270 1,167 4,078 5,004 164 3,417 603 – 63 5 – 31,181 10,362 1,377 28,094 22,611 52,430 2,738 15,076 107 533 177,958 188,757 14,262 21,897 4,613 220,562 356,709 104,649 22,167 7,331 4,613 220,562 359,322 2014 NET 31,337 10,350 1,377 27,262 22,378 48,200 – 144 1,740 – 191 4 1,471 7,820 [1] Fair value excludes shares classiﬁed as available for sale and carried at cost when a fair value cannot be reliably measured. 70 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT NOTE 12 INSURANCE AND INVESTMENT CONTRACT LIABILITIES (CONTINUED) DECEMBER 31, 2013 [NOTE 33] 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 [1] 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 – 143 1,796 – 225 96 1,371 8,554 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 87 546 163,920 173,983 12,947 19,830 4,288 204,057 325,876 90,731 19,517 8,088 4,288 204,057 326,681 [1] Fair value excludes shares classiﬁed as available for sale and carried at cost when a fair value cannot be reliably measured. 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. C H A N G E I N I N S U R A N C E C O N T R AC T L I A B I L I T I E S The change in insurance contract liabilities during the year was the result of the following business activities and changes in actuarial estimates: DECEMBER 31, 2014 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 PARTICIPATING NON-PARTICIPATING GROSS LIABILIT Y REINSURANCE ASSETS NET GROSS LIABILIT Y REINSURANCE ASSETS NET TOTAL NET 39,663 20 2,312 (42) – 940 (121) 39,784 – 8 (32) – 1 20 2,304 (10) – 939 91,511 6,062 2,588 (440) (100) 2,684 5,191 86,320 126,104 152 162 (24) (25) (161) 5,910 2,426 (416) (75) 5,930 4,730 (426) (75) 2,845 3,784 Balance, end of year 42,893 (144) 43,037 102,305 5,295 97,010 140,047 DECEMBER 31, 2013 Balance, beginning of year Business acquisition 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 (93) – 722 1,062 (5,898) 81,970 6,160 5,251 (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 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT 71 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 12 INSURANCE AND INVESTMENT CONTRACT LIABILITIES (CONTINUED) Under fair value accounting, movement in the fair value of the supporting Net participating insurance contract liabilities decreased by $10 million in 2014 assets is a major factor in the movement of insurance contract liabilities. due to management actions and assumption changes. The decrease was Changes in the fair value of assets are largely offset by corresponding changes primarily due to higher investment returns ($152 million decrease), updated in the fair value of liabilities. The change in the value of the insurance contract expenses and taxes ($144 million decrease), modelling reﬁnements ($68 million liabilities associated with the change in the value of the supporting assets is decrease) and updated mortality assumptions ($20 million decrease), partially included in the normal change in force above. offset by increased provisions for future policyholder dividends ($360 million On May 15, 2014, the Canadian Actuarial Standards Board published the Standards of Practice (Standards) effective October 15, 2014, reflecting increase), updated policyholder behaviour assumptions ($13 million increase) and updated morbidity assumptions ($1 million increase). revisions to economic reinvestment assumptions used in the valuation of In 2013, the major contributors to the increase in net insurance contract insurance contract liabilities. In 2014, the major contributors to the increase in net insurance contract liabilities were the impact of new business ($5,930 million increase), the normal change in the in-force business ($4,730 million increase) which was primarily due to the change in fair value and the impact of foreign 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. exchange rate changes ($3,784 million increase). This was partially offset Net non-participating insurance contract liabilities decreased by $84 million by management actions and assumption changes ($426 million decrease). in 2013 due to management actions and assumption changes including Net non-participating insurance contract liabilities decreased by $416 million in 2014 due to management actions and assumption changes including a a $123 million decrease in Canada, a $41 million increase in Europe and a $2 million decrease in the United States. $193 million decrease in Canada, a $135 million decrease in Europe and an The decrease in Canada was primarily due to updated mortality assumptions $88 million decrease in the United States. ($95 million decrease), updated morbidity assumptions ($70 million decrease), The decrease in Canada was primarily due to modelling refinements ($83 million decrease), updated economic assumptions including the change in Standards ($77 million decrease), updated policyholder behaviour assumptions ($60 million decrease), updated morbidity assumptions ($44 million decrease), updated expenses and taxes ($10 million decrease) modelling reﬁnements across the Canadian segment ($15 million decrease), updated economic assumptions ($5 million decrease) and updated expenses and taxes ($3 million decrease), partially offset by updated policyholder behaviour assumptions ($63 million increase) and updated longevity assumptions ($3 million increase). and updates to other provisions ($6 million decrease), partially offset by The increase in Europe was primarily due to increased updated policyholder updated mortality assumptions ($62 million increase) and updated longevity behaviour assumptions ($55 million increase), increased provisions for assumptions ($25 million increase). The decrease in Europe was primarily due to updated longevity assumptions ($110 million decrease), updated economic assumptions including the change in Standards ($107 million decrease), modelling reﬁnements ($63 million decrease) and updated morbidity assumptions ($22 million decrease), partially expenses and taxes ($30 million increase), updated morbidity assumptions ($27 million increase) and updates to other provisions ($4 million increase), partially offset by updates to the life mortality assumptions ($40 million decrease), updated economic assumptions ($25 million decrease) and modelling reﬁnements ($11 million decrease). offset by updated policyholder behaviour assumptions ($142 million increase), The decrease in the United States was primarily due to updated life mortality updated mortality assumptions ($20 million increase) and updates to other assumptions ($12 million decrease), partially offset by updated expenses provisions ($5 million increase). and taxes ($9 million increase), and updated longevity assumptions The decrease in the United States was primarily due to updated mortality ($1 million increase). assumptions ($103 million decrease), updated policyholder behaviour Net participating insurance contract liabilities decreased by $93 million assumptions ($67 million decrease) and updated longevity assumptions in 2013 due to management actions and assumption changes. The decrease ($6 million decrease), partially offset by modelling reﬁnements ($51 million was primarily due to decreases from higher investment returns ($631 million increase) and updated economic assumptions including the change in decrease), modelling reﬁnements in Canada ($109 million decrease) and Standards ($37 million increase). updated expenses and taxes ($88 million decrease), partially offset by increased provisions for future policyholder dividends ($710 million increase), updated policyholder behaviour assumptions ($20 million increase), updated life mortality assumptions ($4 million increase) and updated morbidity assumptions ($1 million increase). 72 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT NOTE 12 INSURANCE AND INVESTMENT CONTRACT LIABILITIES (CONTINUED) C H A N G E I N I N V E S T M E N T C O N T R AC T L I A B I L I T I E S M E A S U R E D AT FA I R VA LU E DECEMBER 31 Balance, beginning of year Business acquisitions Normal change in in-force business Investment experience Management action and changes in assumptions Impact of foreign exchange rate changes Balance, end of year 2014 889 – (78) 43 (10) 13 857 The carrying value of investment contract liabilities approximates their fair value. No investment contract liabilities have been reinsured. P R E M I U M I N C O M E DECEMBER 31 Direct premiums Assumed reinsurance premiums Total P O L I C Y H O L D E R B E N E F I T S DECEMBER 31 Direct Assumed reinsurance Total 2014 19,926 4,760 24,686 2014 14,892 4,471 19,363 2013 739 194 (97) 19 – 34 889 2013 18,772 4,669 23,441 2013 13,516 4,948 18,464 AC T UA R I A L A S S U M P T I O N S Morbidity Lifeco uses industry-developed experience tables modiﬁed to In the computation of insurance contract liabilities, valuation assumptions reﬂect emerging Lifeco experience. Both claim incidence and termination have been made regarding rates of mortality/morbidity, investment are monitored regularly and emerging experience is factored into the returns, levels of operating expenses, rates of policy termination and current valuation. rates of utilization of elective policy options or provisions. The valuation assumptions use best estimates of future experience together with a margin for adverse deviation. These margins are necessary to provide for possibilities of misestimation and/or future deterioration in the best estimate assumptions and provide reasonable assurance that insurance contract liabilities cover a range of possible outcomes. Margins are reviewed periodically for continued appropriateness. Property and casualty reinsurance Insurance contract liabilities for property and casualty reinsurance written by London Reinsurance Group Inc. (LRG), a subsidiary of London Life, are determined using accepted actuarial practices for property and casualty insurers in Canada. The insurance contract liabilities have been established using cash flow valuation techniques, including discounting. The insurance contract liabilities are based on cession statements provided by ceding companies. In certain The methods for arriving at these valuation assumptions are outlined below: instances, LRG management adjusts cession statement amounts to reﬂect 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 in 2011 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. management’s interpretation of the treaty. Differences will be resolved via audits and other loss mitigation activities. In addition, insurance contract liabilities also include an amount for incurred but not reported losses which may differ signiﬁcantly from the 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 21). POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT 73 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 12 INSURANCE AND INVESTMENT CONTRACT LIABILITIES (CONTINUED) Expenses Contractual policy expenses (e.g., sales commissions) and tax Policyholder dividends and adjustable policy features Future expenses are reﬂected on a best estimate basis. Expense studies for indirect policyholder dividends and other adjustable policy features are included operating expenses are updated regularly to determine an appropriate in the determination of insurance contract liabilities with the assumption estimate of future operating expenses for the liability type being valued. that policyholder dividends or adjustable beneﬁts will change in the future Improvements in unit operating expenses are not projected. An inﬂation in response to the relevant experience. The dividend and policy adjustments assumption is incorporated in the estimate of future operating expenses are determined consistent with policyholders’ reasonable expectations, such consistent with the interest rate scenarios projected under the Canadian expectations being inﬂuenced by the participating policyholder dividend Asset Liability Method as inﬂation is assumed to be correlated with new policies and/or policyholder communications, marketing material and past money interest rates. Policy termination Studies to determine rates of policy termination are updated regularly to form the basis of this estimate. Industry data is also available and is useful where Lifeco has no experience with speciﬁc types of policies or its exposure is limited. Lifeco has signiﬁcant exposures in respect of the T-100 and Level Cost of Insurance Universal Life products in Canada and policy renewal rates at the end of term for renewable term policies in Canada and Reinsurance. Industry experience has guided Lifeco’s assumptions for these products as Lifeco’s own experience is very limited. Utilization of elective policy options There are a wide range of elective options embedded in the policies issued by Lifeco. Examples include term renewals, conversion to whole life insurance (term insurance), settlement annuity purchase at guaranteed rates (deposit annuities) and guarantee 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. practice. It is Lifeco’s expectation that changes will occur in policyholder dividend scales or adjustable beneﬁts for participating or adjustable business respectively, corresponding to changes in the best estimate assumptions, resulting in an immaterial net change in insurance contract liabilities. Where underlying guarantees may limit the ability to pass all of this experience back to the policyholder, the impact of this non-adjustability impacting shareholder earnings is reﬂected in the impact of changes in best estimate assumptions above. R I S K M A N AG E M E N T 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. 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. IMPAC T ON NET EARNINGS 2014 (238) (272) (220) – – 41 (383) 34 (113) 355 (372) (99) (568) 2013 (217) (272) (208) – – 12 (322) 34 (150) 353 (392) (76) (466) Mortality – 2% increase Annuitant mortality – 2% decrease Morbidity – 5% adverse change Investment returns Parallel shift in yield curve 1% increase 1% decrease Change in range of interest rates 1% increase 1% decrease Change in equity markets 10% increase 10% decrease Change in best estimate returns for equities 1% increase 1% decrease Expenses – 5% increase Policy termination and renewal – 10% adverse change 74 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT NOTE 12 INSURANCE AND INVESTMENT CONTRACT LIABILITIES (CONTINUED) Concentration risk may arise from geographic regions, accumulation of risks and market risk. The concentration of insurance risk before and after reinsurance by geographic region is described below. DECEMBER 31 Canada United States Europe GROSS LIABILIT Y REINSURANCE ASSETS 59,275 32,973 53,807 146,055 676 245 4,230 5,151 2014 NET 58,599 32,728 49,577 GROSS LIABILIT Y REINSURANCE ASSETS 55,005 28,375 48,683 389 249 4,432 5,070 2013 NET 54,616 28,126 44,251 126,993 140,904 132,063 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 13 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 $26 million at Program and through Canadian bank-sponsored asset-backed commercial December 31, 2014 (a negative fair value of $16 million in 2013). 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 offsetting liabilities for the net proceeds received as obligations to securitization entities which are 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 2014 SECURITIZED MORTGAGES OBLIGATIONS TO SECURI TIZATION ENTITIES NET SECURITIZED MORTGAGES OBLIGATIONS TO SECURITIZATION ENTITIES 4,611 2,013 6,624 4,692 2,062 6,754 (81) (49) (130) 3,803 1,689 5,492 3,843 1,729 5,572 6,820 6,859 (39) 5,659 5,671 2013 NET (40) (40) (80) (12) 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. POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT 75 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 14 DEBENTURES AND DEBT INSTRUMENTS DECEMBER 31 DEBT INSTRUMENTS GREAT-WEST LIFECO INC. Commercial paper and other short-term debt instruments with interest rates from 0.21% to 0.22% (0.24% to 0.33% in 2013) Revolving credit facility with interest equal to LIBOR rate plus 0.75% or U.S. prime rate loan (US$355 million; US$450 million at December 31, 2013), unsecured 2.3% mortgage payable (€50 million), matures June 30, 2015 Term note due October 18, 2015, bearing an interest rate of LIBOR rate plus 0.75%, (US$304 million) – repaid in full on December 22, 2014, unsecured Notes payable with interest rate of 8.0% due May 6, 2014, unsecured TOTAL DEBT INSTRUMENTS DEBENTURES POWER FINANCIAL CORPORATION CARRYING VALUE 2014 FAIR VALUE CARRYING VALUE 2013 FAIR VALUE 114 412 70 – – 596 114 412 70 – – 596 105 477 75 322 1 980 105 477 75 322 1 980 6.90% debentures, due March 11, 2033, unsecured 250 335 250 304 GREAT-WEST LIFECO INC. 5.25% subordinated debentures due February 8, 2017, including associated ﬁxed to ﬂoating swap (€200 million), unsecured 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 298 200 498 695 100 192 391 200 342 313 226 557 773 129 268 536 230 450 317 199 498 729 100 192 391 182 342 321 227 539 713 117 246 493 184 405 348 354 317 328 997 1,087 996 1,097 498 150 375 125 150 175 150 200 583 171 450 160 208 236 205 252 497 150 375 125 150 175 150 200 583 172 450 146 189 213 185 223 (43) 6,291 6,887 (54) 7,469 8,065 (40) 6,295 7,275 (49) 7,086 8,066 On April 18, 2013 Lifeco issued €500 million of 10-year, 2.50% senior euro bonds in connection with the acquisition of Irish Life. 76 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT NOTE 14 DEBENTURES AND DEBT INSTRUMENTS (CONTINUED) The principal payments on debentures and debt instruments in each of the next ﬁve years are as follows: 2015 2016 2017 2018 2019 Thereafter NOTE 15 OTHER LIABILITIES DECEMBER 31 Bank overdraft Accounts payable Dividends and interest payable Income taxes payable Deferred income reserve Capital trust debentures Deposits and certiﬁcates Funds held under reinsurance contracts Pension and other post-employment beneﬁts [Note 24] Other Total other liabilities of $4,468 million as at December 31, 2014 are expected to be settled within 12 months. D E F E R R E D I N C O M E R E S E R V E Changes in the deferred income reserve of Lifeco are as follows: DECEMBER 31 Balance, beginning of year Additions Amortization Foreign exchange Disposals Balance, end of year C A P I TA L T R U S T D E B E N T U R E S DECEMBER 31 Canada Life Capital Trust (CLCT) 7.529% capital trust debentures due June 30, 2052, unsecured Acquisition-related fair value adjustment CARRYING VALUE 150 12 162 596 – 280 350 375 5,286 2013 380 1,935 362 1,014 451 163 187 270 1,194 1,105 7,061 2013 427 70 (39) 38 (45) 451 2013 FAIR VALUE 205 – 205 2014 447 1,828 401 768 429 162 223 313 1,661 1,061 7,293 2014 451 57 (38) 10 (51) 429 2014 FAIR VALUE 220 – 220 CARRYING VALUE 150 13 163 CLCT, a trust established by Canada Life, had issued $150 million of Canada Distributions and interest on the capital trust debentures are classiﬁed as Life Capital Securities – Series B (CLiCS – Series B), the proceeds of which ﬁnancing charges on the statements of earnings (see Note 23). The fair value were used by CLCT to purchase Canada Life senior debentures in the amount for capital trust securities is determined by the bid-ask price. of $150 million. Subject to regulatory approval, CLCT may redeem the CLiCS – Series B, in whole or in part, at any time. POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT 77 2014 % 26.5 (3.4) (4.0) (1.3) 1.4 19.2 2013 % 26.5 (4.4) (2.0) (1.0) (0.7) 18.4 2014 2013 585 9 (33) 561 346 13 (62) (29) 5 273 834 775 – (11) 764 (18) (13) – (6) (49) (86) 678 2013 EQUITY – 2 2 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 16 INCOME TAXES E F F E C T I V E I N C O M E TA X R AT E 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 investments in associates and in jointly controlled corporations Other Effective income tax rate I N C O M E TA X E S 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 Previously unrecognized tax loss, tax credit or temporary differences of prior period Other Deferred taxes Origination and reversal of temporary differences Effect of change in tax rates or imposition of new taxes Write-down or reversal of previous write-down of deferred tax assets Recognition of previously unrecognized tax losses and deductible temporary differences Other 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 2014 OTHER COMPREHENSIVE INCOME OTHER COMPREHENSIVE INCOME EQUITY 29 (168) (139) – (1) (1) (14) 106 92 78 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT NOTE 16 INCOME TAXES (CONTINUED) D E F E R R E D TA X E S 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 2014 1,507 (796) (594) (190) (294) 313 (54) 1,707 (1,761) (54) 2013 [NOTE 33] 1,335 (541) (518) (184) (221) 121 (8) 1,211 (1,219) (8) 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 $1,100 million (US$949 million) as at tax beneﬁt through future taxable proﬁts is probable. December 31, 2014 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 the measurement of deferred tax assets. 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, 2014 are recoverable. At December 31, 2014, Lifeco had tax loss carry forwards totalling $4,200 million ($4,110 million in 2013). Of this amount, $3,954 million expires between 2015 and 2034, while $246 million has no expiry date. Lifeco will realize this beneﬁt in future years through a reduction in current income taxes payable. deductions related to goodwill which has been previously impaired for 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 future taxable income is derived principally from tax planning strategies, some of which have already been executed. As at December 31, 2014, the Corporation and its subsidiaries have non-capital losses of $201 million ($213 million in 2013) available to reduce future taxable income for which the beneﬁts have not been recognized. These losses expire from 2026 to 2034. In addition, the Corporation and its subsidiaries have capital loss carry forwards of $133 million ($133 million in 2013) 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, associates, 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. POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT 79 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 17 STATED CAPITAL AU T H O R I Z E D 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 S U E D A N D O U T S TA N D I N G DECEMBER 31 FIRST PREFERRED SHARES (perpetual) Series A [i] Series D [ii] [ii] Series E Series F [ii] Series H [ii] Series I [ii] Series K [ii] Series L [ii] Series M [iii] Series O [ii] Series P [ii] Series R [ii] Series S [ii] Series T [ii] COMMON SHARES Balance, beginning of year Issued under Stock Option Plan Balance, end of year FIRST PREFERRED SHARES NUMBER OF SHARES 4,000,000 6,000,000 8,000,000 6,000,000 6,000,000 8,000,000 10,000,000 8,000,000 – 6,000,000 11,200,000 10,000,000 12,000,000 8,000,000 2014 STATED CAPITAL 100 150 200 150 150 200 250 200 – 150 280 250 300 200 2,580 NUMBER OF SHARES 4,000,000 6,000,000 8,000,000 6,000,000 6,000,000 8,000,000 10,000,000 8,000,000 7,000,000 6,000,000 11,200,000 10,000,000 12,000,000 8,000,000 711,173,680 550,000 711,723,680 721 22 743 709,104,080 2,069,600 711,173,680 2013 STATED CAPITAL 100 150 200 150 150 200 250 200 175 150 280 250 300 200 2,755 664 57 721 [i] The Series A First Preferred Shares are entitled to an annual cumulative dividend, payable quarterly at a ﬂoating rate equal to 70% of the prime rate of two major Canadian chartered banks and are redeemable, at the Corporation’s option, at $25.00 per share, together with all declared and unpaid dividends to, but excluding, the date of redemption. [ii] The following First Preferred Shares series are entitled to ﬁxed non-cumulative preferential cash dividends payable quarterly. The Corporation may redeem for cash the First Preferred Shares, in whole or in part, at the Corporation’s option, with all declared and unpaid dividends to, but excluding, the date of redemption. FIRST PREFERRED SHARES Non-cumulative, ﬁxed rate Series D, 5.50% Series E, 5.25% Series F, 5.90% Series H, 5.75% Series I, 6.00% Series K, 4.95% Series L, 5.10% Series O, 5.80% Series R, 5.50% Series S, 4.80% Non-cumulative, 5-year rate reset [1] Series P, 4.40% Series T, 4.20% CASH DIVIDENDS PAYABLE QUARTERLY EARLIEST ISSUER REDEMPTION DATE ($/SHARE) 0.343750 0.328125 0.368750 0.359375 0.375000 0.309375 0.318750 0.362500 0.343750 0.300000 Currently redeemable Currently redeemable Currently redeemable Currently redeemable Currently redeemable Currently redeemable Currently redeemable Currently redeemable April 30, 2017 April 30, 2018 0.275000 0.262500 January 31, 2016 January 31, 2019 REDEMPTION PRICE ($/SHARE) 25.00 25.00 25.00 25.00 25.00 25.00 25.25 26.00 26.00 26.00 25.00 25.00 [1] The dividend rate will reset on the earliest issuer redemption date and every ﬁfth year thereafter at a rate equal to the 5-year Government of Canada bond yield plus a reset spread (1.60% for Series P and 2.37% for Series T). The holders have the option to convert their shares into non-cumulative ﬂoating rate First Preferred Shares subject to certain conditions on the earliest redemption date and every ﬁfth year thereafter at a rate equal to the three-month Government of Canada Treasury Bill rate plus the reset spread indicated. [iii] On January 31, 2014, the Corporation redeemed all of its 6.00% Non-Cumulative First Preferred Shares, Series M for cash consideration of $175 million. 80 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT NOTE 17 STATED CAPITAL (CONTINUED) COMMON SHARES During the year 2014, 550,000 common shares (2,069,600 in 2013) were issued under the Corporation’s Employee Stock Option Plan for a consideration of $17 million ($45 million in 2013). Dividends declared on the Corporation’s common shares in 2014 amounted to $1.40 per share ($1.40 per share in 2013). NOTE 18 SHARE-BASED COMPENSATION S TO C K O P T I O N P L A N Under Power Financial’s Employee Stock Option Plan, 13,871,600 common shares are reserved for issuance. The plan requires that the exercise price of the option must not be less than the market value of a share on the date of the grant of the option. Generally, options granted vest on a delayed basis over periods beginning no earlier than one year from the date of grant and no later than ﬁve years from the date of grant. Options recently granted, which are not fully vested, have the following vesting conditions: YEAR OF GRANT OPTIONS VESTING CONDITIONS 2010 2011 2011 2012 2012 2013 2013 2014 2014 679,525 743,080 34,423 598,325 70,254 702,713 53,476 563,879 1,094,212 Vest equally over a period of ﬁve 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 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, 2014 and 2013, 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 2014 2013 OPTIONS WEIGHTED-AVERAGE EXERCISE PRICE OPTIONS WEIGHTED-AVERAGE EXERCISE PRICE 7,522,386 1,658,091 (550,000) 8,630,477 $ 30.56 34.15 31.76 31.18 8,835,797 756,189 (2,069,600) 7,522,386 5,483,586 30.93 5,468,569 $ 28.32 32.44 21.65 30.56 31.29 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT 81 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 18 SHARE-BASED COMPENSATION (CONTINUED) The following table summarizes information about stock options outstanding at December 31, 2014: RANGE OF EXERCISE PRICES OPTIONS WEIGHTED-AVERAGE REMAINING LIFE WEIGHTED-AVERAGE EXERCISE PRICE OPTIONS WEIGHTED-AVERAGE EXERCISE PRICE OPTIONS OUTSTANDING OPTIONS EXERCISABLE $ 25.07 – 26.37 28.13 – 29.95 30.18 – 31.59 32.24 32.46 – 32.58 34.01 – 34.42 34.46 – 37.13 1,525,467 1,532,879 602,383 1,515,000 741,006 1,658,091 1,055,651 8,630,477 (YRS) 6.8 4.5 4.2 0.4 8.4 9.5 3.2 5.3 $ 25.84 28.96 31.42 32.24 32.57 34.15 34.81 31.18 821,360 1,374,600 538,139 1,515,000 178,836 – 1,055,651 5,483,586 $ 25.97 29.02 31.52 32.24 32.55 – 34.81 30.93 Compensation expense During the year ended December 31, 2014, Power Financial granted 1,658,091 options (756,189 options in 2013) 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) 2014 4.8% 19.8% 2.1% 9 $3.27 $34.15 2013 5.0% 18.3% 2.3% 9 $2.78 $32.44 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. Lifeco and IGM have also established stock option plans pursuant to which D E F E R R E D S H A R E U N I T P L A N options may be granted to certain officers and employees. In addition, other Power Financial established a Deferred Share Unit Plan for its Directors to subsidiaries of the Corporation have established share-based compensation promote a greater alignment of interests between Directors and shareholders plans. Compensation expense is recorded based on the fair value of the of the Corporation. Under this Plan, each Director participating in the Plan options or the fair value of the equity investments at the grant date, will receive half of his annual retainer in the form of deferred share units and amortized over the vesting period. Total compensation expense relating to may elect to receive the remainder of his annual retainer and attendance the stock options granted by the Corporation and its subsidiaries amounted fees entirely in the form of deferred share units, entirely in cash, or equally in to $50 million in 2014 ($15 million in 2013). cash and deferred share units. The number of deferred share units granted P E R F O R M A N C E S H A R E U N I T P L A N Power Financial established a Performance Share Unit (PSU) Plan for selected employees and officers (participants) to assist in retaining and further aligning the interests of participants with those of the shareholders. Under the terms of the Plan, PSUs may be awarded annually and are subject to time and performance vesting conditions. The value of each PSU is based on the share price of the Corporation’s common shares. The PSUs are cash settled and vest over a three-year period. Participants can elect at the time of grant to receive a portion of their PSUs in the form of performance deferred share units (PDSU) which also vest over a three-year period. PDSUs are redeemable when 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 is determined by dividing the amount of remuneration payable by the ﬁve- day-average closing price on the Toronto Stock Exchange of the common shares of the Corporation on the last ﬁve days of the ﬁscal quarter (the value of a deferred share unit). A Director will receive additional deferred share units in respect of dividends payable on the common shares, based on the value of a deferred share unit on the date on which the dividends were paid on the common shares. A deferred share unit is payable, at the time a Director’s membership on the Board is terminated (provided the Director is not then a director, officer or employee of the Corporation or an affiliate of the Corporation), or in the event of the death of a Director, by a lump-sum cash payment, based on the value of a deferred share unit at that time. At December 31, 2014, the value of the deferred share units outstanding was $19 million ($18 million in 2013). Alternatively, Directors may participate in the payment based on the value of the PDSU at that time. Additional PSUs and Share Purchase Plan for Directors. 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. For the year ended December 31, 2014, the Corporation recognized compensation expenses of $2 million ($1 million in 2013) for the PSU Plan recorded in operating and administrative expenses on the statement of earnings. The carrying value of the PSU liability is $4 million ($1 million in 2013) recorded within other liabilities. 82 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT NOTE 18 SHARE-BASED COMPENSATION (CONTINUED) E M P LOY E E S H A R E P U R C H A S E P R O G R A M OT H E R S H A R E - B A S E D AWA R D S O F S U B S I D I A R I E S Power Financial established an Employee Share Purchase Program, giving The subsidiaries of the Corporation have also established other share-based employees the opportunity to subscribe for up to 6% of their gross salary to awards for their directors, management and employees. Some of these purchase Subordinate Voting Shares of Power Corporation of Canada on the share-based awards are cash settled and included within other liabilities on open market and to have Power Financial invest, on the employee’s behalf, the balance sheets. The compensation expense related to these subsidiary up to an equal amount. share-based awards is recorded in operating and administrative expenses on the statements of earnings. NOTE 19 NON-CONTROLLING INTERESTS The Corporation has controlling equity interests in Lifeco and IGM as at December 31, 2014 and December 31, 2013. The non-controlling interests of Lifeco and IGM and their subsidiaries reﬂected in the balance sheets are as follows: DECEMBER 31 LIFECO IGM 2014 TOTAL LIFECO IGM 2013 TOTAL Non-controlling interests, beginning of year 9,064 1,877 10,941 Prior period adjustments [Note 33] Restated balance, 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 and other [1] – 9,064 957 121 (478) 200 – 109 – 1,877 291 (22) (215) – – (21) – 10,941 1,248 99 (693) 200 – 88 8,327 (46) 8,281 683 301 (472) – (230) 501 1,775 10,102 – 1,775 301 10 (213) – – 4 (46) 10,056 984 311 (685) – (230) 505 Non-controlling interests, end of year 9,973 1,910 11,883 9,064 1,877 10,941 [1] Change in ownership in Lifeco in 2013 is mainly attributable to the issuance of Lifeco’s common shares in regards to the acquisition of Irish Life (Note 3). Other changes in ownership in 2014 and 2013 are due to the issuance of common shares under stock option plans as well as the repurchase of common shares by the Corporation and its subsidiaries. The carrying value of non-controlling interests consists of the following: DECEMBER 31 LIFECO IGM Common shareholders Preferred shareholders Participating account surplus 4,979 2,514 2,480 9,973 1,760 150 – 2014 TOTAL 6,739 2,664 2,480 LIFECO IGM 4,396 2,314 2,354 9,064 1,727 150 – 2013 TOTAL 6,123 2,464 2,354 1,910 11,883 1,877 10,941 As at December 31, 2014, Power Financial and IGM held 67.2% and 4.0%, respectively, of Lifeco’s common shares, representing approximately 65.0% of the voting rights attached to the outstanding Lifeco voting shares. POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT 83 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 19 NON-CONTROLLING INTERESTS (CONTINUED) Lifeco and IGM’s ﬁnancial information as at and for the year ended December 31, 2014 can be obtained from their publicly available ﬁnancial statements. Summarized ﬁnancial information for Lifeco and IGM is as follows: AS AT AND FOR THE YEARS ENDED BALANCE SHEET Assets Liabilities Equity COMPREHENSIVE INCOME Net earnings Other comprehensive income (loss) CASH FLOWS Operating activities Financing activities Investing activities 2014 LIFECO IGM LIFECO 2013 IGM 356,709 334,812 21,897 14,417 325,876 12,880 9,576 4,841 306,046 19,830 8,172 4,708 2,761 325 5,443 (1,685) (4,129) 762 (28) 741 625 2,318 1,004 5,026 493 (1,232) (4,813) 771 49 715 117 (808) NOTE 20 CAPITAL MANAGEMENT As a holding company, Power Financial’s objectives in managing its capital L I F E C O are to: > provide attractive long-term returns to shareholders of the Corporation; > provide sufficient ﬁnancial ﬂexibility to pursue its growth strategy and invest in its group companies as it determines to be appropriate; and > maintain an appropriate credit rating to ensure stable access to the capital markets. 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 capital. The capital structure of the Corporation consists of preferred shares, debentures and equity composed of stated capital, retained earnings and non-controlling interests. The Corporation utilizes perpetual preferred shares as a permanent and cost-effective source of capital. The Corporation is a long- 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 management strategy are: > 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. 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 monitoring the capital plan. term investor and as such holds positions in long-term investments as well Lifeco’s subsidiaries Great-West Life, Great-West Life & Annuity and as cash and short-term investments for liquidity purposes. Canada Life UK are subject to minimum regulatory capital requirements. The Board of Directors of the Corporation and the boards of directors of its subsidiaries are responsible for their capital management. Management of the Corporation and its subsidiaries are responsible for establishing capital Lifeco’s practice is to maintain the capitalization of its regulated operating subsidiaries at a level that will exceed the relevant minimum regulatory capital requirements in the jurisdictions in which they operate: management procedures and for implementing and monitoring their capital > In Canada, the Office of the Superintendent of Financial Institutions plans. The Board of Directors of the Corporation and the boards of directors has established a capital adequacy measurement for life insurance of its subsidiaries review and approve capital transactions such as issuance, companies incorporated under the Insurance Companies Act (Canada) and redemption and repurchase of common shares, perpetual preferred shares their subsidiaries, known as the Minimum Continuing Capital and Surplus and debentures. The Corporation itself is not subject to externally imposed regulatory capital Requirements (MCCSR). As at December 31, 2014, the MCCSR ratio for Great-West Life was 224% (223% at December 31, 2013). requirements. Certain of the Corporation’s major operating subsidiaries > At December 31, 2014, the Risk-Based Capital ratio (RBC) of Great-West (Lifeco and IGM) are subject to regulatory capital requirements and they Life & Annuity, Lifeco’s regulated U.S. operating company, was estimated manage their capital as described below. to be 453% 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. 84 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT NOTE 20 CAPITAL MANAGEMENT (CONTINUED) > In the United Kingdom, Canada Life UK is required to satisfy the capital I G M F I N A N C I A L resources requirements set out in the Integrated Prudential Sourcebook, IGM’s capital management objective is to maximize shareholder returns part of the Prudential Regulatory Authority Handbook. The capital while ensuring that IGM is capitalized in a manner which appropriately requirements are prescribed by a formulaic capital requirement (Pillar 1) and supports regulatory capital requirements, working capital needs and business an individual capital adequacy framework which requires an entity to self- expansion. IGM’s capital management practices are focused on preserving assess an appropriate amount of capital it should hold, based on the risks the quality of its ﬁnancial position by maintaining a solid capital base and a encountered from its business activities. At the end of 2014, Canada Life UK strong balance sheet. complied with the capital resource requirements in the United Kingdom. IGM’s capital is primarily utilized in its ongoing business operations to support > Other foreign operations and foreign subsidiaries of Lifeco are required working capital requirements, long-term investments made by IGM, business to comply with local capital or solvency requirements in their respective expansion and other strategic objectives. jurisdictions. At December 31, 2014 and 2013, Lifeco maintained capital levels above the minimum local regulatory requirements in each of its other foreign operations. 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 21 RISK MANAGEMENT The Corporation and its subsidiaries have established policies, guidelines This note includes estimates of sensitivities and risk exposure measures for or procedures designed to identify, measure, monitor and mitigate risks certain risks, such as the sensitivity due to speciﬁc changes in interest rate associated with ﬁnancial instruments. The key risks related to ﬁnancial levels projected and market prices as at the valuation date. Actual results can instruments are liquidity risk, credit risk and market risk. differ signiﬁcantly from these estimates for a variety of reasons, including: > Liquidity risk is the risk that the Corporation and its subsidiaries will not be > assessment of the circumstances that led to the scenario may lead able to meet all cash outﬂow obligations as they come due. to changes in (re)investment approaches and interest rate scenarios > Credit risk is the potential for ﬁnancial loss to the Corporation and its considered; subsidiaries if a counterparty in a transaction fails to meet its obligations. > changes in actuarial, investment return and future investment activity > Market risk is the risk that the fair value or future cash ﬂows of a ﬁnancial assumptions; instrument will ﬂuctuate as a result of changes in market factors. Market > actual experience differing from the assumptions; factors include three types of risks: currency risk, interest rate risk and > changes in business mix, effective tax rates and other market factors; equity price risk. > interactions among these factors and assumptions when more than one > Currency risk relates to the Corporation, its subsidiaries and its jointly changes; and controlled corporations and associates operating in different currencies and converting non-Canadian earnings at different points in time at different foreign exchange levels when adverse changes in foreign currency exchange rates occur. > 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. > Equity price risk is the uncertainty associated with the valuation of assets arising from changes in equity markets. POWER FINANCIAL L I Q U I D I T Y R I S K > the general limitations of internal models. For these reasons, the sensitivities should only be viewed as directional estimates of the underlying sensitivities for the respective factors based on the assumptions outlined 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. The Corporation regularly reviews its liquidity requirements and seeks Power Financial is a holding company. As such, corporate cash ﬂows from to maintain a sufficient level of liquidity to meet its operating expenses, operations, before payment of dividends to its common and preferred ﬁnancing charges and payment of preferred share dividends for a reasonable shareholders, are principally made up of dividends received from its subsidiaries period of time. If required, the ability of Power Financial to arrange additional and jointly controlled corporation, and income from investments, less ﬁnancing in the future will depend in part upon prevailing market conditions operating expenses, ﬁnancing charges and income taxes. The ability of Lifeco as well as the business performance of Power Financial and its subsidiaries. and IGM, which are also holding companies, to meet their obligations and pay dividends is dependent upon receipt of dividends from their subsidiaries. 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 management of liquidity risk have not changed materially since December 31, 2013. POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT 85 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 21 RISK MANAGEMENT (CONTINUED) C R E D I T R I S K M A R K E T R I S K Fixed income securities, and derivatives are subject to credit risk. The Currency risk Power Financial’s ﬁnancial instruments are comprised of Corporation mitigates credit risk its ﬁxed income securities by adhering to an cash and cash equivalents, ﬁxed income securities and long-term debt. In investment policy that outlines credit risk parameters and concentration limits. managing its own cash and cash equivalents, Power Financial may hold Fixed income securities, which are included in investments and in cash and cash equivalents, consist primarily of bonds, bankers’ acceptances and highly liquid temporary deposits with Canadian chartered banks and banks in juridictions where Power Financial operates as well as bonds and short-term securities of, or guaranteed by, the Canadian or U.S. governments. The Corporation regularly reviews the credit ratings of its counterparties. The maximum exposure to credit risk on these ﬁnancial instruments is their carrying value. Derivatives continue to be utilized on a basis consistent with the risk management guidelines of the Corporation and are monitored by the Corporation for effectiveness as economic hedges even if speciﬁc hedge accounting requirements are not met. The Corporation regularly reviews the 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, 2014, approximately 90% of Power Financial’s cash and cash equivalents, and ﬁxed income securities 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. Foreign currency translation gains and losses from Pargesa are recorded in other comprehensive income. credit ratings of derivative ﬁnancial instrument counterparties. Derivative Interest rate risk Power Financial’s ﬁnancial instruments are cash and cash contracts are over-the-counter with counterparties that are highly rated equivalents, ﬁxed income securities and long-term debt that do not have ﬁnancial institutions. signiﬁcant exposure to interest rate risk. Power Financial’s exposure to and management of credit risk related to Equity price risk Power Financial’s ﬁnancial instruments are cash and cash cash and cash equivalents, ﬁxed income securities and derivatives have not equivalents, ﬁxed income securities and long-term debt that do not have changed materially since December 31, 2013. exposure to equity price risk. Pargesa indirectly holds substantial investments classified as available for sale; unrealized gains and losses on these investments are recorded in other comprehensive income until realized. These investments 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 > Management of Lifeco monitors the use of lines of credit on a regular basis, oversight of Lifeco’s key risks. and assesses the ongoing availability of these and alternative forms of L I Q U I D I T Y R I S K The following policies and procedures are in place to manage liquidity risk: > Lifeco closely manages operating liquidity through cash ﬂow matching of assets and liabilities and forecasting earned and required yields, to ensure consistency between policyholder requirements and the yield of assets. Approximately 70% (approximately 69% in 2013) of insurance and investment contract liabilities are non-cashable prior to maturity or subject to fair value adjustments. operating credit. > Management of Lifeco closely monitors the solvency and capital positions of its principal subsidiaries opposite liquidity requirements at the holding company. Additional liquidity is available through established lines of credit or via capital market transactions. Lifeco maintains $350 million of liquidity at the Lifeco level through committed lines of credit with Canadian chartered banks. 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, 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. DECEMBER 31, 2014 1 YEAR 2 YEARS 3 YEARS 4 YEARS 5 YEARS Debentures and debt instruments Capital trust debentures [1] Purchase obligations Pension contributions 596 – 71 175 842 – – 34 – 34 280 – 26 – 306 200 – 17 – 217 – – 16 – 16 OVER 5 YEARS 4,295 150 16 – TOTAL 5,371 150 180 175 4,461 5,876 PAYMENTS DUE BY PERIOD [1] Payments due have not been reduced to reﬂect that Lifeco held capital trust securities of $37 million principal amount ($51 million carrying value). 86 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT NOTE 21 RISK MANAGEMENT (CONTINUED) C R E D I T R I S K > 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. > Investment guidelines specify minimum and maximum limits for each asset class. Credit ratings are determined by recognized external credit rating during the grace period speciﬁed by the insurance policy or until the policy is paid up or terminated. Commissions paid to agents and brokers are netted against amounts receivable, if any. 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 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 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 Finance leases receivable Other ﬁnancial assets [2] Derivative assets 2014 2,498 80,000 9,990 13,178 20,546 7,711 12,154 5,151 1,286 1,172 598 405 285 715 652 2013 2,791 70,144 7,915 11,855 19,063 7,332 10,832 5,070 1,242 1,248 578 376 – 831 593 Total balance sheet maximum credit exposure 156,341 139,870 [1] Includes $10,758 million as at December 31, 2014 ($9,848 million as at December 31, 2013) of funds held by ceding insurers where Lifeco retains the credit risk of the assets supporting the liabilities ceded (see Note 6). [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 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 $52 million of collateral received as at December 31, 2014 ($19 million as at December 31, 2013) relating to derivative assets. POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT 87 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 21 RISK MANAGEMENT (CONTINUED) The following table provides details of the carrying value of bonds of Lifeco by issuer, industry sector and geographic distribution: CANADA UNITED STATES EUROPE TOTAL 5,356 6,926 352 198 2,895 433 2,648 52 2,025 647 316 571 2,030 1,078 1,250 1,407 1,967 5,460 1,416 3,616 3 2,567 4,786 24 – 8 3,161 236 346 1,705 1,087 265 2,558 1,292 984 452 985 4,206 1,281 236 46 51 937 11,865 2,021 643 789 206 2,747 2,461 349 693 2,305 718 710 2,849 898 3,912 456 1,687 5,405 9,544 6,075 12,087 4,916 1,084 6,598 494 5,118 4,813 1,752 1,529 6,893 3,088 2,944 4,708 3,850 13,578 3,153 5,539 40,643 26,182 36,343 103,168 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 3,321 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 76 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 1,083 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 4,480 35,635 22,091 32,188 89,914 DECEMBER 31, 2014 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 Short-term bonds 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 Short-term bonds 88 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT NOTE 21 RISK MANAGEMENT (CONTINUED) The following table provides details of the carrying value of mortgage loans of Lifeco by geographic location: DECEMBER 31, 2014 Canada United States Europe DECEMBER 31, 2013 Canada United States Europe Asset quality BOND PORTFOLIO QUALIT Y DECEMBER 31 AAA AA A BBB BB and lower Total bonds DERIVATIVE PORTFOLIO QUALIT Y DECEMBER 31 Over-the-counter contracts (counterparty credit ratings): AAA AA A Total SINGLE-FAMILY RESIDENTIAL MULTI-FAMILY RESIDENTIAL COMMERCIAL TOTAL 1,916 – – 1,916 3,660 1,324 338 5,322 7,017 2,888 3,403 12,593 4,212 3,741 13,308 20,546 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 2014 34,332 18,954 31,133 17,370 1,379 103,168 2014 10 66 576 652 2013 30,626 15,913 25,348 16,809 1,218 89,914 2013 8 86 499 593 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: DECEMBER 31 Less than 30 days 30–90 days Greater than 90 days Total 2014 7 5 3 15 2013 6 – 2 8 Future asset credit losses 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: DECEMBER 31 Participating Non-participating 2014 1,186 1,947 3,133 2013 999 1,796 2,795 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT 89 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 21 RISK MANAGEMENT (CONTINUED) M A R K E T R I S K > For products with less predictable timing of beneﬁt payments, investments Currency risk For Lifeco, if the assets backing insurance and investment are made in ﬁxed income assets with cash ﬂows of a shorter duration than contract liabilities are not matched by currency, changes in foreign exchange the anticipated timing of beneﬁt payments or equities, as described below. rates can expose Lifeco to the risk of foreign exchange losses not offset by liability decreases. Lifeco has net investments in foreign operations. In > The risks associated with the mismatch in portfolio duration and cash ﬂow, asset prepayment exposure and the pace of asset acquisition are quantiﬁed addition, Lifeco’s debt obligations are mainly denominated in Canadian and reviewed regularly. 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. Projected cash flows from the current assets and liabilities are used in the Canadian Asset Liability Method to determine insurance contract liabilities. Valuation assumptions have been made regarding rates of returns on supporting assets, ﬁxed income, equity and inﬂation. The valuation assumptions use best estimates of future reinvestment rates and inﬂation assumptions with an assumed correlation together with margins for adverse deviation set in accordance with professional standards. These margins are necessary to provide for possibilities of misestimation and/or future deterioration in the best estimate assumptions and provide reasonable assurance that insurance contract liabilities cover a range of possible > Investments are normally made in the same currency as the liabilities outcomes. Margins are reviewed periodically for continued appropriateness. supported by those investments. Segmented investment guidelines include maximum tolerances for unhedged currency mismatch exposures. Projected cash ﬂows from ﬁxed income assets used in actuarial calculations are reduced to provide for potential asset default losses. The net effective yield > Foreign currency assets acquired to back liabilities are normally converted rate reduction averaged 0.18% (0.19% in 2013). The calculation for future credit back to the currency of the liability using foreign exchange contracts. losses on assets is based on the credit quality of the underlying asset portfolio. > A 10% weakening of the Canadian dollar against foreign currencies would be Testing under a number of interest rate scenarios (including increasing, expected to increase non-participating insurance and investment contract decreasing and ﬂuctuating rates) is done to assess reinvestment risk. The liabilities and their supporting assets by approximately the same amount, total provision for interest rates is sufficient to cover a broader or more severe resulting in an immaterial change to net earnings. A 10% strengthening set of risks than the minimum arising from the current Canadian Institute of of the Canadian dollar against foreign currencies would be expected to Actuaries-prescribed scenarios. 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. The range of interest rates covered by these provisions is set in consideration of long-term historical results and is monitored quarterly with a full review annually. An immediate 1% parallel shift in the yield curve would not have a Interest rate risk The following policies and procedures are in place to material impact on Lifeco’s view of the range of interest rates to be covered mitigate Lifeco’s exposure to interest rate risk: by the provisions. If sustained however, the parallel shift could impact Lifeco’s > Lifeco utilizes a formal process for managing the matching of assets and range of scenarios covered. liabilities. This involves grouping general fund assets and liabilities into The total provision for interest rates also considers the impact of the Canadian segments. Assets in each segment are managed in relation to the liabilities Institute of Actuaries-prescribed scenarios: in the segment. > The effect of an immediate 1% parallel increase in the yield curve on the > Interest rate risk is managed by investing in assets that are suitable for prescribed scenarios would not change the total provision for interest rates. the products sold. > The effect of an immediate 1% parallel decrease in the yield curve on the > Where these products have benefit or expense payments that are prescribed scenarios would not change the total provision for interest rates. dependent on inﬂation (inﬂation-indexed annuities, pensions and disability claims), Lifeco generally invests in real return instruments to hedge its real dollar liability cash ﬂows. Some protection against changes in the inﬂation index is achieved as any related change in the fair value of the assets will be Another way of measuring the interest rate risk associated with this assumption is to determine the effect on the insurance and investment contract liabilities impacting the shareholders’ earnings of Lifeco of a 1% change in Lifeco’s view of the range of interest rates to be covered by largely offset by a similar change in the fair value of the liabilities. these provisions: > For products with fixed and highly predictable benefit payments, investments are made in ﬁxed income assets or real estate whose cash ﬂows closely match the liability product cash ﬂows. Where assets are not available to match certain period 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. > 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 $75 million, causing an increase in net earnings of approximately $41 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 $564 million, causing a decrease in net earnings of approximately $383 million. 90 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT NOTE 21 RISK MANAGEMENT (CONTINUED) Equity price risk Lifeco has investment policy guidelines in place that would be expected to additionally decrease non-participating insurance and provide for prudent investment in equity markets with clearly deﬁned limits investment contract liabilities by approximately $42 million, causing an increase to mitigate price risk. The risks associated with segregated fund guarantees have been mitigated through a hedging program for lifetime Guaranteed Minimum Withdrawal Beneﬁt guarantees using equity futures, currency forwards, and interest rate in net earnings of approximately $34 million. A 10% decrease in equity values would be expected to additionally increase non-participating insurance and investment contract liabilities by approximately $149 million, causing a decrease in net earnings of approximately $113 million. derivatives. For policies with segregated fund guarantees, Lifeco generally The best estimate return assumptions for equities are primarily based on determines insurance contract liabilities at a conditional tail expectation long-term historical averages. Changes in the current market could result in of 75 (CTE75) level. Some insurance and investment contract liabilities are supported by investment properties, common stocks and private equities, for example, segregated fund products and products with long-tail cash ﬂows. Generally these liabilities will ﬂuctuate in line with equity market values. There will be additional impacts on these liabilities as equity values ﬂuctuate. A 10% increase in equity values changes to these assumptions and will impact both asset and liability cash ﬂows. A 1% increase in the best estimate assumption would be expected to decrease non-participating insurance contract liabilities by approximately $455 million, causing an increase in net earnings of approximately $355 million. A 1% decrease in the best estimate assumption would be expected to increase non-participating insurance contract liabilities by approximately $482 million, causing a decrease in net earnings of approximately $372 million. IGM FINANCIAL L I Q U I D I T Y R I S K > 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 investment funds. Commissions on the sale of investment 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, 2014 Derivative ﬁnancial instruments Deposits and certiﬁcates Obligations to securitization entities Long-term debt Operation leases Pension contributions Total contractual obligations DEMAND LESS THAN 1 YEAR 1–5 YEARS AFTER 5 YEARS – 204 – – – – 9 8 21 8 1,249 5,468 – 55 20 525 147 20 204 1,341 6,189 – 3 37 800 50 – 890 TOTAL 30 223 6,754 1,325 252 40 8,624 In addition to IGM’s current balance of cash and cash equivalents, liquidity C R E D I T R I S K is available through IGM’s operating lines of credit. IGM’s operating lines of IGM’s cash and cash equivalents, securities holdings, mortgage and credit with various Schedule I Canadian chartered banks totalled $525 million investment loan portfolios, and derivatives are subject to credit risk. IGM as at December 31, 2014, unchanged from December 31, 2013. The lines of monitors its credit risk management practices continuously to evaluate credit as at December 31, 2014 consisted of committed lines of $350 million their effectiveness. ($350 million in 2013) and uncommitted lines of $175 million ($175 million in 2013). 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, 2014 and 2013, IGM was not utilizing its committed lines of credit or its uncommitted lines of credit. At December 31, 2014, cash and cash equivalents of $1,216 million ($1,082 million in 2013) consisted of cash balances of $107 million ($89 million in 2013) on deposit with Canadian chartered banks and cash equivalents of $1,109 million ($994 million in 2013). Cash equivalents are composed of Government of Canada treasury bills totalling $191 million ($42 million in 2013), provincial IGM’s liquidity position and its management of liquidity and funding risk have government and government-guaranteed commercial paper of $666 million not changed materially since December 31, 2013. ($564 million in 2013) and bankers’ acceptances issued by Canadian chartered POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT 91 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 21 RISK MANAGEMENT (CONTINUED) banks of $253 million ($388 million in 2013). IGM regularly reviews the credit The portion of this amount pertaining to Canadian bank-sponsored ratings of its counterparties. The maximum exposure to credit risk on these securitization trusts of $65 million ($59 million in 2013) is subordinated to ﬁnancial instruments is their carrying value. IGM manages credit risk related the interests of the trust and represents the maximum exposure to credit to cash and cash equivalents by adhering to its Investment Policy that outlines risk for any failure of the borrowers to pay when due. Credit risk on these credit risk parameters and concentration limits. mortgages is mitigated by any insurance on these mortgages, as previously IGM regularly reviews the credit quality of the mortgage portfolios related discussed, and IGM’s credit risk on insured loans is to the insurer. to IGM’s mortgage banking operations and its intermediary operations, Rights to future net interest income under the NHA MBS and CMB Programs as well as the adequacy of the collective allowance. As at December 31, totalled $97 million ($70 million in 2013). Under the NHA MBS and CMB 2014, mortgages totalled $7.0 billion ($5.9 billion in 2013) and consisted of Programs, IGM has an obligation to make timely payments to security holders residential mortgages: > Sold to securitization programs which are classified as loans and receivables and totalled $6.6 billion compared to $5.5 billion at December 31, 2013. An offsetting liability, obligations to securitization entities, has regardless of whether amounts are received from mortgagors. All mortgages securitized under the NHA MBS and CMB Programs are insured by CMHC or another approved insurer under the programs. Outstanding mortgages securitized under these programs are $4.6 billion ($3.8 billion in 2013). been recorded and totalled $6.8 billion at December 31, 2014, compared to > Fair value of principal reinvestment account swaps had a negative fair $5.6 billion at December 31, 2013. > Related to IGM’s mortgage banking operations which are classified as held for trading and totalled $366 million, compared to $324 million at December 31, 2013. These loans are held by IGM pending sale or securitization. > Related to IGM’s intermediary operations which are classiﬁed as loans and receivables and totalled $30 million at December 31, 2014, compared to $36 million at December 31, 2013. As at December 31, 2014, the mortgage portfolios related to IGM’s intermediary operations were geographically diverse, 100% residential (100% in 2013) and 92.6% insured (88.6% in 2013). As at December 31, 2014, impaired mortgages were nil, unchanged from December 31, 2013. Uninsured non-performing mortgages over 90 days were nil, unchanged from December 31, 2013. The characteristics of the mortgage portfolios have not changed signiﬁcantly during 2014. The NHA MBS and CMB Program require that all securitized mortgages be insured against default by an approved insurer. The ABCP programs do not require mortgages to be insured; however, at December 31, 2014, 51.0% of these mortgages were insured compared to 58.9% at December 31, 2013. At December 31, 2014, 83.6% of the securitized portfolio and the residential mortgages classiﬁed as held for trading were insured, compared to 86.1% at December 31, 2013. As at December 31, 2014, impaired mortgages on these portfolios were $2 million, compared to $2 million at December 31, 2013. Uninsured non-performing mortgages over 90 days on these portfolios were $0.3 million at December 31, 2014, compared to $1 million at December 31, 2013. IGM retains certain elements of credit risk on securitized loans. At December 31, 2014, 85.1% of securitized loans were insured against credit losses compared to 87.4% at December 31, 2013. IGM’s credit risk on its securitization activities is limited to its retained interests. The fair value of IGM’s retained interests in securitized mortgages was $136 million at December 31, 2014, compared to $113 million at December 31, 2013. Retained interests include: > Cash reserve accounts and rights to future net interest income, which were $35 million ($29 million in 2013) and $127 million ($100 million in 2013), value of $26 million at December 31, 2014 (negative $16 million in 2013) 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 $437 million at December 31, 2014 ($1,023 million in 2013). IGM’s exposure to and management of credit risk related to cash and cash equivalents, fixed income securities and mortgage portfolios have not changed materially since December 31, 2013. IGM utilizes over-the-counter derivatives to hedge interest rate risk and 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 risk associated with the CMB Program. The negative fair value of these swaps totalled $9 million at December 31, 2014 (negative $17 million in 2013) and the outstanding notional amount was $6.7 billion ($6.8 billion in 2013). Certain of these swaps relate to securitized mortgages that have been recorded on the balance sheet with an associated obligation. Accordingly, these swaps, with an outstanding notional amount of $4.2 billion ($3.6 billion in 2013) and having a negative fair value of $18 million (negative $28 million in 2013), are not reﬂected on the balance sheet. Principal reinvestment account swaps and hedges of reinvestment and interest rate risk, with an outstanding notional amount of $2.4 billion ($3.2 billion in 2013) and having a fair value of $9 million ($11 million in 2013), 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 $41 million at December 31, 2014, compared respectively, at December 31, 2014. Cash reserve accounts are reﬂected to $47 million at December 31, 2013. on the balance sheet, whereas rights to future net interest income are not reﬂected on the balance sheet and will be recorded over the life of the mortgages. IGM utilizes interest rate swaps to hedge interest rate risk associated with mortgages securitized through Canadian bank-sponsored ABCP programs. The negative fair value of these interest rate swaps totalled $0.3 million (negative $1 million in 2013) on an outstanding notional amount of $24 million at December 31, 2014 ($66 million in 2013). The exposure to credit risk, which is limited to the fair value of swaps in a gain position, was nil at December 31, 2014, unchanged from December 31, 2013. 92 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT NOTE 21 RISK MANAGEMENT (CONTINUED) IGM enters into other derivative contracts which consist primarily of interest banks to hedge the risk that ABCP rates rise. However, IGM remains rate swaps utilized to hedge interest rate risk related to mortgages held exposed to the basis risk that ABCP rates are greater than the bankers’ pending sale, or committed to, by IGM as well as total return swaps and acceptance rates that it receives on its hedges. forward agreements on IGM’s common shares utilized to hedge deferred compensation arrangements. The fair value of interest rate swaps, total return swaps and forward agreements was $1 million on an outstanding notional amount of $156 million at December 31, 2014, compared to a fair value of $12 million on an outstanding notional amount of $154 million at December 31, 2013. The exposure to credit risk, which is limited to the fair value of those instruments which are in a gain position, was $3 million at December 31, 2014, compared to $12 million as at December 31, 2013. > 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 Schedule I chartered banks to hedge the risk that the interest rates earned on ﬂoating rate mortgages decline. As previously discussed, as part of the CMB Program, IGM also is entitled to investment returns on reinvestment of principal repayments of securitized mortgages and is obligated to pay Canada Mortgage Bond coupons that are generally ﬁxed rate. IGM hedges The aggregate credit risk exposure related to derivatives that are in a the risk that reinvestment returns decline by entering into interest rate gain position of $43 million ($58 million in 2013) does not give effect to any swaps with Canadian Schedule I chartered bank counterparties. netting agreements or collateral arrangements. The exposure to credit risk, considering netting agreements and collateral arrangements and including rights to future net interest, was $3 million at December 31, 2014 ($4 million in 2013). 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, 2014. Management of credit risk has not changed materially since December 31, 2013. > IGM is also exposed to the impact that changes in interest rates may have on the value of mortgages held, or committed to, by IGM. IGM may enter into interest rate swaps to hedge this risk. As at December 31, 2014, the impact to annual net earnings of a 100-basis- point change in interest rates would have been a decrease of approximately $2 million. IGM’s exposure to and management of interest rate risk has not changed materially since December 31, 2013. M A R K E T R I S K Equity price risk IGM is exposed to equity price risk on its proprietary Currency risk IGM’s ﬁnancial instruments are generally denominated in investment funds which are classiﬁed as available-for-sale securities and Canadian dollars, and do not have signiﬁcant exposure to changes in foreign its equity securities and proprietary investment funds which are classiﬁed exchange rates. 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 as fair value through proﬁt or loss. Unrealized gains and losses on available- for-sale securities are recorded in other comprehensive income until they are realized or until management of IGM determines there is objective evidence of impairment in value, at which time they are recorded in the statements intermediary operations. of earnings. 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, 2014, the total gap between deposit assets and liabilities was within IGM’s trust subsidiaries’ stated guidelines. IGM sponsors a number of deferred compensation arrangements where payments to participants are linked to the performance of the common shares of IGM Financial Inc. IGM hedges this risk through the use of forward agreements and total return swaps. IGM utilizes interest rate swaps with Canadian Schedule I chartered bank counterparties in order to reduce the impact of ﬂuctuating interest rates on its mortgage banking operations, as follows: R I S K S R E L AT E D TO A S S E T S U N D E R M A N AG E M E N T — M A R K E T R I S K Risks related to the performance of the equity markets, changes in interest > IGM has funded fixed rate mor tgages with ABCP as par t of the rates and changes in foreign currencies relative to the Canadian dollar can securitization transactions with bank-sponsored securitization trusts. have a signiﬁcant impact on the level and mix of assets under management. IGM enters into interest rate swaps with Canadian Schedule I chartered These changes in assets under management directly impact earnings of IGM. NOTE 22 OPERATING AND ADMINISTRATIVE EXPENSES YEARS ENDED DECEMBER 31 Salaries and other employee beneﬁts General and administrative expenses Amortization, depreciation and impairment Premium taxes Restructuring and acquisition expenses Client distributions and other costs [1] 2014 2,934 1,525 233 339 50 81 5,162 2013 2,511 1,344 199 313 107 – 4,474 [1] In the third quarter of 2012, IGM introduced investment solutions for clients with household investments in IGM’s funds in excess of $0.5 million. At December 31, 2014, an accrual of $81 million was recorded related to these lower fee investment solutions. This amount primarily reﬂects distributions to clients who did not transfer to these lower-priced solutions when eligible. POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT 93 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 23 FINANCING CHARGES YEARS ENDED DECEMBER 31 Interest on debentures and debt instruments Interest on capital trust debentures Other 2014 374 11 28 413 2013 364 11 25 400 NOTE 24 PENSION PLANS AND OTHER POST-EMPLOYMENT BENEFITS C H A R AC T E R I S T I C S , F U N D I N G A N D R I S K The Corporation and its subsidiaries also provide post-employment health, The Corporation and its subsidiaries maintain funded deﬁned beneﬁt pension dental and life insurance beneﬁts to eligible employees, advisors and their plans for certain employees and advisors as well as unfunded supplementary dependents. These post-employment benefits are not pre-funded. The employee retirement plans (SERP) for certain employees. The Corporation’s obligations for these beneﬁts are supported by assets of the Corporation subsidiaries also maintain deﬁned contribution pension plans for eligible and its subsidiaries. employees and advisors. The Corporation and its subsidiaries have pension and beneﬁt committees The deﬁned beneﬁt pension plans provide pensions based on length of service or a trustee arrangement that provides oversight for the benefit plans. and ﬁnal average earnings. For most plans, active plan participants share The beneﬁt plans are monitored on an ongoing basis to assess the beneﬁt, in the cost by making contributions in respect of current service. Certain funding and investment policies, ﬁnancial status, and funding requirements pension payments are indexed either on an ad hoc basis or a guaranteed of the Corporation and its subsidiaries. Signiﬁcant changes to beneﬁt plans basis. The determination of the deﬁned beneﬁt obligation reﬂects pension require approval. 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 plans are supported by assets of the Corporation and its subsidiaries. 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 Corporation and its subsidiaries determine if an economic beneﬁt exists in Canadian Employees’ Pension Plan and the London Life Staff Pension Plan the form of potential reductions in future contributions and in the form of added a deﬁned contribution provision to their plans. All new hires after surplus refunds, where permitted by applicable regulation and plan provisions. this date 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 the obligations, longevity of plan members, and future inﬂation. Pension The deﬁned contribution pension plans provide pension beneﬁts based on and beneﬁt risk is managed by regular monitoring of the plans, applicable accumulated employee and employer contributions. Contributions to these regulations and other factors that could impact the expenses and cash ﬂows plans are a set percentage of employees’ annual income and may be subject of the Corporation and its subsidiaries. to certain vesting requirements. 94 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT NOTE 24 PENSION PLANS AND OTHER POST-EMPLOYMENT BENEFITS (CONTINUED) P L A N A S S E T S , B E N E F I T O B L I G AT I O N S A N D F U N D E D S TAT U S 2014 2013 PENSION PL ANS OTHER POST- EMPLOYMENT BENEFITS PENSION PL ANS OTHER POST- EMPLOYMENT BENEFITS DECEMBER 31 CHANGE IN FAIR VALUE OF PLAN ASSETS Fair value of plan assets, beginning of year Interest income Employee contributions Employer contributions Return on assets greater than interest income Beneﬁts paid Administrative expenses Business acquisitions 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 and plan amendments Business acquisitions Foreign exchange and other Deﬁned beneﬁt obligation, end of year FUNDED STATUS Fund deﬁcit Unrecognized amount due to asset ceiling Accrued beneﬁt liability The aggregate deﬁned beneﬁt obligation of pension plans is as follows: YEARS ENDED DECEMBER 31 Wholly or partly funded plans Wholly unfunded plans 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) 5,349 251 25 164 438 (238) (6) – (23) 5,960 5,653 133 25 261 938 114 (3) (238) 21 – (38) – – – 20 – (20) – – – – 438 3 – 20 40 (14) (13) (20) (1) 3 1 6,866 457 (906) (23) (929) (457) – (457) 2014 6,406 460 – – – 19 – (19) – – – – 470 4 – 19 (29) (11) 3 (19) – – 1 438 (438) – (438) 2013 5,229 424 2013 TOTAL 408 (1,194) (786) POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT 95 The net accrued beneﬁt asset (liability) shown above is presented in these ﬁnancial statements as follows: DECEMBER 31 Pension beneﬁt assets Pension and other post-employment beneﬁt liabilities Accrued beneﬁt asset (liability) PENSION PL ANS 275 (1,204) (929) OTHER POST- EMPLOYMENT BENEFITS – (457) (457) 2014 TOTAL 275 (1,661) (1,386) PENSION PL ANS OTHER POST- EMPLOYMENT BENEFITS 408 (756) (348) – (438) (438) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 24 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 has 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 P E N S I O N A N D OT H E R P O S T- E M P LOY M E N T B E N E F I T E X P E N S E DECEMBER 31 Deﬁned beneﬁt current service cost Net interest cost Past service cost and plan amendments Administration fees Deﬁned contribution current service cost Expense recognized in net earnings Actuarial (gain) loss recognized Return on assets greater than interest income Change in asset ceiling Expense (income) recognized in other comprehensive income Total expense (income) 2014 44 2 (23) 23 2013 41 2 1 44 2014 2013 PENSION PL ANS OTHER POST- EMPLOYMENT BENEFITS PENSION PL ANS OTHER POST- EMPLOYMENT BENEFITS 133 12 3 6 42 196 1,049 (438) (23) 588 784 3 20 – – – 23 13 – – 13 36 125 38 1 6 31 201 (287) (310) 1 (596) (395) 4 19 – – – 23 (37) – – (37) (14) During 2014, the Corporation and its subsidiaries incurred $31 million of actuarial losses ($23 million of actuarial gains in 2013) for pension plan remeasurements not included in the table shown above. This relates to the share of actuarial gains (losses) for investments in jointly controlled corporations and associates. A S S E T A L LO C AT I O N BY M A J O R C AT E G O RY W E I G H T E D BY P L A N A S S E T S DECEMBER 31 % Equity securities Debt securities All other assets DEFINED BENEFIT PENSION PL ANS 2013 54 37 9 100 2014 52 38 10 100 No plan assets are directly invested in the Corporation’s or subsidiaries’ $1,066 million (nil in 2013) of plan assets invested in segregated funds of Lifeco. securities. Lifeco’s plan assets include investments in segregated and other Plan assets do not include any property occupied or other assets used by funds managed by subsidiaries of Lifeco in the balance sheet of $4,478 million Lifeco. IGM’s plan assets are invested in IGM’s mutual funds. Power Financial’s at December 31, 2014 ($3,012 million at December 31, 2013). During 2014, Lifeco’s plan assets are invested in segregated funds managed by a subsidiary of Lifeco. pension plans reallocated certain investments which resulted in an additional 96 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT NOTE 24 PENSION PLANS AND OTHER POST-EMPLOYMENT BENEFITS (CONTINUED) D E TA I L S O F D E F I N E D B E N E F I T O B L I G AT I O N PORTION OF DEFINED BENEFIT OBLIGATION SUBJECT TO FUTURE SALARY INCREASES DECEMBER 31 Beneﬁt obligation without future salary increases Effect of assumed future salary increases Deﬁned beneﬁt obligation ALLOCATION OF DEFINED BENEFIT OBLIGATION BY MEMBERSHIP DECEMBER 31 % Actives Deferred vesteds Retirees Total Weighted average duration of deﬁned beneﬁt obligation (in years) C A S H F LOW I N F O R M AT I O N The expected employer contributions for the year 2015 are as follows: Funded (wholly or partly) deﬁned beneﬁt plans Unfunded deﬁned beneﬁt plans Deﬁned contribution plans Total AC T UA R I A L A S S U M P T I O N S A N D S E N S I T I V I T I E S ACTUARIAL ASSUMPTIONS % 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. 2014 OTHER POST- EMPLOYMENT BENEFITS 457 – 457 PENSION PL ANS 6,121 745 6,866 2013 OTHER POST- EMPLOYMENT BENEFITS 438 – 438 PENSION PL ANS 5,036 617 5,653 2014 2013 PENSION PL ANS OTHER POST- EMPLOYMENT BENEFITS PENSION PL ANS OTHER POST- EMPLOYMENT BENEFITS 47 16 37 100 19.1 28 – 72 100 13.0 46 15 39 100 18.2 25 – 75 100 11.9 PENSION PL ANS OTHER POST-EMPLOYMENT BENEFITS 107 22 54 183 – 21 – 21 DEFINED BENEFIT PENSION PL ANS OTHER POST-EMPLOYMENT BENEFITS 2014 2013 2014 2013 4.7 – 5.1 4.1 – 4.6 4.7 – 5.0 4.1 – 4.5 3.1 – 4.1 4.7 – 5.1 3.9 – 4.1 4.7 – 5.0 4.7 3.3 3.5 3.3 4.4 3.2 4.7 3.3 4.8 – 3.9 – 5.3 4.5 2029 4.2 – 4.8 – 6.4 4.5 2024 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT 97 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 24 PENSION PLANS AND OTHER POST-EMPLOYMENT BENEFITS (CONTINUED) SAMPLE LIFE EXPECTANCIES BASED ON MORTALITY ASSUMPTIONS 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. 2014 2013 PENSION PL ANS OTHER POST- EMPLOYMENT BENEFITS PENSION PL ANS OTHER POST- EMPLOYMENT BENEFITS 22.7 25.1 24.7 26.8 22.1 23.8 24.6 26.0 22.0 24.3 23.9 25.8 21.4 23.0 23.7 25.0 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. IMPACT OF CHANGES TO ASSUMPTIONS DECEMBER 31, 2014 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 the discount rate Impact of a change to assumed medical cost trend rates 1% INCREASE 1% DECREASE (1,088) 362 649 (53) 40 1,414 (304) (521) 64 (34) 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. 98 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT NOTE 25 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 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: DECEMBER 31, 2014 1 YEAR OR LESS 1–5 YEARS OVER 5 YEARS TOTAL MA XIMUM CREDIT RISK TOTAL FAIR VALUE NOTIONAL AMOUNT DERIVATIVES NOT DESIGNATED AS ACCOUNTING HEDGES Interest rate contracts Swaps Options purchased Futures – long Futures – short 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 1,876 218 10 12 2,700 182 – – 1,389 78 – – 5,965 478 10 12 2,116 2,882 1,467 6,465 751 354 1,105 156 10 317 107 590 491 2,285 2,776 – 5,492 5,492 – – – – – – – – – – 1,242 8,131 9,373 156 10 317 107 590 411 50 – – 461 41 169 210 2 – 1 – 3 350 50 – – 400 27 (751) (724) (3) – (2) – (5) 3,811 5,658 6,959 16,428 674 (329) – – 11 11 – 1,500 23 1,523 – 3,822 18 7,199 36 – 1 37 72 36 1,500 35 1,571 90 7,068 18,089 14 – 3 17 2 693 14 (219) 1 (204) 1 (532) POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT 99 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 25 DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) DECEMBER 31, 2013 1 YEAR OR LESS 1–5 YEARS OVER 5 YEARS TOTAL MA XIMUM CREDIT RISK TOTAL FAIR VALUE NOTIONAL AMOUNT DERIVATIVES NOT DESIGNATED AS ACCOUNTING HEDGES Interest rate contracts Swaps Options purchased Futures – long Futures – short 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 2,455 265 4 13 3,191 327 – – 990 89 – – 6,636 681 4 13 2,737 3,518 1,079 7,334 602 213 815 476 2,053 2,529 – 4,986 4,986 1,078 7,252 8,330 10,762 15 301 157 11,235 26,899 33 1,512 32 1,577 83 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 – – – – – 6,065 33 12 – 45 66 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) The amount subject to maximum credit risk is limited to the current fair value Call options grant the Corporation and its subsidiaries the right to enter into of the instruments which are in a gain position. The maximum credit risk is a swap with predetermined ﬁxed-rate payments over a predetermined time presented without giving effect to any netting agreements and does not period on the exercise date. Call options are used to manage the variability reﬂect actual or expected losses. The total estimated fair value represents in future interest payments due to a change in credited interest rates and the the total amount that the Corporation and its subsidiaries would receive related potential change in cash ﬂows due to surrenders. Call options are also (or pay) to terminate all agreements at year-end. However, this would not used to hedge minimum rate guarantees. result in a gain or loss to the Corporation and its subsidiaries as the derivative instruments which correlate to certain assets and liabilities provide offsetting gains or losses. I N T E R E S T R AT E C O N T R AC T S F O R E I G N E XC H A N G E C O N T R AC T S Cross-currency swaps are used in combination with other investments to manage foreign currency risk associated with investment activities and insurance and investment contract liabilities. Under these swaps, principal Interest rate swaps, futures and options are used as part of a portfolio of amounts and fixed or floating interest payments may be exchanged in assets to manage interest rate risk associated with investment activities different currencies. The Corporation and its subsidiaries may also enter and insurance and investment contract liabilities and to reduce the impact into certain foreign exchange forward contracts to hedge certain product of fluctuating interest rates on the mortgage banking operations and liabilities, cash and cash equivalents and cash ﬂows. intermediary operations. Interest rate swap agreements require the periodic exchange of payments without the exchange of the notional principal amount on which payments are based. 100 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT NOTE 25 DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) OT H E R D E R I VAT I V E C O N T R AC T S Equity index swaps, futures and options are used to hedge certain product E N F O R C E A B L E M A S T E R N E T T I N G AG R E E M E N T S O R S I M I L A R AG R E E M E N T S liabilities. Equity index swaps are also used as substitutes for cash instruments The Corporation and its subsidiaries enter into the International Swaps and and are used to periodically hedge the market risk associated with certain Derivative Association’s master agreements for transacting over-the-counter fee income. Equity put options are used to manage the potential credit risk derivatives. The Corporation and its subsidiaries receive and pledge collateral impact of signiﬁcant declines in certain equity markets. according to the related International Swaps and Derivative Association’s Forward agreements and total return swaps are used to manage exposure to ﬂuctuations in the total return of common shares related to deferred compensation arrangements. Forward agreements and total return swaps require the exchange of net contractual payments periodically or at maturity Credit Support Annexes. The International Swaps and Derivative Association’s master agreements do not meet the criteria for offsetting on the balance sheets because they create a right of set-off that is enforceable only in the event of default, insolvency, or bankruptcy. without the exchange of the notional principal amounts on which the For exchange-traded derivatives subject to derivative clearing agreements payments are based. Certain of these instruments are not designated as with exchanges and clearing houses, there is no provision for set-off at default. hedges. Changes in fair value are recorded in operating and administrative Initial margin is excluded from the table below as it would become part of a expenses in the statements of earnings for those instruments not designated pooled settlement process. as hedges. 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. The following disclosure shows the potential effect on the Corporation’s balance sheets on ﬁnancial instruments that have been shown in a gross position where right of set-off exists under certain circumstances that do not qualify for netting on the balance sheets. DECEMBER 31, 2014 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, 2013 FINANCIAL INSTRUMENTS (ASSETS) Derivative ﬁnancial instruments Reverse repurchase agreements [3] Total ﬁnancial instruments (assets) FINANCIAL INSTRUMENTS (LIABILITIES) Derivative instruments Total ﬁnancial instruments (liabilities) REL ATED AMOUNTS NOT SET OFF IN THE BAL ANCE SHEETS GROSS AMOUNT OF FINANCIAL INSTRUMENTS PRESENTED IN THE BALANCE SHEET OFFSETTING COUNTERPARTY POSITION [1] FINANCIAL COLLATERAL RECEIVED/ PLEDGED [2] NET EXPOSURE 693 44 737 1,225 1,225 (331) – (331) (331) (331) (51) (44) (95) (260) (260) 311 – 311 634 634 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 FINANCIAL COLL ATERAL RECEIVED/ POSITION [1] PLEDGED [2] NET EXPOSURE 654 87 741 779 779 (271) – (271) (271) (271) (22) (87) (109) (199) (199) 361 – 361 309 309 [1] Includes counterparty amounts recognized on the balance sheets where the Corporation and its subsidiaries have 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 $52 million ($22 million at December 31, 2013), received on reverse repurchase agreements was $45 million ($89 million at December 31, 2013), and pledged on derivative liabilities was $299 million ($222 million at December 31, 2013). [3] Assets related to reverse repurchase agreements are included in bonds in the balance sheets. POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT 101 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 26 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 conditions 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, 2014 FINANCIAL ASSETS Financial assets recorded at fair value Bonds Fair value through proﬁt or loss Available for sale Mortgage 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 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 79,957 10,501 366 6,697 60 4,613 693 421 103,308 13,178 27,199 560 40,937 144,245 857 1,225 16 2,098 6,754 6,887 162 223 14,026 16,124 – – – 6,671 59 – 1 278 7,009 – – – – 79,871 10,500 366 7 – – 692 143 86 1 – 19 1 4,613 – – 79,957 10,501 366 6,697 60 4,613 693 421 91,579 4,720 103,308 14,533 126 14,659 22,197 6,819 29,016 – 36,730 560 7,505 560 44,235 7,009 128,309 12,225 147,543 – 4 16 20 – 526 – – 526 546 829 1,195 – 2,024 – 7,469 220 225 7,914 9,938 28 26 – 54 6,859 70 – – 6,929 6,983 857 1,225 16 2,098 6,859 8,065 220 225 15,369 17,467 [1] Fair value of certain shares available for sale cannot be reliably measured, therefore these investments are held at cost. 102 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT NOTE 26 FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) DECEMBER 31, 2013 FINANCIAL ASSETS Financial assets recorded at fair value Bonds Fair value through proﬁt or loss Available for sale Mortgage 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 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 – 582 – – 582 608 859 749 – 1,608 – 7,409 205 188 7,802 9,410 30 24 – 54 5,671 75 – – 5,746 5,800 889 779 20 1,688 5,671 8,066 205 188 14,130 15,818 [1] Fair value of certain shares available for sale cannot be reliably measured, therefore these investments are held at cost. There were no signiﬁcant transfers between Level 1 and Level 2 in 2014 and 2013. The Corporation’s ﬁnancial assets and ﬁnancial liabilities recorded at fair value > Level 2 inputs utilize other-than-quoted prices included in Level 1 that and those for which fair value is disclosed have been categorized based upon are observable for the asset or liability, either directly or indirectly. Level the following fair value hierarchy: > Level 1 inputs utilize observable, quoted prices (unadjusted) in active markets for identical assets or liabilities that the Corporation has the ability to access. Financial assets and liabilities utilizing Level 1 inputs include actively exchange-traded equity securities, 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 in instances where there are quoted prices available from active markets. 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 a matrix which is based on credit quality and average life, government and POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT 103 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 26 FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) agency securities, restricted stock, some private bonds and equities, most > Level 3 inputs utilize one or more signiﬁcant inputs that are not based on investment-grade and high-yield corporate bonds, most asset-backed observable market inputs and include situations where there is little, if securities, most over-the-counter derivatives, mortgage loans, deposits any, market activity for the asset or liability. The values of the majority and certiﬁcates, and most debentures and debt instruments. The fair of Level 3 securities were obtained from single-broker quotes, internal value of derivative ﬁnancial instruments and deposits and certiﬁcates is pricing models, external appraisers or by discounting projected cash determined using valuation models, discounted cash ﬂow methodologies, ﬂows. Financial assets and liabilities utilizing Level 3 inputs include certain or similar techniques using primarily observable market inputs. The fair bonds, certain asset-backed securities, some private equities, some value of long-term debt is determined using indicative broker quotes. mortgage loans, investments in mutual and segregated funds where Investment contracts that are measured at fair value through proﬁt or loss there are redemption restrictions, certain over-the-counter derivatives, are mostly included in the Level 2 category. investment properties, obligations to securitization entities, and certain debt instruments. 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, 2014. BONDS SHARES DECEMBER 31, 2014 FAIR VALUE THROUGH PROFIT OR LOSS AVAILABLE FOR SALE FAIR VALUE THROUGH PROFIT OR LOSS AVAILABLE FOR SALE INVESTMENT PROPERTIES DERIVATIVES, NET OTHER ASSETS (LIABILITIES) INVESTMENT CONTRACT LIABILITIES TOTAL Balance, beginning of year 333 24 26 Total gains (losses) In net earnings In other comprehensive income [1] Purchases Sales Settlements Transferred to owner- occupied properties Other Transfers out of Level 3 Balance, end of year 6 – 33 – (1) – – – 1 – – – – – (285) 86 (24) 1 – – 8 (13) (1) – – (1) 19 1 – – – – – – – – 1 4,288 262 56 127 (98) – (13) (9) – (16) (25) – 1 – 14 – – – 4,613 (26) 21 (30) 4,647 1 – – (22) – – – – – – – – – – – 2 – 244 57 169 (133) 12 (13) (7) (310) (28) 4,666 [1] Amount of other comprehensive income for investment properties represents the unrealized gains on foreign exchange. 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. 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 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. Discount rate Range of 3.5% – 10.5% Reversionary rate Range of 5.3% – 8.3% Vacancy rate Weighted average of 2.5% INTER-RELATIONSHIP BETWEEN KEY UNOBSERVABLE INPUTS AND FAIR VALUE MEASUREMENT 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. 104 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT NOTE 27 OTHER COMPREHENSIVE INCOME YEAR ENDED DECEMBER 31, 2014 Balance, beginning of year Other comprehensive income (loss) Balance, end of year YEAR ENDED DECEMBER 31, 2013 Balance, beginning of year Prior period adjustment [Note 33] Restated balance, beginning of year Other comprehensive income (loss) Other Restated 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 ASSOCIATES AC TUARIAL GAIN (LOSSES) ON DEFINED BENEFIT PENSION PL ANS SHARE OF JOINTLY CONTROLLED CORPORATIONS AND ASSOCIATES (49) 61 12 263 403 666 327 (86) 241 (179) (300) (479) (25) (25) (50) 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 ASSOCIATES AC TUARIAL GAIN (LOSSES) ON DEFINED BENEFIT PENSION PL ANS SHARE OF JOINTLY CONTROLLED CORPORATIONS AND ASSOCIATES 78 – 78 (128) 1 (49) (302) 7 (295) 556 2 263 76 – 76 251 – 327 (475) – (475) 292 4 (179) (44) – (44) 19 – (25) TOTAL 337 53 390 TOTAL (667) 7 (660) 990 7 337 NOTE 28 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 Net earnings adjusted for dilutive effect NUMBER OF COMMON SHARES (MILLIONS) Weighted average number of common shares outstanding – Basic Potential exercise of outstanding stock options Weighted average number of common shares outstanding – Diluted NET EARNINGS PER COMMON SHARE Basic Diluted 2014 2013 2,268 (132) 2,136 (3) 2,133 711.3 0.7 712.0 3.00 3.00 2,027 (131) 1,896 (28) 1,868 710.8 0.4 711.2 2.67 2.63 For 2014, 2,713,742 stock options (141,415 in 2013) have been excluded from the computation of diluted earnings per share as they were anti-dilutive. POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT 105 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 29 RELATED PARTY TRANSACTIONS P R I N C I PA L S U B S I D I A R I E S A N D J O I N T V E N T U R E The ﬁnancial statements of Power Financial include the operations of the following subsidiaries and joint venture: CORPORATIONS 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 [1] 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 [1] Lifeco holds 100% of the voting shares and 95.2% of the total outstanding shares. % EQUIT Y INTEREST 2014 67.2 100 100 100 100 100 95.2 58.8 100 100 50 55.5 2013 67.0 100 100 100 100 100 95.6 58.6 100 100 50 55.6 In the normal course of business, Power Financial and its subsidiaries T R A N S AC T I O N S W I T H R E L AT E D PA R T I E S enter into various transactions; subsidiaries provide insurance beneﬁts, During 2014, IGM sold residential mortgage loans to Great-West Life, sub-advisory services, distribution of insurance products and/or other London Life and segregated funds maintained by London Life for $184 million administrative services to other subsidiaries of the group and to the ($204 million in 2013). Corporation. In all cases, these transactions are in the normal course of operations and have been recorded at fair value. Balances and transactions between the Corporation and its subsidiaries have been eliminated on consolidation and are not disclosed in this note. Details of other transactions between the Corporation and related parties are disclosed below. Lifeco provides asset management and administrative services for employee beneﬁt plans relating to pension and other post-employment beneﬁts for employees of Power Financial, and Lifeco and its subsidiaries. On January 6, 2015, the Corporation increased its tax loss consolidation transactions with IGM. The Corporation acquired $330 million of 4.50% secured debentures of IGM. As sole consideration for the debentures a wholly owned subsidiary of Power Financial issued $330 million of 4.51% preferred shares to IGM. The Corporation has legally enforceable rights to settle these ﬁnancial instruments on a net basis and the Corporation intends to exercise these rights. 106 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT NOTE 29 RELATED PARTY TRANSACTIONS (CONTINUED) K E Y M A N AG E M E N T C O M P E N S AT I O N Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Corporation, directly or indirectly. The persons included in the key 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 2014 17 9 11 37 2013 19 9 9 37 NOTE 30 CONTINGENT LIABILITIES The Corporation and its subsidiaries are from time to time subject to legal On October 17, 2012, a subsidiary of Lifeco, Putnam Advisory Company, LLC, actions, including arbitrations and class actions, arising in the normal course received an administrative complaint from the Massachusetts Securities of business. It is inherently difficult to predict the outcome of any of these Division in relation to that subsidiary’s role as collateral manager of two proceedings with certainty, and it is possible that an adverse resolution collateralized debt obligations. On May 1, 2014 Putnam Advisory Company, LLC, could have a material adverse effect on the consolidated ﬁnancial position of reached a settlement with the Massachusetts Securities Division in relation the Corporation. However, based on information presently known, it is not to its administrative complaint. In addition, that same subsidiary was a expected that any of the existing legal actions, either individually or in the defendant in two civil litigation matters brought by institutions involved aggregate, will have a material adverse effect on the consolidated ﬁnancial in those collateralized debt obligations. In the third quarter of 2013, one position of the Corporation. Actual results could differ from the best estimates of the civil litigation matters was dismissed. On April 28, 2014, the second of the Corporation’s and its subsidiaries’ management. civil litigation matter was dismissed. On July 2, 2014, the complainant in the L I F E C O second civil litigation matter ﬁled an appeal of the dismissal. The resolution of these matters will not have a material adverse effect on the consolidated A subsidiary of Lifeco, Canada Life, has declared four partial windups in ﬁnancial position of Lifeco. respect of an Ontario deﬁned beneﬁt pension plan. The partial windups will involve the distribution of the amount of actuarial surplus attributable to the windups. A settlement of the class action proceeding commenced in Ontario relating to the partial windups received court approval in 2014. The settlement remains subject to regulatory approval. The provisions for certain Canadian retirement plans have been adjusted to $26 million after taxes as at December 31, 2014. In connection with the acquisition of its subsidiary Putnam, Lifeco has an indemnity from a third party against liabilities arising from certain litigation and regulatory actions involving Putnam. Putnam continues to have potential liability for these matters in the event the indemnity is not honoured. Lifeco expects the indemnity will continue to be honoured and that any liability of Putnam would not have a material adverse effect on its consolidated ﬁnancial position. 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 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 for the year ended December 31, 2013 by $226 million. On September 4, 2014, the Supreme Court of Canada dismissed, with costs, the plaintiffs’ application for leave to appeal the February 3, 2014 decision of the Court of Appeal for Ontario. There will not be any impact on the capital position of Lifeco or on participating policy contract terms and conditions. POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT 107 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 31 COMMITMENTS AND GUARANTEES G UA R A N T E E S I N V E S T M E N T C O M M I T M E N T S In the normal course of operations, the Corporation and its subsidiaries With respect to Lifeco, commitments of 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 $591 million as at December 31, 2014 ($466 million as at December 31, 2013). At agreed to indemnify their directors and certain of their officers. The nature of December 31, 2014, the full amount of $591 million will mature within 1 year (at these agreements precludes the possibility of making a reasonable estimate December 31, 2013, $466 million was to mature within 1 year). of the maximum potential amount the Corporation and its subsidiaries could be required to pay third parties as the agreements often do not specify a maximum amount and the amounts are dependent on the outcome of future contingent events, the nature and likelihood of which cannot be determined. Historically, the Corporation has not made any payments under such indemniﬁcation agreements. No amounts have been accrued related to these agreements. L E T T E R S O F C R E D I T I N V E S T E D A S S E T S O N D E P O S I T F O R R E I N S U R A N C E AG R E E M E N T S As at December 31, 2014, Lifeco has $598 million ($582 million at December 31, 2013) 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, C O M M I T M E N T S the total amount of letter of credit facilities is US$3.0 billion, of which US$2.6 billion were issued as of December 31, 2014. 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 2015 165 2016 146 2017 123 2018 98 2019 61 2020 AND THEREAFTER 120 TOTAL 713 NOTE 32 SEGMENTED INFORMATION The Corporation’s reportable operating segments are Lifeco, IGM Financial The Corporate column is comprised of corporate activities of Power Financial and Parjointco. These reportable segments reflect Power Financial’s and also includes consolidation elimination entries. management 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 is a ﬁnancial service holding company with subsidiaries offering life of these ﬁnancial statements. insurance, health insurance, retirement and investment management services and engaged in the asset management and reinsurance businesses primarily in Canada, the United States and Europe. The Corporation evaluates the per formance based on the operating segment’s contribution to net earnings. Revenues and assets are attributed to geographic areas based on the point of origin of revenues and the location > IGM Financial is a ﬁnancial services company operating in Canada primarily of assets. The contribution to net earnings of each segment is calculated within the advice segment of the ﬁnancial services market. IGM earns after taking into account the investment Lifeco and IGM have in each other. revenues from a range of sources, but primarily from management fees, which are charged to its mutual funds for investment advisory and management services. IGM also earns revenues 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; testing, inspection and certiﬁcation, wines and spirits; electricity, natural gas, and energy and environmental services; and water and waste management services. 108 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT NOTE 32 SEGMENTED INFORMATION (CONTINUED) I N F O R M AT I O N O N C O N T R I B U T I O N TO N E T E A R N I N G S FOR THE YEAR ENDED DECEMBER 31, 2014 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 associates Earnings before income taxes Income taxes Contribution to net earnings Attributable to Non-controlling interests Perpetual preferred shareholders Common shareholders I N F O R M AT I O N O N A S S E T S A N D L I A B I L I T I E S DECEMBER 31, 2014 Goodwill Total assets Total liabilities 21,222 13,513 4,422 39,157 29,160 2,084 4,244 304 35,792 3,365 24 3,389 628 2,761 1,052 – 1,709 2,761 – 165 2,762 2,927 – 993 877 92 1,962 965 – 965 203 762 317 – 445 762 – – – – – – – – – – 187 187 – 187 – – 187 187 – (115) (194) (309) 21,222 13,563 6,990 41,775 – 29,160 (176) 41 17 (118) (191) – (191) 3 (194) (121) 132 (205) (194) 2,901 5,162 413 37,636 4,139 211 4,350 834 3,516 1,248 132 2,136 3,516 LIFECO IGM PARJOINTCO CORPORATE TOTAL 6,315 356,770 334,812 2,834 13,801 9,576 – 2,440 – – 832 553 9,149 373,843 344,941 I N F O R M AT I O N O N TOTA L A S S E T S A N D TOTA L R E V E N U E S DECEMBER 31, 2014 CANADA UNITED STATES EUROPE TOTAL Invested assets (including cash and cash equivalents) Investments in jointly controlled corporations and associates Investments on account of segregated fund policyholders Other assets Goodwill and intangible assets Total assets Total revenues 73,206 36,198 45,427 154,831 – 68,372 4,084 10,226 – 31,030 3,613 2,061 2,677 75,564 19,026 2,359 2,677 174,966 26,723 14,646 155,888 72,902 145,053 373,843 20,043 7,551 14,181 41,775 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT 109 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 32 SEGMENTED INFORMATION (CONTINUED) I N F O R M AT I O N O N C O N T R I B U T I O N TO N E T E A R N I N G S 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 associates Earnings before income taxes Income taxes Contribution to net earnings Attributable to Non-controlling interests Perpetual preferred shareholders Common shareholders 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 I N F O R M AT I O N O N A S S E T S A N D L I A B I L I T I E S DECEMBER 31, 2013 [NOTE 33] LIFECO IGM PARJOINTCO CORPORATE TOTAL Goodwill Total assets Total liabilities 6,272 325,946 306,046 2,833 12,340 8,173 – 2,437 – – 959 529 9,105 341,682 314,748 I N F O R M AT I O N O N TOTA L A S S E T S A N D TOTA L R E V E N U E S DECEMBER 31, 2013 CANADA UNITED STATES EUROPE TOTAL Invested assets (including cash and cash equivalents) Investments in jointly controlled corporations and associates Investments on account of segregated fund policyholders Other assets [Note 33] Goodwill and intangible assets Total assets Total revenues 67,129 31,206 40,919 139,254 – 62,204 3,650 10,158 – 28,168 3,327 1,828 2,664 70,407 17,622 2,400 2,664 160,779 24,599 14,386 143,141 64,529 134,012 341,682 15,211 5,231 8,388 28,830 110 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT NOTE 33 PRIOR PERIOD ADJUSTMENT During the year, Lifeco corrected an error that occurred in 2008 that resulted accounting value and the tax book value. The nature of this error is such that from the impairment charge recorded against the goodwill associated with it was not material to the period to which it relates; however, correcting the the Putnam acquisition. Speciﬁcally, Lifeco’s tax affected the entire goodwill error in the year ended December 31, 2014 would have distorted net earnings. impairment charge when there was a permanent difference between the tax The Corporation corrected the error by decreasing equity at January 1, 2013. The Corporation corrected the error retrospectively which resulted in the impact to the following amounts previously reported at: ASSETS Deferred tax assets LIABILITIES Deferred tax liabilities EQUITY Retained earnings Reserves–other comprehensive income (loss) [1] Non-controlling interest COMPREHENSIVE INCOME Total comprehensive income AS AT JANUARY 1, 20 13 AS AT DECEMBER 31, 20 13 AMOUNT PREVIOUSLY REPORTED PRIOR PERIOD ADJUSTMENT RESTATED BAL ANCE AMOUNT PREVIOUSLY REPORTED PRIOR PERIOD ADJUSTMENT RESTATED BAL ANCE 1,223 (158) 1,065 1,240 (29) 1,211 1,018 – 1,018 1,079 140 1,219 11,201 (667) 10,102 (119) 11,082 12,204 (119) 12,085 7 (46) (660) 338 10,056 10,990 (1) (49) 337 10,941 4,323 (11) 4,312 [1] The adjustments to other comprehensive income (loss) and to total comprehensive income arise from unrealized foreign exchange gains (losses) on translation of foreign operations. The adjustment had no impact on net earnings or earnings per share for the periods presented within these ﬁnancial statements. POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT 111 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, 2014 and December 31, 2013, and the consolidated statements of earnings, statements of comprehensive income, statements of changes in equity and statements of cash ﬂows for the years then ended and a summary of signiﬁcant accounting policies and other explanatory information. M A N AG E M E N T ’ S R E S P O N S I B I L I T Y F O R T H E C O N S O L I DAT E D F I N A N C I A L S TAT E M E N T S 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 D I TO R ’ S R E S P O N S I B I L I T Y Our responsibility is to express an opinion on these consolidated ﬁnancial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the 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. O P I N I O N In our opinion, the consolidated ﬁnancial statements present fairly, in all material respects, the ﬁnancial position of Power Financial Corporation as at December 31, 2014 and December 31, 2013, and its ﬁnancial performance and its cash ﬂows for the years then ended in accordance with International Financial Reporting Standards. Signed, Deloitte LLP 1 March 18, 2015 Montréal, Québec 1 CPA auditor, CA, public accountancy permit No. A104630 112 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT POWER FINANCIAL CORPORATION FIVE-YEAR FINANCIAL SUMMARY DECEMBER 31 [IN MILLIONS OF CANADIAN DOLL ARS, EXCEPT PER SHARE AMOUNTS] (UNAUDITED) CONSOLIDATED BALANCE SHEETS Cash and cash equivalents Total assets [2] Shareholders’ equity [2] 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 associates 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 [3] 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 [2] MARKET PRICE (COMMON SHARES) High Low Year-end 2014 2013 2012 2011 [1] 2010 [1] 3,989 373,843 17,019 4,344 341,682 15,993 3,313 268,586 13,563 3,385 252,678 13,521 3,656 244,644 12,811 21,222 13,563 6,990 41,775 29,160 2,901 5,162 413 37,636 4,139 211 4,350 834 3,516 – 3,516 1,248 132 2,136 3,516 2.96 – 3.00 1.40 20.29 36.70 30.14 36.18 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 1.40 18.61 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 1.40 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 1.40 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 1.40 15.26 34.23 27.00 30.73 [1] The 2011 and 2010 ﬁgures have not been adjusted to reﬂect current year reclassiﬁcations and new and revised IFRS adopted on January 1, 2013. [2] Comparative ﬁgures have been restated as described in Note 33. [3] Operating earnings per share is a non-IFRS ﬁnancial measure. Please refer to the reconciliation of non-IFRS ﬁnancial measures to ﬁnancial measures in accordance with IFRS in the Review of Financial Performance. QUARTERLY FINANCIAL INFORMATION [IN MILLIONS OF CANADIAN DOLL ARS, EXCEPT PER SHARE AMOUNTS] (UNAUDITED) 2014 First quarter Second quarter Third quarter Fourth quarter 2013 First quarter Second quarter Third quarter Fourth quarter TOTAL REVENUES 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 10,584 10,716 9,134 11,341 8,150 4,236 7,803 8,641 799 911 965 841 692 780 744 795 467 568 595 506 394 475 434 593 0.66 0.80 0.83 0.71 0.55 0.67 0.61 0.84 POWER FINANCIAL CORPOR ATION(cid:18)2014 ANNUAL REPORT 0.66 0.80 0.83 0.71 0.55 0.67 0.61 0.84 113 BOARD OF DIRECTORS MARC A. BIBEAUŒ[1] President and Chief Executive Officer, Beauward Shopping Centres Ltd. ANDRÉ DESMARAIS, O.C., O.Q.Œ[4] Executive 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.Œ[4] Executive Co-Chairman of the Corporation and Chairman and Co-Chief Executive Officer, Power Corporation of Canada GÉRALD FRÈREŒ[2, 3] Managing Director, Frère-Bourgeois S.A. ANTHONY R. GRAHAM, LL.D.Œ[4] Vice-Chairman, Wittington Investments, Limited V. PETER HARDER, LL.D.Œ[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, FCAŒ[1, 2, 3, 4] Company Director T. TIMOTHY RYAN, JR. Company Director EMŐKE J.E. SZATHMÁRY, C.M., O.M., PH.D., FRSCŒ[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 114 POWER FINANCIAL CORPORATION(cid:18) 2014 ANNUAL REPORT OFFICERS PAUL DESMARAIS, JR., O.C., O.Q. Executive Co-Chairman ANDRÉ DESMARAIS, O.C., O.Q. Executive Co-Chairman R. JEFFREY ORR President and Chief Executive Officer 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 CLAUDE GÉNÉREUX Executive Vice-President ARNAUD VIAL Senior Vice-President OLIVIER DESMARAIS Vice-President PAUL DESMARAIS III 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 PHILIPPE MARTIN Treasurer POWER FINANCIAL CORPORATION(cid:18) 2014 ANNUAL REPORT 115 CORPORATE INFORMATION POWER FINANCIAL CORPORATION 751 Victoria Square Montréal, Québec, Canada H2Y 2J3 514-286-7430 161 Bay Street, Suite 5000 Toronto, Ontario, Canada M5J 2S1 www.powerﬁnancial.com This document is also available on the Corporation’s website TRANSFER AGENT AND REGISTRAR and on SEDAR at www.sedar.com. Computershare Investor Services Inc. 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 L: PWF.PR.L 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 Series D: PWF.PR.E Series E: PWF.PR.F Series F: PWF.PR.G Series H: PWF.PR.H Series I: PWF.PR.I Series K: PWF.PR.K Series O: PWF.PR.O Series P: PWF.PR.P Series R: PWF.PR.R Series S: PWF.PR.S Series T: PWF.PR.T 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 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. 116 POWER FINANCIAL CORPORATION(cid:18) 2014 ANNUAL REPORT DE SIG N: A R D O ISE.COM 2 0 1 4 A N N U A L R E P O R T P O W E R F I N A N C I A L C O R P O R A T I O N A D A N A C N I D E T N I R P

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