2 0 1 5 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 2015 ANNUAL REPORT Table of Contents GROUP ORGANIZATION CHART 2 REVIEW OF FINANCIAL PERFORMANCE 22 DIRECTORS’ REPORT TO SHAREHOLDERS 4 CONSOLIDATED FINANCIAL STATEMENTS 46 2015 AT A GLANCE 8 GREAT-WEST LIFECO 14 IGM FINANCIAL 16 PARGESA GROUP 18 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 51 FIVE-YEAR FINANCIAL SUMMARY 113 BOARD OF DIRECTORS 114 RESPONSIBLE MANAGEMENT 20 OFFICERS 115 CORPORATE INFORMATION 116 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 in Canadian dollars and as of December 31, 2015, 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 of the Review of Financial Performance and are comprised of: • operating earnings attributable to common shareholders; and • 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 include the Corporation’s share of items presented as other items or non-operating earnings 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 considered to be ongoing operating 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 IFRS, see the Results of Power Financial Corporation – Earnings Summary – Condensed Supplementary Non-Consolidated 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); Euronext Brussels (EBR); Euronext Paris (EPA); GDF Suez (Engie); Great-West Life & Annuity Insurance Company (Great-West Financial or Great-West Life & Annuity); Great-West Lifeco Inc. (Great-West Lifeco or Lifeco); Groupe Bruxelles Lambert (GBL); IGM Financial Inc. (IGM Financial or IGM); International Financial Reporting Standards (IFRS); Investment Planning Counsel Inc. (Investment Planning Counsel); Investors Group Inc. (Investors Group); Irish Life Group Limited (Irish Life); Lafarge SA (Lafarge); LafargeHolcim Ltd (LafargeHolcim); London Life Insurance Company (London Life); Mackenzie Financial Corporation (Mackenzie Investments or Mackenzie); Pargesa Holding SA (Pargesa); Parjointco N.V. (Parjointco); Power Corporation of Canada (Power Corporation); Putnam Investments, LLC (Putnam Investments or Putnam); SGS SA (SGS); Suez Environnement Company (Suez Environnement); Swiss Stock Exchange (SIX); The Canada Life Assurance Company (Canada Life); The Great-West Life Assurance Company (Great-West Life); Total SA (Total); Wealthsimple Financial Corp. (Wealthsimple). This is Power Financial Financial Highlights FOR THE YEARS ENDED DECEMBER 31 [IN MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS] 2015 2014 $2.3 BILLION 14.3% of net earnings attributable to common shareholders return on equity [1] THROUGH GREAT-WEST LIFECO AND IGM FINANCIAL $780 BILLION $1.4 TRILLION of assets under management of assets under administration 30 MILLION customer relationships 25,700 employees and 14,400 financial advisors Revenues 36,512 41,775 THROUGH THE PARGESA GROUP Significant shareholdings in six leading European-based multinationals [ 1] Return on equity is calculated using operating earnings. Net earnings – attributable to common shareholders Net earnings – per common share Operating earnings [1] – attributable to common shareholders Operating earnings [1] – per common share Dividends declared – per common share 2,319 3.25 2,136 3.00 2,241 2,105 3.14 1.49 2.96 1.40 Consolidated assets 417,630 373,843 Consolidated assets and assets under management Shareholders’ equity [2] Total equity [3] Book value per common share Common shares outstanding [in millions] 779,944 709,406 19,550 17,019 32,402 28,902 23.79 713.2 20.29 711.7 [ 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. [ 2] Represents preferred and common shareholders’ equity. [ 3] Includes non-controlling interests in the equity of subsidiaries. POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 1 Group Organization Chart Power Financial Corporation 67.4%[1] GREAT-WEST LIFECO 4.0% 2015 operating and net earnings attributable to common shareholders $2,762 MILLION 2015 return on shareholders’ equity 14.7% Total assets under administration $1,213 BILLION 100% 100% [2] 100% 100% 100% 100% GREAT-WEST PUTNAM GREAT-WEST LONDON LIFE CANADA LIFE IRISH LIFE FINANCIAL INVESTMENTS LIFE 2 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 60.4% IGM FINANCIAL 3.8% 2015 net earnings available to common shareholders $772 MILLION 2015 return on shareholders’ equity 17.0% 2015 operating earnings available to common shareholders $796 MILLION Total assets under management $134 BILLION 100% 100% 96.9% INVESTORS MACKENZIE GROUP INVESTMENTS INVESTMENT PLANNING COUNSEL PARGESA[3] 2015 net earnings SF638 MILLION 2015 operating earnings SF308 MILLION Net asset value SF8.0 BILLION 50.0% [4] GROUPE BRUXELLES LAMBERT Percentages denote participating equity interest as at December 31, 2015. [1] Representing 65% of the voting rights. [2] Denotes voting interest. Return on shareholders’ equity is calculated using operating earnings. Operating earnings is a non-IFRS financial measure. [3] 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. [4] Representing 52% of the voting rights. POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 3 Directors’ Report to Shareholders Power Financial reported record earnings in 2015, driven by organic growth at its subsidiaries. The Corporation increased the quarterly dividend payable to common shareholders during the year, the first such increase since the financial crisis. The record earnings were realized while the Corporation’s principal financial services subsidiaries invested heavily in products and services to meet the ever-evolving needs of their customers. At Great-West Lifeco, the year 2015 saw solid U.S.-based Retirement Plan Services, acquired sales across all lines of business in the Canadian in 2014 — continues to build its customer base. operations. In Europe, the integration of Irish Life It is the second largest defined contribution was completed during the year and, with a nod to retirement provider in the United States and the strength of the Empower Retirement brand celebrated its first anniversary with $50 billion in the United States, Irish Life adopted Empower in new business commitments. as the marketing platform for its retirement services. Empower Retirement — the amalgam of the retirement businesses of Great-West Financial, Putnam Investments and J. P. Morgan’s At IGM Financial, the management team continues to focus on long-term growth and value creation. The company continues to invest energy and resources in product innovation and distribution channels. Investors Group used its exclusive As a group of companies, we continue to invest in consultant network, which reached an all-time high our people, helping our consultants, advisors and of 5,320 consultants by year-end, to enhance its employees develop their skills and earn professional financial planning capabilities and to further define designations that speak to their ability to provide its competitive advantage. Mackenzie Investments practical and beneficial advice to clients. We are is transforming its business to be a leader among businesses enabled by personal relationships and trust. its peers by focusing on competitive risk-adjusted On our clients’ behalf, we recruit and nurture the best performance through its investment boutiques, professionals in the industry at every level in the group. product innovation and distribution excellence. Power Financial is actively assessing emerging Consistent with the previous three years, the year business models in the so-called “Fintech” space, with 2015 at Pargesa was characterized by faster portfolio a view to identifying opportunities to either serve turnover, with the goal of increasing sector and existing client groups more effectively or address geographic diversification. Many investments were the needs of new client segments. In this regard, made and GBL took advantage of the greater volatility in 2015 Power Financial announced an investment in the financial markets to strengthen certain of its of $30 million in Wealthsimple, Canada’s largest interests (Umicore) and acquire new positions (adidas automated investing service, and in 2016 has made AG, Ontex Group NV). GBL’s portfolio restructuring smaller investments in several other ventures. activities continued with the progressive reduction of its holdings in Total, which occurred mainly in late 2015 and early 2016. While the reduction in its investment will have an impact on the dividends GBL receives from Total (for the most part beginning in 2016), the continuing implementation of its strategy through new investments is not expected to affect the group’s dividend policy for 2016. Power Financial and its subsidiaries all maintain strong balance sheets. Maintaining such positions of financial strength is a key priority for the Corporation, allowing us the flexibility to manage our financial affairs in a prudent fashion while remaining equipped to pursue strategic acquisitions to complement our existing operations. During the course of 2015, Power Financial continued to evolve and strengthen its governance model. We play an active role in our companies’ boards of directors as a long-term investor committed to their future success. The principles of responsible management continue to guide the actions of Power Financial and its portfolio companies. To bring focus to these activities, we have included a section later in this report that outlines our commitments under the Corporation’s responsible management philosophy. Of note in 2015, we launched a website that details our policies, programs and performance as it pertains to corporate social responsibility, www.PowerFinancialCSR.com. POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 5 Financial Results Results of Group Companies Power Financial’s operating earnings attributable to common shareholders for the year ended December 31, 2015 were $2,241 million or $3.14 per share, compared with $2,105 million or $2.96 per share in 2014. GREAT-WEST LIFECO Great-West Lifeco’s operating and net earnings attributable to common shareholders were $2.8 billion or $2.774 per share in 2015, compared with $2.5 billion or $2.549 per share in 2014. Other items represented a contribution of $78 million in 2015, compared with $31 million in 2014. Great-West Lifeco maintained a strong return on equity of 14.7 per cent based on net earnings. Net earnings attributable to common shareholders were $2,319 million or $3.25 per share, compared with Total assets under administration at December 31, 2015 grew to over $1.2 trillion, up $149 billion from $2,136 million or $3.00 per share in 2014. December 31, 2014. In March of 2015, the Board of Directors increased the quarterly dividend from 35 cents to 37.25 cents per common share, the first quarterly increase since 2008. Dividends declared by Power Financial totalled In February of 2016, Great-West Lifeco announced a 6.1 per cent increase in its quarterly dividend, to 34.60 cents per common share. $1.49 per common share in 2015, compared with IGM FINANCIAL $1.40 per share in 2014. In March of 2016, the Board of Operating earnings available to common shareholders, Directors announced a further increase in the quarterly excluding other items, were $796 million or $3.21 per dividend to 39.25 cents per common share. share in 2015, compared with $826 million or $3.27 per Net earnings attributable to common shareholders [in millions of dollars] Operating earnings attributable to common shareholders [in millions of dollars] 1,722 1,618 1,896 2,136 2,319 2011 2012 2013 2014 2015 share in 2014. Net earnings available to common shareholders were $772 million or $3.11 per share in 2015, compared with $753 million or $2.98 per share in 2014. Total assets under management at December 31, 2015 totalled $134 billion, compared with $142 billion at December 31, 2014. PARGESA Pargesa’s operating earnings were SF308 million in 2015, compared with SF339 million in 2014. Including non- operating earnings consisting primarily of gains on the 1,729 1,678 1,708 2,105 2,241 partial disposals by GBL of its interest in Total and mark- 2011 2012 2013 2014 2015 to-market gains related to the LafargeHolcim merger, Pargesa’s net earnings in 2015 were SF638 million, compared with SF637 million in 2014. 6 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT Executive Changes in the Group The Power Financial Group Murray J. Taylor, President and Chief Executive Officer Our financial services businesses are focused upon of Investors Group for the past 12 years, will retire providing financial security and peace of mind from the company at IGM Financial’s upcoming to millions of people through various investment, annual meeting after a 40-year career with the Power retirement and insurance solutions. These are provided Financial group of companies. Under his leadership, to our clients through one-on-one relationships Investors Group greatly enhanced the products, with their financial advisors and through workplace services and advice given to clients and expanded its programs. Excellence and innovation in products network of consultants. Jeffrey R. Carney, CFA, will be appointed President and Chief Executive Officer of Investors Group. Since May 2013, he has served as President and Chief 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. Executive Officer of Mackenzie Financial Corporation. The need for these products and services is expected Mr. Carney will also become President and Chief to continue to grow in the future. The strategies Executive Officer of IGM Financial, a position he has being pursued by our group companies to serve shared with Mr. Taylor for the past three years. these growing markets are focused upon organic Board of Directors growth, based upon delivering ever-improving client outcomes and experiences. Acquisitions are expected At the May 2016 Annual Meeting of the Corporation, to continue to complement these strategies as shareholders will be asked to elect Mr. Gary A. Doer opportunities arise. to the Board. Mr. Doer served as Canada’s Ambassador Power Financial and its subsidiaries are committed to to the United States from 2009 to 2015. Prior to creating long-term value for shareholders based upon that, he was Premier of the Province of Manitoba the success of our clients, our employees and our after serving in a number of roles in the Legislative business partners, while contributing positively to the Assembly of Manitoba. Mr. Doer has also been communities in which we operate. nominated for election to the boards of Power Corporation, Lifeco and IGM at their upcoming annual meetings of shareholders. Your Directors wish to express gratitude, on behalf of all shareholders, for the important contribution of the management and employees of our Corporation and Mr. V. Peter Harder will not stand for re-election to its associated companies to the successful results the Corporation’s Board of Directors. Mr. Harder was achieved in 2015. a member of the Board since 2009; he served on the Compensation Committee and the Related Party and Conduct Review Committee, of which he had been the Chairman since May 2010. The Directors wish to thank Mr. Harder, on behalf of the shareholders, for his important contribution to the Board. On behalf of the Board of Directors, Signed, Signed, Signed, R. Jeffrey Orr President and 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 23, 2016 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 7 2015 at a Glance During 2015, the companies in the Power Financial group celebrated important milestones, expanded the reach and variety of their products and services, and worked diligently to protect and grow the financial security and health of their millions of customers. They also distinguished themselves with their corporate responsibility practices. GREAT-WEST LIFE Breaking new ground for health and wellness delivery Great-West Life piloted an online health and wellness platform that supports its commitment to helping improve the physical and mental well-being of Canadians, while M A N E U V E R I N M A R K E T S SM NAVIGATE INTEREST RATES EXPAND SHORT-TERM OPTIONS DIVERSIFY TO HELP REDUCE RISK PURSUE GREATER RETURNS Equip yourself with dynamic strategies to guide clients toward their goals. Learn more at putnam.com/advisor Request a prospectus or summary prospectus from your financial representative or by calling Putnam at 1-800-225-1581. The prospectus includes investment objectives, risks, fees, expenses, and other information that you should read and consider carefully before investing. Putnam Retail Management PUTNAM INVESTMENTS Strong long-term investment performance helping reduce associated health plan costs Long-term investment performance continues to be for plan sponsors. The pilot project was strong at Putnam with nearly two thirds of the firm’s the first major initiative for the company’s mutual funds performing above Lipper median and new innovation team, launched last year almost forty per cent of the funds’ assets performing to embed innovative thinking across the in the top quartile for the three-year period at the organization and support the incubation end of 2015. Putnam has been focusing on helping of new ideas. advisors and their clients “maneuver in markets” by providing an array of traditional and non-traditional products including multi-asset strategies and alternative solutions. 8 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT INVESTORS GROUP New Maestro Portfolios™ attractive to clients Investors Group has seen an increase in the number of clients with more than $500K invested with the company, in part due to its expanded product offering. Their new Maestro Portfolios combine a long-term investment management EMPOWER RETIREMENT Innovation helps customers reach goals Empower Retirement, a combination of three U.S. retirement outlook with dynamic asset allocation businesses, celebrated its first anniversary with $50 billion strategies to better manage volatility in new business commitments. Forward-thinking and and help clients continue to build focused on client needs, Empower launched a new customer wealth. Since their launch in July 2015, experience with unique online and mobile features in 2015. Maestro Portfolios’ assets under Social media tools and simplified communications help guide management grew to $720 million at participants to better retirement outcomes. Empower’s December 31, 2015. state-of-the-art record-keeping platform created efficiencies and provided scalability. MACKENZIE INVESTMENTS A bold new look brings a message of confidence In October 2015, Mackenzie Investments launched a new brand identity and tagline “Confidence in a Changing World”, to inspire both advisors and investors. The new identity and messaging reflects the strong heritage of thought leadership and innovation while reflecting a modernized yet sound, established company. The branding and tagline reinforce that Mackenzie Investments is focused on helping its clients confidently navigate the changing world. POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 9 GREAT-WEST LIFE, LONDON LIFE, CANADA LIFE HelloLife driving organic growth in retirement income market HelloLife symbolizes a new approach to helping Canadians achieve their best possible retirement while driving organic growth. Reflecting in-depth consumer feedback, HelloLife made its public debut last year in television, newspaper and magazine ads. The product name was spotlighted and, for the first time, the Great-West Life, London Life and Canada Life brands were advertised together. IGM FINANCIAL Recognized for corporate responsibility As a result of enhanced reporting and the introduction of a number of initiatives demonstrating a long-standing commitment to corporate responsibility, IGM Financial was recognized as one of the top five-performing Canadian diversified financial services companies by Sustainalytics — a global environmental, social and governance research firm — and was named to the Jantzi Social Index (JSI). IGM Financial’s addition to the JSI demonstrates its leadership in corporate responsibility. 10 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT PUTNAM INVESTMENTS Leader in the digital revolution Putnam has distinguished itself in the financial services industry as a leader in the digital revolution, from its highly acclaimed website and innovative practice management offerings to the firm’s trailblazing use of social media. In 2015, Putnam’s advisor website was ranked No. 1 by DALBAR and kasina, two well-regarded industry consultants. CANADA LIFE New CanRetire suite launched in the U.K. Responding to pension legislation changes that became effective in 2015, Canada Life in the U.K. launched its CanRetire suite of products — its largest U.K. product launch in many years. Under its distinctive brand, the four new products are engaging customers to rethink their view of retirement planning, as they mix and match products to suit their needs. CanRetire also supports advisors to become subject matter experts in guiding their clients’ retirement planning decisions. IRISH LIFE Empowering better retirement outcomes Leveraging expertise from Great-West Lifeco’s businesses in North America, Irish Life Empower is helping customers make retirement planning decisions that will lead them closer to financial security. No matter what mobile platform they use, plan members can create their own unique service experience. They can also draw on strategies to help them decide where to invest or how much to contribute, or use budgeting and planning tools to help them boost their retirement savings. POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 11 CANADA LIFE Marking 15 years in Germany The Canada Life Cologne office began operations in 2000, as the opening of the cross-border life insurance market in Europe led to expansion from Ireland. Today, employees based in Dublin, Ireland, Cologne and Frankfurt serve 325,000 German customers. Canada Life continues to be one of the leading insurers for unit-linked PUTNAM INVESTMENTS Key international partnership Putnam and Nissay Asset Management (NAM) pension savings products distributed extended their strategic alliance to manage and by independent brokers and is well recognized for its service and technology capabilities. provide investment products and services to Japanese institutional and retail investors through the year 2020. NAM, in which Putnam holds a 10 per cent ownership stake, is the asset management arm of Nippon Life Insurance Company, the largest life insurance company in Japan. The partnership was originally established in 1998 and last renewed in 2010. PARGESA Lafarge, Holcim join forces On July 15, 2015, LafargeHolcim was officially launched around the world following the successful completion of the merger between Lafarge and Holcim. The new entity has dedicated itself to becoming the highest-performing company in the building materials industry. 12 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT GREAT-WEST LIFE Minimizing its carbon footprint The Carbon Disclosure Project (CDP) once again included Great-West Life’s Canadian operations on the Canada 200 Climate Disclosure Leadership Index in 2015, with the top score amongst insurers in Canada. The designation was based on the company’s disclosure of high-quality data on greenhouse gas emissions. Also in 2015, real estate subsidiary, GWL Realty Advisors, achieved a Green Star ranking in its first submission to the Global Real Estate Sustainability Benchmark (GRESB) survey. GREAT-WEST FINANCIAL New U.S. brand identity points the way Building on its history of strength and stability, Great-West Financial launched a new brand identity in the U.S. that positions it for the future. A bold, modern logo evokes a compass, projecting progress toward new horizons. A redesigned website and digital, social media and print advertising campaign highlighted the new visual identity. With a focus on retirement income, life insurance and wealth transfer products, Great-West Financial championed the freedoms that come from preparing for financial independence. LafargeHolcim will be organized along a new operating model oriented to serve local customers, while leveraging the group’s size, footprint, and capabilities on a global scale. Pargesa, through its subsidiary GBL, owns 9.4 per cent of LafargeHolcim. POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 13 Great-West Lifeco Great-West Lifeco Inc. is an international financial services holding company with interests in life insurance, health insurance, retirement and investment services, asset management and reinsurance businesses. Great-West Lifeco has operations in Canada, the United States, Europe and Asia through Great-West Life, London Life, Canada Life, Irish Life, Great-West Financial and Putnam Investments. Great-West Lifeco and its companies have over $1.2 trillion in total assets under administration. Net earnings attributable to common shareholders [in millions of dollars] Operating earnings attributable to common shareholders [in millions of dollars] Total assets under administration [in billions of dollars] 2,022 1,806 2,278 2,546 2011 2012 2013 2014 2,762 2015 1,898 1,946 2,052 2,546 2011 2012 2013 2014 2,762 2015 502 546 758 1,063 2011 2012 2013 2014 1,213 2015 2015 total assets under administration $1,213 BILLION 2015 operating earnings attributable to common shareholders $2,762 MILLION 2015 return on shareholders’ equity [1] 14.7% [1] Return on shareholders’ equity is calculated using operating earnings. GREAT-WEST LIFECO GREAT-WEST LIFE 100% GREAT-WEST FINANCIAL 100% PUTNAM INVESTMENTS 100% [2] LONDON LIFE 100% CANADA LIFE 100% IRISH LIFE 100% [2] Denotes voting interest. Canada Europe United States United States • Europe • Asia 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. 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. $238 billion Total assets under administration $19.5 billion 2015 insurance and annuities sales $166 billion Total assets under administration $1,174 million 2015 net earnings $12.6 billion 2015 sales $1,195 million 2015 net earnings Great-West Financial® provides life insurance, annuities, executive benefits products and investment services. Its Empower Retirement arm is the second-largest retirement services provider in the U.S. by participants. 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. 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 the United States, Europe, and Asia. US$436 billion Total assets under administration US$148 billion Assets under management Over 8 million retirement, insurance and annuity customers No. 1 in government deferred compensation market by assets and participants No. 2 defined contribution record keeper in the U.S. by participants 200+ investment professionals 100+ mutual funds available 75+ years of investment experience 150+ institutional mandates 158,000 advisors distribute Putnam products POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 15 IGM Financial IGM Financial Inc. is one of Canada’s premier personal financial services companies with $134 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. Net earnings available to common shareholders [in millions of dollars] Operating earnings available to common shareholders [in millions of dollars] Total assets under management [in billions of dollars] 901 759 762 753 2011 2012 2013 2014 772 2015 833 746 764 826 2011 2012 2013 2014 796 2015 119 121 132 142 2011 2012 2013 2014 134 2015 Total assets under management $134 BILLION 2015 operating earnings available to common shareholders $796 MILLION 2015 return on shareholders’ equity [1] 17.0% [1] Return on shareholders’ equity is calculated using operating earnings. IGM FINANCIAL INVESTORS GROUP 100% MACKENZIE INVESTMENTS 100% INVESTMENT PLANNING COUNSEL 96.9% 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 5,300 consultants to nearly one million Canadians. $74.9 billion Total assets under management $7.9 billion Mutual fund sales 114 region offices across Canada 5,320 consultants Mackenzie Investments provides investment management and related services through diversified investment solutions using proprietary investment research and experienced investment professionals to deliver its various product offerings. The company distributes its investment services through distribution channels to both retail and institutional investors. $61.7 billion Total assets under management $7.0 billion Mutual fund sales Investment products offered through 30,000 independent financial advisors 60% of Mackenzie Funds rated 3, 4 or 5 Star by Morningstar 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 advisors with the tools, products, and support they need to build a successful business and serve a wide range of clients. $4.2 billion Assets under management in Counsel Portfolio Services $24.5 billion Assets under administration Partners with over 850 advisors across the country POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 17 17 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. 2015 operating earnings SF308 MILLION Net asset value SF8.0 BILLION PARGESA 50.0%[1] GROUPE BRUXELLES LAMBERT IMERYS 53.9% LAFARGE HOLCIM 9.4% TOTAL 2.4% PERNOD RICARD 7.5% SGS 15.0% ENGIE 2.3% [1] Representing 52% of the voting rights. 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 specialties have a very wide range of uses and are becoming more common in growing markets. LafargeHolcim, the product of the merger between Lafarge and Holcim in July 2015, is the world leader in construction materials, including cement, aggregates and concrete, with a presence in 90 countries. LafargeHolcim is the industry benchmark in R&D and serves every segment from the individual homebuilder to the largest and most complex project with the widest range of value-adding products, innovative services and comprehensive building solutions. Value of investment €2,761 million Capital/voting rights 53.9% / 69.8% Key 2015 financial data Market capitalization Turnover Operating income (EBIT) 5,126 4,087 538 Value of investment €2,674 million Capital/voting rights 9.4% / 9.4% Key 2015 financial data [SF million] Market capitalization Turnover [pro-forma] Operating income (EBIT) [pro-forma] 30,528 29,483 4,645 Value of investment €2,463 million Capital/voting rights 2.4% / 2.2% 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 2015 financial data Market capitalization Turnover [US$ million] Adjusted net operating income from business segments [US$ million] 11,362 100,689 165,357 Value of investment €2,093 million Capital/voting rights 7.5% / 6.9% Since its inception in 1975, Pernod Ricard has built up the most premium portfolio in the industry and become the world’s co-leader in the Wine & Spirits market through significant organic growth and numerous acquisitions, including Seagram in 2001, Allied Domecq in 2005 and Vin & Sprit in 2008. This portfolio includes in particular 14 strategic brands, 18 key local brands and 5 premium wine brands, produced and distributed by the group through its own worldwide distribution network. Key 2015 financial data Market capitalization Turnover Operating income [1] June 30, 2015 year-end 27,498 8,558 2,238 [1] [1] Value of investment €2,067 million Capital/voting rights 15.0% / 15.0% SGS is the world leader in inspection, verification, testing and certification. SGS provides tailored solutions to its customers to make their commercial activities faster, simpler and more efficient. Its worldwide network consists of more than 85,000 employees at more than 1,800 offices and laboratories. Key 2015 financial data [SF million] Market capitalization Turnover Adjusted operating income (EBIT) 14,949 5,712 917 Value of investment €893 million Capital/voting rights 2.3% / 2.3% Key 2015 financial data in millions of euros, unless otherwise indicated. Created from the merger between Suez and Gaz de France in 2008, ENGIE covers the entire energy chain, in electricity, natural gas and services. Its acquisition of International Power in 2011 strengthened its leading position in the European and international energy market. Key 2015 financial data Market capitalization Turnover Operating income (EBIT) POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 39,756 69,883 6,326 19 Responsible Management Our approach to corporate social responsibility (CSR) is about more than just good business sense – it is also about contributing to economic and social progress. As an investor, employer and contributor to the communities where we operate, we recognize that our actions can influence how others view and act on corporate responsibility. Our responsible management philosophy is embedded in our business and defines our approach to creating a more sustainable world. Reinforcing Our CSR Commitments Responsibly Managing Our Investments More than a year ago, Power Financial became a We are long-term investors and believe in signatory to the United Nations Global Compact investing in quality companies with sustainable (UNGC), along with 13,000 participants around franchises and attractive growth prospects, the globe. Through the UNGC, we pledged our and that are managed in a responsible manner. commitment to act responsibly in the areas Environmental, social and governance factors of human rights, labour, the environment and are considered through our investment analysis anti-corruption. The UNGC is helping us to guide process to help us mitigate risks and identify our efforts in these areas and to strengthen potential growth opportunities. our responsible management commitments, programs and performance. As part of our governance model, we take an active-ownership approach through the boards In 2015, we launched a new website to report on of directors of our group companies. We also our progress in the various aspects of CSR. The engage regularly with our major operating content of the website aligns with the Global subsidiaries through a CSR committee and Reporting Initiative, an international standards through other informal communication channels organization that provides guidance on CSR to share knowledge and best practices on CSR. reporting. It also includes our first UNGC Communication on Progress. We encourage you to visit us at www.PowerFinancialCSR.com for more information. Through these engagements, we ensure our investments are managed in a manner consistent with our responsible management philosophy, which is reflected in our Code of Business We have also developed a Code of Conduct for Conduct and Ethics, our CSR Statement and our third-party suppliers which we are deploying our commitment to the UNGC. in 2016. 20 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT Contributing to Economic and Social Progress Power Financial and its group companies have a long and proud history of contributing positively to economic and social progress. We provide fulfilling and rewarding careers for our people and invest in products and services that benefit society by enabling financial security, addressing climate change and investing in building stronger, healthier communities. PROVIDING FULFILLING AND REWARDING CAREERS The commitment, motivation and talent of our people help us ENABLING FINANCIAL SECURITY FOR OUR CUSTOMERS build sustainable, value-creating companies. In 2015, Power With more than 30 million customer relationships in Canada, Financial and its group companies employed 25,700 individuals the United States and Europe, our financial services companies and contributed $3.4 billion in employee salaries and benefits. represent a positive force in society by enabling financial security Programs are in place at many of our companies to strengthen how we empower and promote employees, and reward their performance. We are proud of the accomplishments of our companies. For example, our subsidiary Great-West Life was through life and health insurance, retirement savings programs, and a suite of investment products. Our group’s 14,400 financial consultants and advisors provide financial advice and guidance to our clients, thus promoting financial literacy. selected as one of Canada’s Top 100 Employers in 2015 and 2016, Great-West Lifeco and IGM Financial offer a range of responsible and one of Manitoba’s Top Employers for 2016. investment offerings. This includes specific socially responsible ADDRESSING CLIMATE CHANGE investment products which help clients ensure their investments promote environmental sustainability, social responsibility and In line with the Paris Agreement at COP 21, we reiterate our corporate governance. In 2015, IGM Financial was recognized commitment to playing our part in accelerating climate action by Sustainalytics as one of the top five-performing Canadian and finding suitable financial solutions. From an investment diversified financial companies and was added to the Jantzi standpoint, we are helping finance cleaner and more renewable Social Index. energy projects through our subsidiary Great-West Life. Despite our limited environmental impact as a holding company, we make every effort to conserve resources, improve energy efficiency, and manage waste effectively. Together with our group companies, we continued to reduce our greenhouse gas emissions and implemented innovative environmental initiatives. In 2015, Power Financial, Great-West Lifeco, and IGM Financial were recognized for their efforts through the Carbon Disclosure Project (CDP). Furthermore, Great-West Life’s Canadian operations received the top score among insurers in Canada as part of the CDP’s 2015 Canada 200 Climate Disclosure Leadership Index. GWL Realty Advisors — a subsidiary of Great-West Life — was also recognized for its property management excellence, obtaining leadership standing on the Global Real Estate Sustainability Benchmark (GRESB). INVESTING TO BUILD STRONGER, HEALTHIER COMMUNITIES Our investments in the communities where we operate are creating positive impacts in the areas of community development, arts and culture, the environment, education, and health. Our employees also play an active role in both charitable giving and volunteering, and sit on the boards of a number of non-profit organizations. As a result, our parent company Power Corporation has been designated a “Caring Company” by Imagine Canada. For more information on some of the charitable organizations we support, please refer to Power Corporation’s community investment website at www.PowerCorporationCommunity.com. POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 21 Review of Financial Performance ALL TABUL AR AMOUNTS ARE IN MILLIONS OF CANADIAN DOLL ARS, UNLESS OTHERWISE NOTED. MARCH 23, 2016 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 Management’s Discussion and Analysis 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, 2015 (the 2015 Consolidated Financial Statements or the Financial Statements); International Financial Reporting Standards (IFRS). 22 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT Overview Power Financial, a subsidiar y of Power Corporation, is a diversified As at December 31, 2015, GBL’s portfolio was mainly comprised of investments management and holding company with substantial operations in the in: Imer ys – mineral-based specialty solutions for industr y (EPA: NK); financial services sector in Canada, the United States and Europe, through its LafargeHolcim – cement, aggregates and concrete (SIX: HOLN and EPA: LHN); controlling interests in Lifeco and IGM. Power Financial also holds, together Total – oil, gas and alternative energies (EPA: FP); Pernod Ricard – wines and with the Frère Group, of Belgium, a controlling interest in Pargesa, a holding spirits (EPA: RI); SGS – testing, inspection and certification (SIX: SGSN); and company which focuses on a limited number of significant and strategic core Engie (formerly called GDF Suez) – electricity, natural gas, and energy and holdings, held through its subsidiary, GBL. Lifeco (TSX: GWO) and IGM (TSX: environmental services (EPA: GSZ). 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, 2015, Power Financial and IGM held 67.4% and 4.0%, respectively, of Lifeco’s common shares, representing approximately 65% of the voting rights attached to all outstanding Lifeco voting shares. Voting rights of a life insurance company are limited by law to 65%. On June 1, 2015, Holcim Ltd (Holcim) launched a public exchange offer for all the shares of Lafarge. The offer closed on July 3, 2015. Shares representing 87.46% of the share capital of Lafarge were tendered to the offer. Holcim and Lafarge announced on July 10, 2015, that they had completed their global merger and officially launched LafargeHolcim, whose shares are traded on the Swiss Exchange and on the Euronext in Paris. The exchange offer was subsequently reopened from July 15 to July 28, 2015, resulting in LafargeHolcim holding 96.4% of the share capital of Lafarge. In September 2015, LafargeHolcim implemented a “squeeze-out” procedure for the Lafarge shares not tendered to the public exchange offer, which closed on October 23, 2015. LafargeHolcim also distributed in September 2015 a post-closing stock dividend of one new During 2015, Lifeco completed two acquisitions in its Europe segment. In LafargeHolcim share for 20 existing shares (with no impact on the earnings the first quarter of 2015, Lifeco acquired the assets and liabilities associated of GBL). with The Equitable Life Assurance Society’s annuity business in the U.K. The transaction involved the initial reinsurance of approximately 31,000 policies with liabilities and supporting assets of approximately $1.6 billion. The initial reinsurance arrangement was effective January 1, 2015 and the ultimate transfer is expected to be completed in 2016, subject to final court approval. In the third quarter of 2015, Lifeco completed the acquisition of Legal & General On June 30, 2015, in accordance with IFRS 5 – Non-Current Assets Held for Sale and Discontinued Operations, GBL classified its investment in Lafarge as held for sale. On July 10, 2015, GBL classified its resulting investment in LafargeHolcim as available for sale and consequently the investment was recorded at fair value. Accordingly, mark-to-market gains representing reversals of a portion of a previously recorded impairment charge were recorded by GBL (see “Other International (Ireland) Limited (LGII), a provider of investment and wealth Items” below). management solutions for high-net-worth individuals in the U.K. 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, 2015, Power Financial and Great-West Life, a subsidiary of Lifeco, held 60.4% and 3.8%, respectively, of IGM’s common shares. Power Financial’s equity interest in IGM increased by 1.6% from 58.8% as at December 31, 2014 to 60.4% as at December 31, 2015 as a result of IGM’s repurchases and subsequent cancellation of its common shares. Great-West Life’s equity interest increased from 3.7% to 3.8% over the same period. PARGESA AND GBL Power Financial Europe B.V., a wholly owned subsidiary of Power Financial, and the Frère Group of Belgium each hold a 50% interest in Parjointco, which, At December 31, 2015, GBL held a 9.4% economic and voting interest in LafargeHolcim, and the LafargeHolcim share price was lower than the carrying value of the investment. Under IFRS, available-for-sale investments are marked to market and impairment charges are recorded if the loss is significant or prolonged. As these criteria were not present at December 31, 2015, GBL did not record an impairment charge on LafargeHolcim. The share price has continued to decline in 2016 and was €38.8 per share on March 11, 2016, a price where the above mentioned criteria are present. GBL has indicated, should the March 31, 2016 share price be the same as the March 11 share price, they would record a non-cash impairment charge of €1,584 million, of which the Corporation’s share is approximately C$340 million. In 2015, GBL disposed of a 0.5% equity interest in Total, which resulted in gains of SF225 million for Pargesa. As at December 31, 2015, GBL held a 2.4% equity interest in Total. In February 2016, GBL sold an additional 1% equity interest in Total, resulting in a gain to be recorded in the first quarter of 2016. Following as at December 31, 2015, held a 55.5% interest in Pargesa, representing 75.4% this transaction, GBL held a 1.4% equity interest in Total. of the voting rights in that company. Pargesa is a holding company, which at December 31, 2015, 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). WEALTHSIMPLE In 2015, Power Financial, through a wholly owned subsidiary, invested in Wealthsimple, a technology-driven investment manager. Power Financial’s investment amounted to $17 million at December 31, 2015. Subsequent to December 31, 2015, Power Financial made a second equity investment in Wealthsimple, bringing the total investment to date to $30 million, representing a 60.4% equity interest. Basis of Presentation The 2015 Consolidated Financial Statements of the Corporation have been liabilities, revenues, expenses and cash flows of the parent company and its prepared in accordance with IFRS and are presented in Canadian dollars. operating subsidiaries. The consolidated financial statements present the Lifeco and IGM are controlled by Power Financial and their financial statements are consolidated with those of Power Financial. Consolidated financial statements present, as a single economic entity, the assets, financial results of Power Financial (parent) and Lifeco and IGM (operating subsidiaries) after the elimination of intercompany balances and transactions. POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 23 Power Financial’s investment in Pargesa is held through Parjointco. Parjointco ▪ Power Financial’s net earnings or loss includes its share of Pargesa’s net is a holding company jointly controlled by Power Financial and the Frère earnings or loss; and Group. Parjointco’s only investment is its interest in Pargesa. Power Financial’s investment in Parjointco is accounted for using the equity method, in which: ▪ Power Financial’s other comprehensive income includes its share of Pargesa’s other comprehensive income. ▪ The investment is initially recognized at cost and adjusted thereafter for Power Financial’s investment in Wealthsimple is accounted for using the post-acquisition changes in Power Financial’s share of Pargesa’s net assets equity method. (shareholders’ equity); The following table summarizes the accounting presentation for the Corporation’s holdings: CONTROL BASIS OF ACCOUNTING EARNINGS AND OTHER COMPREHENSIVE INCOME IMPAIRMENT TESTING IMPAIRMENT REVERSAL Controlling interest in the entity ▪ Consolidation ▪ Consolidated with non-controlling interests ▪ 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 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 Non-controlled 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 share price decrease subsequent to an impairment leads to a further impairment As at December 31, 2015, the Corporation’s holdings were as follows: HOLDINGS Lifeco [1] IGM [2] Pargesa [3] Wealthsimple [4] % ECONOMIC INTEREST BASIS OF ACCOUNTING METHOD OF ACCOUNTING 67.4 60.4 27.8 33.2 Controlling interest Controlling interest Joint control Consolidation Consolidation Equity method of accounting Significant influence Equity method of accounting [1] IGM also holds a 4.0% interest in Lifeco. [2] Great-West Life also holds a 3.8% interest in IGM. [3] Held through Parjointco, a jointly controlled corporation (50%). [4] On February 4, 2016, Power Financial made an additional investment in Wealthsimple; the Corporation now holds a 60.4% equity interest. As at December 31, 2015, Pargesa’s holdings were as follows: HOLDINGS GBL Imerys LafargeHolcim [1] Total Pernod Ricard SGS Engie % ECONOMIC INTEREST BASIS OF ACCOUNTING METHOD OF ACCOUNTING 50.0 53.9 9.4 2.4 7.5 15.0 2.3 Controlling interest Controlling interest Portfolio investment Portfolio investment Portfolio investment Portfolio investment Portfolio investment Consolidation Consolidation Available for sale Available for sale Available for sale Available for sale Available for sale [1] Until June 30, 2015, the investment in Lafarge, in which GBL had significant influence with an equity interest of 21.0%, was accounted for using the equity method. On June 30, 2015, the investment in Lafarge was classified as held for sale. Following the merger of Lafarge and Holcim on July 10, 2015, the investment in LafargeHolcim was classified as available for sale. This summary of accounting presentation should be read in conjunction with the following notes to the Corporation’s 2015 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. 24 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT REVIEW OF FINANCIAL PERFORMANCE NON-IFRS FINANCIAL MEASURES AND PRESENTATION In analyzing the financial results of the Corporation and consistent with the 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 presentation in previous periods, “Net earnings attributable to common other entities. For a reconciliation of these non-IFRS measures to results shareholders”, presented in the section “Results of Power Financial reported in accordance with IFRS, see the “Results of Power Financial Corporation”, are comprised of: ▪ operating earnings attributable to common shareholders; and ▪ 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 include the Corporation’s share of items presented as other items or non-operating earnings 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 considered to be ongoing operating activities are excluded from this non-IFRS measure. Results of Power Financial Corporation Corporation – Earnings Summar y – Condensed Supplementar y Non- Consolidated Statements of Earnings” section below. 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 holding company’s (parent) results separately from the results of its operating subsidiaries. Reconciliations of the non-IFRS basis of presentation with the presentation in accordance with IFRS are included elsewhere in this review of financial performance. EARNINGS SUMMARY — CONDENSED SUPPLEMENTARY NON - CONSOLIDATED STATEMENTS OF EARNINGS 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. T WELVE MONTHS ENDED DECEMBER 31 Operating earnings Lifeco IGM Pargesa Corporate operations Dividends on perpetual preferred shares Operating earnings (attributable to common shareholders) Other items (non-operating earnings) [1] Lifeco IGM Pargesa 2015 1,862 474 112 2,448 (77) (130) 2,241 (1) (14) 93 78 2014 1,710 488 112 2,310 (73) (132) 2,105 (1) (43) 75 31 Net earnings (attributable to common shareholders) 2,319 2,136 Earnings per share (attributable to common shareholders) Operating earnings Non-operating earnings Net earnings [1] See “Other Items” below 3.14 0.11 3.25 2.96 0.04 3.00 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 25 NET EARNINGS (attributable to common shareholders) OPERATING EARNINGS (attributable to common shareholders) Net earnings attributable to common shareholders for the twelve-month Operating earnings attributable to common shareholders for the twelve- period ended December 31, 2015 were $2,319 million or $3.25 per share, month period ended December 31, 2015 were $2,241 million or $3.14 per share, compared with $2,136 million or $3.00 per share in the corresponding period compared with $2,105 million or $2.96 per share in the corresponding period in 2014, an increase of 8.3% on a per share basis. in 2014, an increase of 6.1% on a per share basis. A discussion on the results of the Corporation is provided in the sections “Contribution to operating earnings”, “Corporate operations of Power Financial”, and “Other items” below. CONTRIBUTION TO OPERATING EARNINGS — LIFECO, IGM AND PARGESA Power Financial’s share of operating earnings from Lifeco, IGM and Pargesa increased by 6% for the year ended December 31, 2015, compared with the same period in 2014, from $2,310 million to $2,448 million. Lifeco Lifeco’s contribution to Power Financial’s operating earnings for the twelve- ▪ Lifeco reported operating earnings attributable to Lifeco common shareholders of $2,762 million or $2.774 per share for the twelve-month month period ended December 31, 2015, was $1,862 million, compared with period ended December 31, 2015, compared with $2,546 million or $2.549 per $1,710 million for the corresponding period in 2014. share in the corresponding period in 2014, an increase of 8.8% on a per share basis. ▪ Summary of Lifeco’s operating segment results: T WELVE MONTHS ENDED DECEMBER 31 2015 2014 CANADA Individual Insurance Wealth Management Group Insurance Canada Corporate UNITED STATES Financial Services Asset Management U.S. Corporate EUROPE Insurance and Annuities Reinsurance Europe Corporate LIFECO CORPORATE Operating earnings (attributable to Lifeco common shareholders) Power Financial’s share 307 479 432 (23) 1,195 384 32 (7) 409 886 313 (25) 1,174 (16) 2,762 1,862 395 383 422 28 1,228 382 (71) (5) 306 810 265 (37) 1,038 (26) 2,546 1,710 For the twelve months ended December 31, 2015, Lifeco’s operating earnings attributable to Lifeco common shareholders increased by 8.5% from the previous year, reflecting earnings growth in the Europe and U.S. segments. C A N A DA primarily due to higher net investment income and the positive impact of an Operating earnings for the twelve months ended December 31, 2015 were adjustment to certain income tax estimates of US$27 million in 2015, partially $1,195 million, compared to $1,228 million for the corresponding period in offset by lower fee income. 2014. The results of 2014 included changes to actuarial standards related to economic reinvestment assumptions that positively impacted operating EU RO P E earnings in the twelve-month period ended December 31, 2014 that did not recur in 2015. U N ITED S TATE S Operating earnings for the twelve months ended December 31, 2015 were $1,174 million, an increase of $136 million compared to the same period in 2014, primarily due to the impact of currency movements, higher contributions from insurance contract liability basis changes, and higher asset management Operating earnings for the twelve months ended December 31, 2015 were fees, partially offset by lower contributions from investment experience. US$318 million (C$409 million), compared to US$274 million (C$306 million) for the corresponding period in 2014. This increase in the twelve-month period is 26 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT REVIEW OF FINANCIAL PERFORMANCE IGM Financial IGM’s contribution to Power Financial’s operating earnings was $474 million for the twelve-month period ended December 31, 2015, compared with $488 million for the corresponding period in 2014. ▪ IGM reported operating earnings available to IGM common shareholders of $796 million or $3.21 per share for the twelve-month period ended December 31, 2015, compared with $826 million or $3.27 per share in the corresponding period in 2014. ▪ Operating earnings before interest and taxes of IGM’s segments (a non-IFRS measure) 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, income taxes, preferred share dividends and other) Interest expense, income taxes, preferred share dividends and other Operating earnings (available to IGM common shareholders) Power Financial’s share 2015 761 216 140 1,117 (321) 796 474 2014 777 246 133 1,156 (330) 826 488 I N V E S TO RS G RO U P M AC K ENZI E Operating earnings decreased in the twelve-month period ended Operating earnings decreased in the twelve-month period ended December 31, December 31, 2015, compared to the same period in 2014, due to higher 2015, compared to the same period in 2014, due to a combination of lower expenses principally resulting from consultant network expansion, other total assets under management, as well as higher expenses related to the business development efforts, pension expense, as well as the timing of enhancement of future operating capabilities (systems and technology) and certain expenditures, partially offset by higher revenue primarily due to the investment in revenue-generating initiatives to further grow its business. higher assets under management. ▪ Total assets under management were as follows: [IN BILLIONS OF DOLL ARS] Investors Group Mackenzie Corporate and other [1] Total DECEMBER 31, 2015 SEPTEMBER 30, 2015 DECEMBER 31, 2014 SEPTEMBER 30, 2014 74.9 61.7 (3.0) 73.5 60.3 (2.9) 73.5 70.9 (2.5) 72.7 70.0 (2.1) 133.6 130.9 141.9 140.6 [1] Includes Investment Planning Counsel’s assets under management less an adjustment for assets sub-advised by Mackenzie on behalf of Investors Group and Investment Planning Counsel. ▪ Total average daily mutual fund assets under management were as follows: [IN BILLIONS OF DOLL ARS] Q4 Q3 Q2 Investors Group Mackenzie Corporate and other [1] Total 75.3 48.5 4.0 75.4 49.2 4.0 76.8 50.6 4.0 2015 Q1 75.5 50.5 3.9 Q4 Q3 Q2 72.5 48.3 3.8 73.1 49.3 3.8 71.5 48.5 3.6 2014 Q1 69.3 47.0 3.4 127.8 128.6 131.4 129.9 124.6 126.2 123.6 119.7 [1] Includes Investment Planning Counsel’s assets under management less an adjustment for assets sub-advised by Mackenzie on behalf of Investors Group and Investment Planning Counsel. POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 27 Pargesa Pargesa’s contribution to Power Financial’s operating earnings was $112 million for the twelve-month period ended December 31, 2015, same as in the corresponding period in 2014. The components of Pargesa’s operating earnings were: T WELVE MONTHS ENDED DECEMBER 31 [IN MILLIONS OF SWISS FRANCS] Contribution from principal holdings Share of earnings of: Imerys Lafarge [1] Dividends from: Total SGS Pernod Ricard Engie Suez Environnement Contribution from private equity activities and other investment funds Net financing charges Other operating income from holding company activities General expenses and taxes Operating earnings Power Financial’s share [in millions of Canadian dollars] [1] Share of earnings of Lafarge until June 30, 2015. 2015 2014 102 13 85 37 20 26 − 283 14 34 10 (33) 308 112 113 55 97 40 20 35 2 362 34 (33) 6 (30) 339 112 Results for twelve-month period ended December 31, 2015 reflect the impact of the euro’s depreciation relative to the Swiss franc since the beginning of the year on GBL’s contribution to Pargesa. GBL’s functional currency is the euro and its contribution constitutes most of Pargesa’s earnings. As there has not been a significant depreciation of the euro relative to the Canadian dollar in 2015, Power Financial’s share of GBL’s earnings in 2015 is the same as in 2014. The average exchange rates for the twelve-month period ended December 31, 2015 were as follows: Euro/SF SF/CAD 2015 SF1.07 C$1.33 2014 SF1.21 C$1.21 CHANGE % (12) 10 Pargesa’s operating earnings decreased in the twelve-month period ended In addition to the effect of exchange rates discussed above, the changes in December 31, 2015, mainly due to: dividends received reflect the 0.5% decrease in GBL’s equity interest in Total ▪ As of July 1, 2015, the investment in Lafarge was no longer being accounted in 2015 and the decrease in the dividend declared by Engie. for using the equity method (see “Overview” above); the contribution from Net financing charges include interest income and expenses and the result Lafarge in 2015 is therefore not comparable with the same period in 2014; of the mark to market of derivative financial instruments. Net financing ▪ A decrease in the contribution from private equity activities and other charges for the twelve-month period ended December 31, 2015 include investment funds; and Pargesa’s share of: ▪ A decrease in the contribution from GBL to Pargesa’s operating earnings due to the depreciation of the euro relative to the Swiss franc (see table above). A significant portion of Pargesa’s earnings consists of dividends received from: ▪ Total (regularly declared in the second, third and fourth quarters); ▪ SGS (regularly declared in the first quarter); ▪ Pernod Ricard (regularly declared in the second and fourth quarters); and ▪ Engie (regularly declared in the second and third quarters). ▪ Net gains (losses) are related to call options embedded in bonds exchangeable for Suez Environnement shares and Engie shares and in bonds issued by GBL in 2013 which are convertible for GBL shares. GBL has issued in the past bonds exchangeable for Suez Environnement (issued in 2012 and now expired) and Engie (issued in 2013 and expiring in 2017) shares. Net gains for the twelve-month period ended December 31, 2015, recorded by GBL in the amount of SF56 million, compared to a loss of SF6 million in the corresponding period of 2014. 28 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT REVIEW OF FINANCIAL PERFORMANCE CORPORATE OPERATIONS OF POWER FINANCIAL Corporate operations include income from investments, operating expenses, financing charges, depreciation and income taxes. T WELVE MONTHS ENDED DECEMBER 31 Income from investments Interest on cash and cash equivalents and foreign exchange gains (losses) Six-month equity put options on S&P 500 Other Operating and other expenses Corporate operations 2015 2014 24 − (3) 21 (98) (77) 14 (3) 1 12 (85) (73) Operating and other expenses Operating and other expenses were $98 million for the twelve-month period ended December 31, 2015, compared with $85 million in the corresponding period of 2014. The increase in the twelve-month periods is primarily due to a deferred income tax expense relating to withholding taxes applicable to an expected repatriation of cash held by Power Financial Europe B.V. to Power Financial. OTHER ITEMS (non-operating earnings) The following table presents the Corporation’s share of Lifeco’s, IGM’s and Pargesa’s Other items: T WELVE MONTHS ENDED DECEMBER 31 IGM Restructuring and other charges Distribution to clients Pargesa Total – Gain on partial disposal Suez Environnement – Gain on exchange LafargeHolcim – Mark-to-market gains and reversal of impairment charges related to the merger Lafarge – Impairment and restructuring charges Imerys – Impairment and restructuring charges Other (charge) income 2015 2014 (15) − 57 4 88 (23) (26) (7) 78 (8) (36) 70 17 − − − (12) 31 Other items in 2015 were mainly comprised of the Corporation’s share of: S ECO N D Q UA RTER IGM Financial FO U RTH Q UA RTER ▪ Restructuring and other charges: reflecting severance and payments to third parties related to exiting certain investment management activities ▪ Suez Environnement – Gain on exchange: a gain of $2 million, as described in the first quarter above. ▪ Lafarge – Impairment and restructuring charges: a charge of $23 million, representing non-operating items recorded by Lafarge, comprised of impairment charges and charges recorded in connection with the merger and third-party back office relationships associated with Mackenzie and with Holcim. Investors Group, for an amount of $15 million. Pargesa FI RS T Q UA RTER ▪ LafargeHolcim – Mark-to-market gains of $80 million representing the partial reversal of previous impairment charges recorded by GBL on its investment in Lafarge, resulting from its merger with Holcim. ▪ Total – Gain on partial disposal: GBL disposed of a 0.1% equity interest in TH I R D Q UA RTER Total for a gain of $9 million. ▪ LafargeHolcim – Mark-to-market gains of $8 million as described in the ▪ Suez Environnement – Gain on exchange: a gain of $2 million, resulting from second quarter above. delivery of Suez Environnement shares pursuant to the exercise of exchange FO U RTH Q UA RTER rights by certain holders of Suez Environnement’s exchangeable bonds. ▪ Total – Gain on partial disposal: GBL disposed of an additional 0.4% equity interest in Total for a gain of $48 million. ▪ Imerys – Impairment and restructuring charges: a charge of $26 million, representing non-operating items recorded by Imerys, comprised of the impairment charge on its Oilfield Solutions division and restructuring charges relating to the integration of S&B’s activities (S&B is a global provider of mineral-based specialties). POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 29 Other items in 2014 were mainly comprised of the Corporation’s share of: Pargesa IGM Financial S ECO N D Q UA RTER ▪ Restructuring and other charges: primarily reflecting severance and other one-time costs associated with Mackenzie cost rationalization activities as well as senior management changes announced and implemented during the second quarter of 2014, for an amount of $8 million. FO U RTH Q UA RTER ▪ Distribution to clients: in the amount of $36 million. In the third quarter of 2012, Investors Group introduced investment solutions for clients with household account balances in excess of $500,000. At December 31, 2014, FI RS T Q UA RTER ▪ Total – Gain on partial disposal: GBL disposed of a 0.2% equity interest in Total for an amount of $26 million. S ECO N D Q UA RTER ▪ Total – Gain on partial disposal: GBL disposed of an additional 0.2% equity interest in Total for an amount of $17 million. ▪ Suez Environnement – Gain on exchange: a gain of $17 million, resulting from the deliver y of Suez Environnement shares pursuant to the exercise of exchange rights by certain holders of Suez Environnement’s exchangeable bonds. an accrual was recorded related to these lower-fee investment solutions. TH I R D Q UA RTER This amount primarily reflects distributions to clients who did not transfer ▪ Total – Gain on partial disposal: GBL disposed of an additional portion of its to these lower-priced solutions when eligible. interest in Total for an amount of $2 million. FO U RTH Q UA RTER ▪ Total – Gain on partial disposal: GBL disposed of an additional 0.2% equity interest in Total for an amount of $25 million. Financial Position CONSOLIDATED BALANCE SHEETS (condensed) The condensed balance sheet of Lifeco and IGM, and Power Financial’s non-consolidated balance sheet are presented below. This table reconciles the non- consolidated balance sheet, which is not in accordance with IFRS, with the condensed consolidated balance sheet of the Corporation as of December 31, 2015. POWER FINANCIAL LIFECO IGM CONSOLIDATION ADJUSTMENTS [1] DECEMBER 31, 2015 DECEMBER 31, 2014 POWER FINANCIAL CONSOLIDATED BAL ANCE SHEETS 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 other 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 [2, 3] Total equity Total liabilities and equity 870 55 16,631 2,610 − − − 123 − − − 20,289 − − 250 489 − 739 2,580 16,970 − 19,550 20,289 2,813 158,133 358 − 277 15,512 5,131 9,568 4,036 5,913 198,194 399,935 160,672 − 5,395 10,414 198,194 374,675 2,514 19,940 2,806 25,260 399,935 983 7,443 904 − − − − 894 1,947 2,660 − (478) 381 (17,893) − 18 − − (90) − 637 − 4,188 3,989 166,012 150,842 − 2,610 295 15,512 5,131 10,495 5,983 9,210 198,194 − 2,440 237 12,154 5,151 9,418 5,497 9,149 174,966 373,843 14,831 (17,425) 417,630 − 7,092 1,325 1,566 − 9,983 150 4,698 − 4,848 14,831 − − (43) (126) 160,672 146,055 7,092 6,927 6,754 6,887 12,343 10,279 − 198,194 (169) 385,228 174,966 344,941 (2,664) (24,638) 10,046 (17,256) 2,580 16,970 12,852 32,402 2,580 14,439 11,883 28,902 (17,425) 417,630 373,843 [1] Consolidation adjustments include eliminations and reclassifications. [2] Non-controlling interests for Lifeco includes the Participating Account surplus in subsidiaries. [3] Non-controlling interests for consolidation adjustments represents non-controlling interests in the equity of Lifeco and IGM. 30 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT REVIEW OF FINANCIAL PERFORMANCE Total assets of the Corporation increased to $417.6 billion at December 31, 2015, Liabilities increased to $385.2 billion at December 31, 2015, compared with compared with $373.8 billion at December 31, 2014, mainly due to the following: $344.9 billion at December 31, 2014, mainly due to the following, as disclosed ▪ Investments at December 31, 2015 were $166 billion, a $15.2 billion by Lifeco: increase from December 31, 2014, primarily due to the impact of currency ▪ Insurance and investment contract liabilities increased by $14.6 billion, movements as the U.S. dollar and British pound strengthened against the primarily due to the strengthening of the U.S. dollar, euro and British Canadian dollar. ▪ Interest on account of segregated fund policyholders increased by $23.2 billion, primarily due to the impact of currency movements and pound against the Canadian dollar and Lifeco’s acquisition of Equitable Life’s annuity business and a block of investment contract liabilities in the form of structured settlements with fixed terms and amounts. the impact of the acquisition of Legal & General International (Ireland) ▪ Insurance and investment contract liabilities on account of segregated Limited (LGII). fund policyholders increased by $23.2 billion, primarily due to the impact of currency movements of $12.9 billion, the $5.5 billion impact of the acquisition of LGII, and the combined impact of market value gains and investment income of $4.7 billion, partially offset by net withdrawals of $0.3 billion. NON- CONSOLIDATED BALANCE SHEETS In the non-consolidated basis of presentation shown below, Lifeco and IGM are presented by the Corporation using the equity method. These non-consolidated balance sheets, which are not in accordance with IFRS, 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 Lifeco and IGM, 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 2015 2014 870 55 16,631 2,610 123 20,289 250 489 739 2,580 16,970 19,550 20,289 786 31 14,342 2,440 135 17,734 250 465 715 2,580 14,439 17,019 17,734 [1] In these non-consolidated balance sheets, cash equivalents include $478 million ($511 million at December 31, 2014) of fixed income securities with maturities of more than 90 days. In the 2015 Consolidated Financial Statements, this amount is classified in investments. Cash and cash equivalents Cash and cash equivalents held by Power Financial amounted to $870 million at December 31, 2015, compared with $786 million at the end of December 2014. The fourth quarter dividend declared by the Corporation and paid on February 1, 2016, amounted to $298 million. Dividends declared in the fourth quarter by IGM and received by the Corporation on January 29, 2016, amounted to $83 million (see “Non-consolidated Statements of Cash Flows” below for details). POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 31 Investment in subsidiaries and Parjointco The carrying value of Power Financial’s investments in Lifeco, IGM and Parjointco, at equity, increased to $19,241 million at December 31, 2015, compared with $16,782 million at December 31, 2014: Carrying value, at the beginning of the year Share of operating earnings Share of other items Share of other comprehensive income Dividends Other, mainly related to effects of change in ownership Carrying value, at December 31, 2015 EQUITY LIFECO IGM PARJOINTCO TOTAL 11,548 1,862 (1) 1,243 (873) (30) 2,794 474 (14) 51 (333) (90) 2,440 112 93 24 (69) 10 16,782 2,448 78 1,318 (1,275) (110) 13,749 2,882 2,610 19,241 Preferred shares Preferred Shares of the Corporation consist of 10 series of Non-Cumulative On February 1, 2016, 2,234,515 of its outstanding 11,200,000 Non-Cumulative Fixed Rate First Preferred Shares and two series of Non-Cumulative 5-year Rate Reset First Preferred Shares, Series P were converted, on a one- 5-year Rate Reset Preferred Shares, with an aggregate stated capital of for-one basis, into Non-Cumulative Floating Rate First Preferred Shares, $2,580 million as at December 31, 2015 (same as at December 31, 2014). All series Series Q. are perpetual preferred shares and are redeemable in whole or in part solely at the Corporation’s option from specified dates. The terms and conditions of the outstanding First Preferred Shares are described in Note 17 to the Corporation’s Consolidated Financial Statements. Common shareholders’ equity Common shareholders’ equity was $16,970 million at December 31, 2015, compared with $14,439 million at December 31, 2014: T WELVE MONTHS ENDED DECEMBER 31 Common shareholders’ equity, at the beginning of the year Changes in retained earnings Net earnings Dividends declared Effects of changes in ownership in subsidiaries and other Changes in reserves Other comprehensive income (loss) Foreign currency translation adjustments Available-for-sale assets and cash flow hedges Actuarial gains (losses) related to benefit plans Share of Pargesa’s and other associates’ other comprehensive income Issuance of 1,515,000 common shares under the Corporation’s Employee Stock Option Plan [1] Common shareholders’ equity at December 31 [1] Issued for $49 million and including an amount of $12 million representing the cumulative expenses related to these options. The book value per common share of the Corporation was $23.79 at December 31, 2015, compared with $20.29 at the end of 2014. 2015 14,439 2,449 (1,193) (137) 1,119 1,370 (184) 105 60 1,351 61 16,970 32 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT REVIEW OF FINANCIAL PERFORMANCE Outstanding number of common shares As of the date hereof, there were 7 13,238,680 common shares of the 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 Corporation outstanding, compared with 711,723,680 as at December 31, may issue up to an aggregate of $3 billion of First Preferred Shares, common 2014. The increase in the number of outstanding common shares reflects the shares, subscription receipts and unsecured debt securities, or any options exercised under the Corporation’s Employee Stock Option Plan. As of combination thereof. This filing provides the Corporation with the flexibility the date hereof, options were outstanding to purchase up to an aggregate to access debt and equity markets on a timely basis. of 8,773,932 common shares of the Corporation under the Corporation’s Employee Stock Option Plan. Cash Flows CONSOLIDATED STATEMENTS OF CASH FLOWS (condensed) The condensed cash flow of Lifeco and IGM, and Power Financial’s non-consolidated cash flow, are presented below. This table reconciles the non-consolidated statement of cash flows, which is not in accordance with IFRS, to the condensed consolidated statement of cash flows of the Corporation for the twelve- month period ended December 31, 2015. T WELVE MONTHS ENDED DECEMBER 31 POWER FINANCIAL LIFECO IGM CONSOLIDATION ADJUSTMENTS 2015 2014 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 1,229 (1,127) (18) − 84 786 870 5,123 (1,683) (3,424) 299 315 2,498 2,813 622 (420) (435) − (233) 1,216 983 (1,278) 1,278 33 − 33 (511) (478) 5,696 (1,952) (3,844) 299 199 3,989 4,188 6,136 (1,136) (5,433) 78 (355) 4,344 3,989 POWER FINANCIAL CONSOLIDATED CASH FLOWS On a consolidated basis, cash and cash equivalents increased by $199 million in Cash flows from investing activities resulted in a net outflow of $3,844 million the twelve-month period ended December 31, 2015, compared with a decrease in the twelve-month period ended December 31, 2015, compared with a net of $355 million in the corresponding period of 2014. outflow of $5,433 million in the corresponding period of 2014. Operating activities produced a net inflow of $5,696 million in the twelve- The Corporation decreased its level of fixed income securities with maturities month period ended December 31, 2015, compared with a net inflow of of more than 90 days, resulting in a net inflow of $33 million in the twelve- $6,136 million in the corresponding period of 2014. month period ended December 31, 2015, compared with a net outflow of Cash flows from financing activities, which include dividends paid on the common and preferred shares of the Corporation and dividends paid by subsidiaries to non-controlling interests, represented a net outflow of $1,952 million in the twelve-month period ended December 31, 2015, compared with a net outflow of $1,136 million in the corresponding period of 2014. $57 million in the corresponding period of 2014. POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 33 NON- CONSOLIDATED STATEMENTS OF CASH FLOWS As Power Financial is a holding company, corporate cash flows are primarily comprised of dividends received from Lifeco, IGM and Parjointco and income from investments, less operating expenses, financing charges, income taxes and preferred and common share dividends. 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 as it isolates 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 Adjusting items Earnings from Lifeco, IGM and Parjointco not received in cash Other FINANCING ACTIVITIES Dividends paid on preferred shares Dividends paid on common shares Repurchase of preferred shares Issuance of common shares INVESTING ACTIVITIES Investment in Wealthsimple Other Increase (decrease) in cash and cash equivalents Cash and cash equivalents, at the beginning of the year Cash and cash equivalents, at December 31 2015 2,449 (1,251) 31 1,229 (130) (1,046) − 49 (1,127) (17) (1) (18) 84 786 870 2014 2,268 (1,123) 17 1,162 (132) (996) (175) 17 (1,286) − (15) (15) (139) 925 786 On a non-consolidated basis, cash and cash equivalents increased by ▪ Pargesa declares and pays an annual dividend in the second quarter ending $84 million in the twelve-month period ended December 31, 2015, compared June 30. The dividend paid by Pargesa to Parjointco in 2015 amounted to with a decrease of $139 million in the corresponding period in 2014. SF2.27 per bearer share, compared with SF2.64 in 2014. The Corporation Operating activities produced a net inflow of $1,229 million in the twelve- month period ended December 31, 2015, compared with a net inflow of $1,162 million in the corresponding period in 2014. ▪ In the twelve-month period ended December 31, 2015, the Corporation received dividends from Lifeco of $873 million, compared with $824 million in the corresponding period of 2014. Dividends declared by Lifeco on its common shares during the twelve-month period ended December 31, 2015 were $1.3040 per share, compared with $1.2300 per share in the received dividends of $69 million (SF53 million) from Parjointco in 2015, compared with $75 million (SF62 million) in the corresponding period of 2014. At its upcoming annual meeting in May, Pargesa’s board of directors will propose for shareholder approval a 2015 dividend of SF2.38 per bearer share, to be paid on May 10, 2016. The Corporation’s financing activities during the twelve-month period ended December 31, 2015 were a net outflow of $1,127 million, compared with a net outflow of $1,286 million in the corresponding period in 2014, and included: corresponding period of 2014. On February 11, 2016, Lifeco announced an ▪ Dividends paid on preferred and common shares by the Corporation of increase of its quarterly dividend from $0.3260 to $0.3460 per common $1,176 million, compared with $1,128 million in the corresponding period share, an increase of 6.1%, payable March 31, 2016. of 2014. In the twelve-month period ended December 31, 2015, dividends ▪ In the twelve-month period ended December 31, 2015, the Corporation received dividends from IGM of $333 million, compared with $322 million in declared on the Corporation’s common shares were $1.49 per share, compared with $1.40 per share in the corresponding period of 2014. the corresponding period of 2014. Dividends declared by IGM on its common ▪ Repurchase of First Preferred Shares, Series M, for an amount of $175 million shares during the twelve-month period ended December 31, 2015 were in the first quarter of 2014. $2.2500 per share, compared with $2.1750 per share in the corresponding period of 2014. ▪ Issuance of common shares of the Corporation for $49 million pursuant to the Corporation’s Employee Stock Option Plan, compared with $17 million in the corresponding period of 2014. The Corporation’s investing activities during the twelve-month period ended December 31, 2015 represented a net outflow of $18 million, compared to a net outflow of $15 million in the corresponding period of 2014. 34 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 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: ▪ provide attractive long-term returns to shareholders of the Corporation; ▪ provide sufficient financial flexibility to pursue its growth strategy to invest on a timely basis in its operating companies and other investments as opportunities present; 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 directors of the public subsidiaries, as well as those of Pargesa and GBL, are responsible for their respective company’s capital management. The Corporation holds positions in long-term investments as well as cash and fixed income securities for liquidity purposes. With the exception of debentures and other debt instruments, the Corporation’s capital is permanent, matching the long-term nature of its investments. The capital structure of the Corporation consists of perpetual 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 capital structure, the Corporation may adjust the amount of dividends paid relatively low level of debt. 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 capital transactions such as the issuance, redemption and repurchase of In the following table, consolidated capitalization reflects the consolidation of the Corporation’s subsidiaries. The Corporation’s consolidated capitalization includes the debentures and other debt instruments of its consolidated subsidiaries. Debentures and other debt instruments issued by Lifeco and IGM are non-recourse to the Corporation. Perpetual preferred shares and total equity account for 82% of consolidated capitalization at December 31, 2015. DECEMBER 31 2015 2014 DEBENTURES AND OTHER DEBT INSTRUMENTS Power Financial Lifeco IGM Consolidating adjustments PREFERRED SHARES Power Financial Lifeco IGM EQUITY Common shareholders’ equity Non-controlling interests [1] 250 5,395 1,325 (43) 6,927 2,580 2,514 150 5,244 16,970 10,188 27,158 39,329 250 5,355 1,325 (43) 6,887 2,580 2,514 150 5,244 14,439 9,219 23,658 35,789 [1] Represents the non-controlling equity interests of the Corporation’s subsidiaries excluding Lifeco and IGM’s preferred shares, which are shown in this table 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; however, Lifeco and certain of its main subsidiaries and IGM’s the potential impact of all risks on the value of securities and are subject to subsidiaries are subject to regulatory capital requirements. revision or withdrawal at any time by the rating organization. RATINGS The current rating by Standard & Poor’s (S&P) of the Corporation’s debentures is “A+” with a stable outlook. Dominion Bond Rating Service’s (DBRS) current rating on the Corporation’s debentures is “A (High)” with a stable rating trend. The “A+” rating assigned to the Corporation’s debentures 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 Credit ratings are intended to provide investors with an independent measure on the obligation is still strong. 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 (High)” rating assigned to the Corporation’s debentures by DBRS is the fifth highest of the 26 ratings used for long-term debt. A long-term debenture rated “A (High)” implies that the capacity for the repayment is substantial, but of lesser credit quality than AA, and may be vulnerable to future events, although qualifying negative factors are considered manageable. On December 17, 2015, DBRS adopted a new Global Insurance Methodology and the Corporation’s rating changed from “AA (Low)” to “A (High)”. POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 35 Risk Management Power Financial is a holding company that holds substantial interests in the financial services sector through its controlling interest in each of Lifeco LAWS, RULES AND REGULATIONS There are many laws, governmental rules and regulations and stock exchange and IGM. As a result, the Corporation bears the risks associated with being rules that apply to the Corporation. Changes in these laws, rules and a significant shareholder of these operating companies. The respective regulations, or their interpretation by governmental agencies or the courts, boards of directors of Lifeco, IGM, Pargesa and GBL are responsible for the risk could have a significant effect on the business and the financial condition of oversight function at their respective companies. The risk committee of the the Corporation. The Corporation, in addition to complying with these laws, board of directors of Lifeco is responsible for its risk oversight, and the board rules and regulations, must also monitor them closely so that changes therein of directors of IGM provides oversight and carries out its risk management are taken into account in the management of its activities. mandate through various committees. Certain 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, a holding company, is also subject to risks due to the nature of its activities and also those of its direct subsidiary GBL. FINANCIAL INSTRUMENTS RISK Power Financial has established policies, guidelines and procedures designed to identify, measure, monitor and mitigate material risks associated with financial instruments. The key risks related to financial instruments are These risks relate to credit, liquidity and market risk as described in Pargesa’s liquidity risk, credit risk and market risk. consolidated financial statements for the year ended December 31, 2015. ▪ Liquidity risk is the risk that the Corporation will not be able to meet all The Corporation believes that a prudent approach to risk is achieved through a cash outflow obligations as they come due. governance model that focuses on the active oversight of its investments. The ▪ Credit risk is the potential for financial loss to the Corporation if a Board of Directors of the Corporation has overall responsibility for operational counterparty in a transaction fails to meet its obligations. risks associated with financial instruments and for monitoring management’s implementation and maintenance of policies and controls to manage the risks associated with the Corporation’s business as a holding company. ▪ 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 The Board of Directors provides oversight and carries out its risk management equity price risk. mandate primarily through the following committees: ▪ Currency risk relates to the Corporation operating in different currencies ▪ The Audit Committee addresses risks related to financial reporting. and converting non-Canadian earnings at different points in time at ▪ The Compensation Committee considers risks associated with the different foreign exchange levels when adverse changes in foreign Corporation’s compensation policies and practices. currency exchange rates occur. ▪ The Governance and Nominating Committee oversees the Corporation’s approach to appropriately address potential risk s related to ▪ 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 governance matters. interest rates. ▪ The Related Party and Conduct Review Committee oversees the risks ▪ Equity price risk is the uncertainty associated with the valuation of related to transactions with related parties of the Corporation. assets arising from changes in equity markets. Liquidity risk As a holding company, Power Financial’s ability to meet its obligations, 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 operating performance, profitability, financial position and creditworthiness 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 interest and 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. There are certain risks inherent in an investment in the securities of the Corporation and in the activities of the Corporation, including the following risks and others discussed elsewhere in this review of financial performance, which investors should carefully consider before investing in securities of the Corporation. The following is a review of certain risks that could impact the financial condition and financial performance, and the value of the equity of the Corporation. This description of risks does not include all possible risks, and there may be other risks of which the Corporation is not currently aware. OWNERSHIP OF COMMON AND PREFERRED SHARES The share price of Power Financial and its subsidiaries may be volatile and subject to fluctuations in response to numerous factors beyond Power Financial’s and such subsidiaries’ 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 and Europe. In recent years, financial markets have experienced significant price and volume fluctuations that have affected the market prices of equity securities held by the Corporation and its subsidiaries and that have often been unrelated to the operating performance, underlying asset values or prospects of such companies. 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. 36 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT REVIEW OF FINANCIAL PERFORMANCE Power Financial regularly reviews its liquidity requirements and seeks accounting requirements are not met. Power Financial regularly reviews the to maintain a sufficient level of liquidity to meet its operating expenses, credit ratings of derivative financial instrument counterparties. Derivative financing charges and payment of preferred share dividends for a reasonable contracts are over-the-counter with counterparties that are highly rated period of time. If required, the ability of Power Financial to arrange additional financial institutions. financing in the future will depend in part upon prevailing market conditions as well as the business performance of Power Financial and its subsidiaries. Although the Corporation has been able to access capital on financial markets in the past, there can be no assurance this will be possible in the future. The inability of Power Financial to access sufficient capital on acceptable terms could have a material adverse effect on Power Financial’s business, prospects, Power Financial’s exposure to and management of credit risk related to cash and cash equivalents, fixed income securities and derivatives have not changed materially since December 31, 2014. Market risk Power Financial’s financial instruments are comprised of cash and cash dividend paying capability and financial condition, and further enhancement equivalents, fixed income securities and debentures. opportunities or acquisitions. Power Financial’s management of liquidity risk has not changed materially since December 31, 2014. Credit risk Fixed income securities and derivatives are subject to credit risk. Power Financial mitigates credit risk on its fixed income securities by adhering to an investment policy that establishes guidelines which provide exposure limits by defining admissible securities, minimum rating and 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 or U.S. governments. Power Financial regularly reviews the credit ratings of its counterparties. The maximum exposure to credit risk on these financial instruments is their carrying value. C U R R EN C Y R I S K In managing its own cash and cash equivalents and fixed income securities, 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, 2015, approximately 88% of Power Financial’s cash and cash equivalents and fixed income securities were denominated in Canadian dollars. 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. I NTER E S T R ATE R I S K Power Financial’s financial instruments do not have significant exposure to interest rate risk. Derivatives continue to be utilized on a basis consistent with the risk EQ U IT Y P R I C E R I S K management guidelines of Power Financial and are monitored by the Power Financial’s financial instruments do not have significant exposure to Corporation for effectiveness as economic hedges even if specific hedge equity price risk. Power Financial’s management of financial instruments risk has not changed materially since December 31, 2014. For a further discussion of Power Financial’s financial instruments risk management, refer to Note 21 to the Corporation’s 2015 Consolidated Financial Statements. Lifeco’s and IGM’s management of financial instruments risk has not changed materially since December 31, 2014. Financial Instruments FAIR VALUE OF FINANCIAL INSTRUMENTS Financial instruments held by the Corporation and its subsidiaries include investments, derivative financial instruments, debentures and other debt instruments, investment contract liabilities and certain other assets ▪ Level 2 inputs utilize other-than-quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. ▪ Level 3 inputs utilize one or more significant inputs that are not based on observable market inputs and include situations where there is little, if any, and liabilities. market activity for the asset or liability. Fair value represents the amount that would be exchanged in an arm’s-length transaction between willing parties and is best evidenced by a quoted market price, if one exists. Fair values represent management’s estimates and are generally calculated using market information and at a specific point in time and may not reflect future fair values. The calculations are subjective in nature, involve uncertainties and matters of significant judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement falls has been determined based on the lowest level input that is significant to the fair value measurement. The Corporation’s assessment of the significance of a particular input to the fair value measurement requires judgment and The Corporation’s financial assets and financial liabilities recorded at fair value considers factors specific to the asset or liability. and those for which fair value is disclosed have been categorized based upon the following fair value hierarchy: ▪ Level 1 inputs utilize observable, unadjusted quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to access. POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 37 The following table presents the carrying amounts and fair value of the fair value if the carrying amount is a reasonable approximation of the fair Corporation and its subsidiaries’ financial assets and financial liabilities. The value. Items excluded are: cash and cash equivalents, dividends, interest table distinguishes between those financial instruments recorded at fair and accounts receivable, loans to policyholders, certain other financial value and those recorded at amortized cost. The table excludes fair value assets, accounts payable, dividends and interest payable and certain other information for financial assets and financial liabilities not measured at financial liabilities. 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 Obligations to securitization entities Debentures and other debt instruments Capital trust debentures Deposits and certificates Total financial liabilities CARRYING VALUE 2015 FAIR VALUE CARRYING VALUE 2014 FAIR VALUE 86,460 12,014 86,460 12,014 79,957 10,501 79,957 10,501 384 384 366 366 6,692 63 5,237 520 599 6,692 63 5,237 520 599 6,697 60 4,613 693 421 6,697 60 4,613 693 421 111,969 111,969 103,308 103,308 16,905 18,253 13,178 14,659 29,029 30,712 27,199 29,016 534 534 560 560 46,468 49,499 40,937 44,235 158,437 161,468 144,245 147,543 2,180 2,682 4 2,180 2,682 4 4,866 4,866 7,092 6,927 161 310 14,490 19,356 7,272 7,964 215 312 15,763 20,629 857 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 [1] Fair value of certain shares available for sale cannot be reliably measured, therefore these investments are recorded at cost. Refer to Note 26 to the Corporation’s 2015 Consolidated Financial Statements for additional disclosure of the Corporation’s fair value measurement of financial instruments at December 31, 2015. 38 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT REVIEW OF FINANCIAL PERFORMANCE DERIVATIVE FINANCIAL INSTRUMENTS In the course of their activities, the Corporation and its subsidiaries use derivative financial instruments. When using such derivatives, they only act as limited end-users and not as market-makers in such derivatives. operating policies, guidelines and procedures relating to the use of derivative financial instruments, which in particular focus on: ▪ prohibiting the use of derivative instruments for speculative purposes; ▪ documenting transactions and ensuring their consistency with risk The use of derivatives is monitored and reviewed on a regular basis by management policies; senior management of the Corporation and by senior management of its subsidiaries. The Corporation and its subsidiaries have each established ▪ demonstrating the effectiveness of the hedging relationships; and ▪ monitoring the hedging relationships. 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, 2015. The following table provides a summary of the Corporation and its subsidiaries’ derivatives portfolio: DECEMBER 31 Power Financial Lifeco IGM 2015 2014 MA XIMUM CREDIT RISK TOTAL FAIR VALUE NOTIONAL MA XIMUM CREDIT RISK TOTAL FAIR VALUE 1 461 58 520 1 8 (2,163) 15,460 − 2,621 (2,162) 18,089 1 652 40 693 1 (543) 10 (532) NOTIONAL 11 16,712 2,702 19,425 During the twelve-month period ended December 31, 2015, there was an increase of $1.3 billion in the notional amount outstanding and a decrease in the maximum credit risk that represents the market value of those instruments, which are in a gain position, primarily as a result of regular hedging activities. See Note 25 to the Corporation’s 2015 Consolidated Financial Statements for additional information. Off-Balance Sheet Arrangements GUARANTEES In the normal course of their operations, the Corporation and its subsidiaries LETTERS OF CREDIT In the normal course of Lifeco’s reinsurance business, Lifeco provides letters of may enter into certain agreements, the nature of which precludes the credit to other parties or beneficiaries. A beneficiary will typically hold a letter possibility of making a reasonable estimate of the maximum potential of credit as collateral in order to secure statutory credit for insurance and amount the Corporation or subsidiary could be required to pay third parties, investment contract liabilities ceded to or amounts due from Lifeco. Lifeco as some of these agreements do not specify a maximum amount and the may be required to seek collateral alternatives if it is unable to renew existing amounts are dependent on the outcome of future contingent events, the letters of credit on maturity. (See also Note 31 to the Corporation’s 2015 nature and likelihood of which cannot be determined. Consolidated Financial Statements.) Contingent Liabilities The Corporation and its subsidiaries are from time to time subject to legal actions, including arbitrations and class actions, arising in the normal course of business. It is inherently difficult to predict the outcome of any of these proceedings with certainty, and it is possible that an adverse resolution could have a material adverse effect on the consolidated financial position of the Corporation. However, based on information presently known, it is not expected that any of the existing legal actions, either individually or in the aggregate, will have a material adverse effect on the consolidated financial position of the Corporation. POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 39 Commitments and Contractual Obligations PAYMENTS DUE BY PERIOD Debentures and other debt instruments [1] Capital trust debentures 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 LESS THAN 1 YEAR 467 − 299 1–5 YEARS 1,525 − 8 1,235 5,799 144 85 229 203 356 135 − − MORE THAN 5 YEARS 4,957 150 3 58 116 7 − − TOTAL 6,949 150 310 7,092 616 227 229 203 2,662 7,823 5,291 15,776 6 1,069 1,587 2,662 3 1,414 6,406 7,823 251 4,183 857 5,291 260 6,666 8,850 15,776 [1] Please refer to Note 14 to the Corporation’s 2015 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. Subsequent to year-end, Lifeco’s subsidiaries signed an office lease for 15 years commencing in 2018, for an additional commitment of $271 million over the period of the lease. [3] Purchase obligations are commitments of Lifeco to acquire goods and services, primarily 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 debentures of the Corporation of $250 million. Income Taxes (Non-Consolidated Basis) The Corporation had, at December 31, 2015, non-capital losses of $76 million available to reduce future taxable income (including capital gains). These losses expire in 2028 and 2029 and are net of losses that will be transferred to IGM under a tax loss consolidation program. In addition, the Corporation has capital losses of $81 million that can be used indefinitely to reduce future capital gains. See also “Transactions with Related Parties” below. Transactions with Related Parties Power Financial has a Related Party and Conduct Review Committee IGM enters into transactions with subsidiaries of Lifeco. These transactions composed entirely of Directors who are independent of management and are in the normal course of operations and include (i) providing certain independent of the Corporation’s controlling shareholder. The mandate of administrative services, (ii) distributing insurance products and (iii) the sale of this Committee is to review proposed transactions with related parties of residential mortgages to Great-West Life and London Life. These transactions the Corporation, including its controlling shareholder, and to approve only are at market terms and conditions. those transactions that it deems appropriate and that are done at market terms and conditions. On November 14, 2013, the Board of Directors approved a tax loss consolidation program with IGM. This program allows Power Financial to generate In the normal course of business, Great-West Life enters into various sufficient taxable income to use its non-capital losses which would otherwise transactions with related companies which include providing group insurance expire, while IGM receives tax deductions which are used to reduce its benefits to other companies within the Power Financial group of companies. taxable income. Such transactions are at market terms and conditions. These transactions are reviewed by the appropriate related party and conduct review committee. As of December 31, 2015, under this program, the Corporation owned $2 billion of 4.50% secured debentures of IGM. These debentures represent the Lifeco provides reinsurance, asset management and administrative services consideration obtained from the sale to IGM of $2 billion of 4.51% preferred for employee benefit plans relating to pension and other post-employment shares issued to Power Financial from a wholly owned subsidiary. The benefits for employees of Power Financial, and Lifeco and its subsidiaries. Corporation has legally enforceable rights to settle these financial instruments These transactions are at market terms and conditions and are reviewed by on a net basis and the Corporation intends to exercise these rights. the appropriate related party and conduct review committee. See Note 29 to the Corporation’s 2015 Consolidated Financial Statements for more information. 40 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT REVIEW OF FINANCIAL PERFORMANCE Summary of Critical Accounting Estimates and Judgments In the preparation of the financial statements, management of the Corporation and the managements of its subsidiaries — Lifeco and IGM — FAIR VALUE MEASUREMENT The carrying values of financial assets necessarily reflect the prevailing market are required to make estimates and assumptions that affect the reported liquidity and the liquidity premiums embedded in the market pricing methods amounts of assets, liabilities, net earnings and related disclosures. Key sources that the Corporation and its subsidiaries rely upon. of estimation uncertainty and areas where significant judgments made by the management of the Corporation and the managements of its subsidiaries are: the entities to be consolidated, insurance and investment contract liabilities, fair value measurements, investment impairment, goodwill and intangible assets (including deferred selling commissions), income taxes and employee future benefits. These are described in the notes to the Corporation’s 2015 Consolidated Financial Statements. CONSOLIDATION Management of the Corporation consolidates all subsidiaries and entities in which it has determined that the Corporation has control. Control is evaluated according to the ability of the Corporation to direct the relevant activities of the subsidiary or other structured entity in order to derive variable returns. Management of the Corporation and each of its subsidiaries exercice judgment in determining whether control exists. Judgment is exercised in the evaluation of the variable returns and in determining the extent to which the Corporation and its subsidiaries have the ability to exercise the power to generate variable returns. INSURANCE AND INVESTMENT CONTRACT LIABILITIES Insurance and investment 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 subsidiaries are responsible for determining the amount of the liabilities to make appropriate provisions for Lifeco’s obligations to policyholders. The Appointed Actuaries determine the insurance and investment contract liabilities using generally accepted actuarial practices, according to the standards established by the Canadian Institute of Actuaries. The valuation of insurance contracts uses the Canadian Fair value movement on the assets supporting insurance contract liabilities is a major factor in the movement of insurance contract liabilities. Changes in the fair value of bonds designated or classified as fair value through profit or loss that support insurance contract liabilities are largely offset by corresponding changes in the fair value of liabilities, except when the bond has been deemed impaired. The following is a description of the methodologies used to determine fair value. B O N DS AT FAI R VA LU E TH RO U G H P RO FIT O R LOS S A N D AVAI L A B LE FO R SA LE Fair values for bonds recorded 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 dates 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 curves, prepayment rates and other relevant factors. For bonds that are not traded in active markets, valuations are adjusted to reflect illiquidity, and such adjustments are generally based on available market evidence. In the absence Asset Liability Method (CALM). This method involves the projection of future of such evidence, management’s best estimate is used. 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 misestimation and/or future deterioration in the best estimate assumptions and provide reasonable S H A R E S AT FAI R VA LU E TH RO U G H P RO FIT O R LOS S A N D AVAI L A B LE FO R SA LE Fair values for publicly traded shares are generally determined by the last bid price for the security from the exchange where it is principally traded. Fair values for shares for which there is no active market are determined by discounting expected future cash flows. The Corporation and its subsidiaries maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Corporation and its subsidiaries obtain quoted prices in active markets, when available, for identical assets at the balance sheet dates to measure shares at fair value in its fair value through assurance that insurance contract liabilities cover a range of possible outcomes. profit or loss and available-for-sale portfolios. Margins are reviewed periodically for continued appropriateness. Investment contract liabilities are measured at fair value determined using discounted cash flows utilizing the yield curves of financial instruments with similar cash flow characteristics. Additional details regarding these estimates can be found in Note 12 to the Corporation’s 2015 Consolidated Financial Statements. M O RTGAG E LOA N S A N D B O N DS C L A S S I FI ED A S LOA N S A N D R EC EIVA B LE S The fair values disclosed 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. POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 41 I N V E S TM ENT P RO P ERTI E S Fair values for investment properties are determined using independent qualified appraisal ser vices and include any adjustments by Lifeco GOODWILL AND INDEFINITE LIFE INTANGIBLES IMPAIRMENT TESTING Goodwill and indefinite life intangible assets are tested for impairment management for material changes in proper ty cash flows, capital annually or more frequently if events indicate that impairment may have expenditures or general market conditions in the interim period between occurred. Indefinite life intangible assets that were previously impaired are appraisals. The determination of the fair value of investment property reviewed at each reporting date for evidence of reversal. 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 IMPAIRMENT Investments are reviewed regularly on an individual basis at the end of each Goodwill and indefinite life intangible assets have been allocated to cash generating units or 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 CGU to the recoverable amount of the CGU to which the goodwill and indefinite life intangible assets have been allocated. An impairment loss is recognized for the amount by which the asset’s carrying reporting period to determine whether there is any objective evidence that amount exceeds its recoverable amount. The recoverable amount is the the investment is impaired. The Corporation and its subsidiaries consider higher of the asset’s fair value less cost of disposal or value in use, which is various factors in the impairment evaluation process, including, but not calculated using the present value of estimated future cash flows expected limited to, the financial condition of the issuer, specific adverse conditions to be generated. 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. DEFERRED SELLING COMMISSIONS 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, 2015, there were no indications For impaired mortgage loans, and bonds classified as loans and receivables, of impairment to deferred selling commissions. 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. 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. 42 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT REVIEW OF FINANCIAL PERFORMANCE PENSION PLANS AND OTHER POST-EMPLOYMENT BENEFITS 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. The defined benefit pension plans provide pensions based on length of service and final average earnings. Expenses for the defined benefit plans are 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 benefit 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. INCOME TAXES Current income tax Current income tax is based on taxable income for the year. Current tax liabilities (assets) for the current and prior periods are measured at the amount expected to be paid to (recovered from) the taxation authorities using the rates that have been enacted or substantively enacted at the balance sheet date. Current tax assets and current 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 ▪ The Corporation and its subsidiaries determine the net interest component are generally recognized for all taxable temporary differences and deferred of the pension expense for the period by applying the discount rate used tax assets are recognized to the extent that it is probable that future taxable to measure the accrued benefit liability at the beginning of the annual profits will be available against which deductible temporary differences and period to the net accrued benefit liability. The discount rate used to value unused tax attributes can be utilized. liabilities is determined using a yield curve of AA corporate debt securities. Deferred tax assets and liabilities are measured at the tax rates expected to ▪ If the plan benefits are changed, or a plan is curtailed, any past service costs apply in the year when the asset is realized or the liability is settled, based on or curtailment gains or losses are recognized immediately in net earnings. tax rates and tax laws that have been enacted or substantively enacted at the ▪ 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. ▪ The accrued benefit asset (liability) represents the plan surplus (deficit). ▪ Payments to the defined contribution plans are expensed as incurred. balance sheet date. Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to net current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient future taxable profits will be available to allow all or part of the deferred tax asset to be utilized. Unrecognized deferred tax assets are reassessed at each balance sheet date and are recognized to the extent that it has become probable that future taxable profits will allow the deferred tax asset to be recovered. Deferred tax liabilities are recognized for taxable temporary differences 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. POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 43 Changes in Accounting Policies There were no changes to the Corporation’s accounting policies for the year ended December 31, 2015. Future Accounting Changes The Corporation and its subsidiaries continuously monitor the potential In December 2015, the IASB published an exposure draft with proposed changes proposed by the International Accounting Standards Board (IASB) amendments to IFRS 4, Insurance Contracts to alleviate the temporary and analyze the effect that changes in the standards may have on their consequences of the different effective dates with IFRS 9. Companies whose consolidated financial statements when they become effective. business model is to predominantly issue insurance contracts are allowed the IFRS 4 — INSURANCE CONTRACTS In June 2013, the IASB issued a revised IFRS 4, Insurance Contracts exposure draft proposing changes to the accounting standard for insurance contracts. option to defer the effective date of IFRS 9 until the earliest of the mandatory effective date of IFRS 4 or January 1, 2021. For companies that do not issue insurance contracts, the effective date of January 1, 2018 should remain. The Corporation and its subsidiaries are evaluating the impact of the adoption The IASB continues to deliberate the proposals in this exposure draft. The of this standard. proposed standard differs significantly from Lifeco’s current accounting and actuarial practices under the Canadian Asset Liability Method (CALM) and is expected to produce more volatile financial results. Lifeco has disclosed that it is actively monitoring developments in this area and that 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. IFRS 9 — FINANCIAL INSTRUMENTS The IASB issued IFRS 9, Financial Instruments, which replaces IAS 39, Financial Instruments: Recognition and Measurement, 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. IFRS 15 — REVENUE FROM CONTRACTS WITH CUSTOMERS 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 will be effective January 1, 2018. The Corporation and its subsidiaries are evaluating the impact of the adoption of this standard. IFRS 16 — LEASES In January 2016, the IASB issued IFRS 16, Leases, which requires a lessee to recognize a right-of-use asset representing its right to use the underlying leased asset and a corresponding lease liability representing its obligation to make lease payments for all leases. A lessee recognizes the related expense as depreciation on the right-of-use asset and interest on the lease liability. Short-term (less than 12 months) and low-value asset leases are exempt from ▪ Hedge accounting: this phase replaces the current rule-based hedge these requirements. accounting requirements in IAS 39 with guidance that more closely aligns the accounting with an entity’s risk management activities. The standard will be effective January 1, 2019. The Corporation and its subsidiaries are evaluating the impact of the adoption of this standard. Disclosure Controls and Procedures Based on their evaluations as at December 31, 2015, the Chief Executive Officer and Chief Financial Officer have concluded that the Corporation’s disclosure controls and procedures were effective as at December 31, 2015. 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 2015, 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. Based on such evaluation, the Chief Executive become ineffective because of changes in conditions. Therefore, even those Officer and the Chief Financial Officer have concluded that the Corporation’s systems determined to be effective can provide only reasonable assurance internal control over financial reporting was effective as at December 31, 2015. with respect to financial statement preparation and presentation. There have been no changes in the Corporation’s internal control over financial reporting during the year ended December 31, 2015 which have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting. 44 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT REVIEW OF FINANCIAL PERFORMANCE Selected Annual Information FOR THE YEARS ENDED DECEMBER 31 Total revenue Operating earnings (attributable to common shareholders) [1] per share – basic Net earnings (attributable to common shareholders) per share – basic per share – diluted Consolidated assets Total financial liabilities Debentures and other debt instruments Shareholders’ equity Book value per common share Number of common shares outstanding [millions] Dividends per share [declared] Common shares First preferred shares Series A [2] Series D Series E Series F Series H Series I Series K Series L Series O Series P [3] Series R Series S [4] Series T [5] 2015 36,512 2,241 3.14 2,319 3.25 3.24 417,630 22,327 6,927 19,550 23.79 713.2 1.4900 0.4887 1.3750 1.3125 1.4750 1.4375 1.5000 1.2375 1.2750 1.4500 1.1000 1.3750 1.2000 1.0500 2014 41,775 2,105 2.96 2,136 3.00 3.00 373,843 18,800 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 17,562 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 − [1] 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. [2] The Series A First Preferred Shares are entitled to a quarterly cumulative dividend at a floating rate equal to one quarter of 70% of the average prime rates quoted by two major Canadian chartered banks. [3] On February 1, 2016, 2,234,515 of its outstanding 11,200,000 Non-Cumulative 5-year Rate Reset First Preferred Shares, Series P were converted, on a one- for-one basis, into Non-Cumulative Floating Rate First Preferred Shares, Series Q. The Series Q First Preferred shares are entitled to an annual non-cumulative dividend, payable quarterly at a floating rate equal to the 3-month Government of Canada Treasury Bill rate plus 1.60%. The dividend rate for the remaining 8,965,485 Series P shares was reset to an annual fixed rate of 2.31% or $0.144125 per share in cash dividends payable quarterly. [4] Issued in February 2013. The first dividend payment was made in April 30, 2013, in the amount of $0.2006 per share. [5] Issued in December 2013. The first dividend payment was made on April 30, 2014 in the amount of $0.4027 per share. POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 45 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 other 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 46 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT Signed, R, Jeffrey Orr Director 2015 2014 4,188 3,989 115,379 29,413 7,289 5,237 8,694 166,012 15,512 5,131 2,905 1,106 520 6,908 1,961 5,983 9,210 198,194 417,630 103,636 27,565 7,317 4,613 7,711 150,842 12,154 5,151 2,677 986 693 6,032 1,707 5,497 9,149 174,966 373,843 158,492 145,198 2,180 7,092 6,927 2,682 7,686 1,975 198,194 385,228 2,580 804 14,283 1,883 19,550 12,852 32,402 417,630 857 6,754 6,887 1,225 7,293 1,761 174,966 344,941 2,580 743 13,164 532 17,019 11,883 28,902 373,843 Consolidated Statements of Earnings FOR THE YEARS ENDED DECEMBER 31 [IN MILLIONS OF CANADIAN DOLL ARS, EXCEPT PER SHARE AMOUNTS] 2015 2014 REVENUES Premium income Gross premiums written Ceded premiums Premium income, net Net investment income [Note 5] Regular net investment income Change in fair value through profit or loss Investment income, net Fee income Total revenues EXPENSES Policyholder benefits Insurance and investment contracts Gross Ceded Total net policyholder benefits 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 Earnings before investments in jointly controlled corporations and associates, and income taxes 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 28,129 (3,628) 24,501 6,332 (2,013) 4,319 7,692 36,512 22,553 (2,000) 20,553 1,477 812 22,842 3,133 5,883 413 32,271 4,241 224 4,465 679 3,786 1,337 130 2,319 3,786 3.25 3.24 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 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 47 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 TS 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 investments in foreign operations Income tax (expense) benefit 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 benefit plans [Note 24] 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 2015 3,786 (15) 6 (106) 18 (97) (253) 95 2 (1) (157) 2,038 (50) 9 1,997 45 1,788 194 (36) 1 159 1,947 5,733 1,953 130 3,650 5,733 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 48 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT Consolidated Statements of Changes in Equity STATED CAPITAL RESERVES FOR THE YEAR ENDED DECEMBER 31, 2015 [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 2,580 743 13,164 142 Net earnings Other comprehensive income Total comprehensive income Dividends to shareholders Perpetual preferred shares Common shares Dividends to non-controlling interests Share-based compensation Stock options exercised Effects of changes in ownership of subsidiaries, capital and other – – – – – – – – – Balance, end of year 2,580 – – – – – – – 61 – 804 2,449 – 2,449 (130) (1,063) – – – (137) 14,283 – – – – – – 48 (48) – 142 390 – 1,331 1,331 – – – – – NON- CONTROLLING INTERESTS TOTAL EQUIT Y 11,883 28,902 1,337 616 1,953 – – (711) 19 36 3,786 1,947 5,733 (130) (1,063) (711) 67 49 TOTAL 532 – 1,331 1,331 – – – 48 (48) 20 1,741 20 (328) (445) 1,883 12,852 32,402 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 perpetual preferred shares (175) Dividends to shareholders Perpetual preferred shares Common shares Dividends to non-controlling interests Share-based compensation Stock options exercised Effects of changes in ownership of subsidiaries, capital and other – – – – – – Balance, end of year 2,580 – – – – – – – – 22 – 743 2,268 – 2,268 – (132) (996) – – – (61) 13,164 – – – – – – – 35 (11) 23 142 337 – 53 53 – – – – – – – 390 NON- CONTROLLING INTERESTS 10,941 1,248 99 1,347 – – – (693) 15 6 TOTAL EQUIT Y 26,934 3,516 152 3,668 (175) (132) (996) (693) 50 17 267 229 11,883 28,902 TOTAL 432 – 53 53 – – – – 35 (11) 23 532 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 49 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 TS 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] Redemption of preferred shares by the Corporation Issue of common shares by subsidiaries Issue of preferred shares by subsidiaries Repurchase of common shares by subsidiaries Changes in debt instruments Change in obligations to securitization entities Other INVESTMENT ACTIVITIES Bond sales and maturities Mortgage loan repayments Sale of shares 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 50 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 2015 4,465 (543) (1,088) 821 28 367 2,013 (367) 5,696 (715) (130) (1,046) (1,891) 49 – 113 – (509) (137) 336 87 (1,952) 29,591 2,926 2,274 (4) (32,491) (3,394) (2,551) (195) (3,844) 299 199 3,989 4,188 5,881 533 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 (43) (31,462) (4,703) (2,156) (28) (5,433) 78 (355) 4,344 3,989 5,479 533 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 The Consolidated Financial Statements (f inancial statements) of publicly listed company (TSX: PWF) incorporated and domiciled in Canada Power Financial for the year ended December 31, 2015 were approved by its whose registered address of the Corporation is 751 Victoria Square, Montréal, Board of Directors on March 23, 2016. The Corporation is controlled by Power Québec, Canada, H2Y 2J3. 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 and Europe. 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, 2015 have been Jointly controlled corporations are entities in which unanimous consent is prepared in accordance with International Financial Reporting Standards. required for decisions relating to relevant activities. Associates are entities BASIS OF PRESENTATION The financial statements include the accounts of Power Financial and all its subsidiaries on a consolidated basis after elimination of intercompany transactions and balances. Subsidiaries are entities the Corporation controls, when the Corporation has power over the entity, it is exposed, or has rights, to variable returns from its involvement and has the ability to affect those returns through its use of power over the entity. Subsidiaries of the Corporation are consolidated from the date of acquisition, being the date on which the Corporation obtains control, and continue to be consolidated until the date that such control ceases. The Corporation will reassess whether or not it controls an entity if facts and circumstances indicate there are changes to one or more of the elements of control listed above. The operating subsidiaries of the Corporation are: ▪ Great-West Lifeco Inc., a public company in which the Corporation and IGM Financial Inc. hold 67.4% and 4.0% of the common shares, respectively (2014 – 67.2% and 4.0%, respectively). Lifeco’s 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 in which the Corporation and The Great-West Life Assurance Company hold 60.4% and 3.8% of the common shares, respectively (2014 – 58.8% and 3.7%, respectively). IGM’s major operating subsidiary companies are Investors Group Inc. and Mackenzie Financial Corporation. 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 derived from 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, 2015. The notes to Power Financial’s financial statements are derived from the notes to the financial statements of Great-West Lifeco Inc. and IGM Financial Inc. in which the Corporation exercises significant influence over the entity’s operating and financial policies, without having 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 consolidated statements of earnings, consolidated statements of comprehensive income and consolidated statements of changes in equity, respectively. The Corporation holds a 50% (2014 – 50%) interest in Parjointco N.V., a jointly controlled corporation that is considered to be a joint venture. Parjointco holds a 55.5% (2014 – 55.5%) equity interest in Pargesa Holding SA. Accordingly, the Corporation accounts for its investment in Parjointco using the equity method. USE OF SIGNIFICANT JUDGMENTS, ESTIMATES AND ASSUMPTIONS In the preparation of the financial statements, management of the Corporation and management of its subsidiaries are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, net earnings and related disclosures. Key sources of estimation uncertainty and areas where significant judgments have been made are listed below and are discussed throughout the notes in these financial statements, including: ▪ Management consolidates all subsidiaries and entities in which it has determined that the Corporation has control. Control is evaluated according to the ability of the Corporation to direct the relevant activities of the subsidiary or other structured entity in order to derive variable returns. Management of the Corporation and of each of its subsidiaries exercise judgment in determining whether control exists. Judgment is exercised in the evaluation of the variable returns and in determining the extent to which the Corporation or its subsidiaries have the ability to exercise the power to generate variable returns. ▪ The actuarial assumptions made by management of Lifeco, including in regard to the behaviour, mortality and morbidity of policyholders, used in the valuation of insurance and certain investment contract liabilities in accordance with the CALM, require judgment and estimation (Note 12). POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 51 NOTE 2 Basis of Presentation and Summary of Significant Accounting Policies (continued) ▪ Management of Lifeco uses judgment to evaluate the classification ▪ Management of Lifeco exercises judgment, such as the determination of of insurance and reinsurance contracts to determine whether these the risks and benefits associated with the transaction, that are used in arrangements should be accounted for as insurance, investment or determining whether Lifeco retains the primary obligation with a client service contracts. in sub-advisor arrangements. Where Lifeco retains the risks and benefits, ▪ In the determination of the fair value of financial instruments, management revenue and expenses are recorded on a gross basis. of the Corporation and of its subsidiaries exercise judgment in the ▪ The provision for future credit losses within Lifeco’s insurance contract determination of fair value inputs, particularly those items categorized liabilities relies upon investment credit ratings. Lifeco’s practice is to within Level 3 of the fair value hierarchy (Note 26). use third-party independent credit ratings where available. Lifeco ▪ Management of the Corporation and of its subsidiaries evaluate the synergies and future benefits for initial recognition and measurement of goodwill and intangible assets, as well as testing for impairment. The determination of the carrying value and recoverable amount of the cash generating units (to which goodwill and intangible assets are assigned to) relies upon the determination of fair value using valuation methodologies (Note 10). ▪ Cash generating units for which goodwill and indefinite life intangible assets have been determined by management of the Corporation and of its subsidiaries as the lowest level at which goodwill is monitored for internal reporting purposes. Management of the Corporation and of its subsidiaries use judgment in determining the lowest level of monitoring (Note 10). ▪ The determination by IGM’s management of the estimated useful lives of deferred selling commissions (Note 10). ▪ The actuarial assumptions used in determining the expense and defined benefit obligation for the Corporation and its subsidiaries’ pension plans and other post-employment benefits require significant judgment and estimation. Management of the Corporation and of its subsidiaries review the previous experience of its plan members and market conditions, including interest rates and inflation rates, in evaluating the assumptions management’s judgment is required when setting credit ratings for instruments that do not have a third-party rating. REVENUE RECOGNITION 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 shares 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). Lifeco Premiums for all types of insurance contracts and contracts with limited mortality or morbidity risk are generally recognized as revenue when due and collection is reasonably assured. Investment property income includes rents earned from tenants under lease agreements and property tax and operating cost recoveries. Rental income leases with contractual rent increases and rent-free periods are recognized on a straight-line basis over the term of the lease. Investment property income is included in net investment income in the statement of earnings. used in determining the expense for the current year (Note 24). Fee income primarily includes fees earned from the management of ▪ The Corporation and its subsidiaries operate within various tax jurisdictions where significant management judgments and estimates are required when interpreting the relevant tax laws, regulations and legislation in the determination of the Corporation and of its subsidiaries’ tax provisions and segregated fund assets, proprietary mutual fund assets, fees earned on administrative services only for Group health contracts and fees earned from management services. Fee income is recognized when the service is performed, the amount is collectible and can be reasonably estimated. the carrying amounts of its tax assets and liabilities (Note 16). Lifeco has sub-advisor arrangements where Lifeco retains the primary ▪ Legal and other provisions are recognized resulting from a past event which, in the judgment of management of the Corporation and of its subsidiaries, obligation with the client. As a result, fee income earned is reported on a gross basis, with the corresponding sub-advisor expense recorded in operating and has resulted in a probable outflow of economic resources which would administrative expenses. be passed onto a third party to settle the obligation. Management of the Corporation and of 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 which include judgments and estimates. These appraisals are adjusted by 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). IGM Financial Management fees are based on the net asset value of the investment fund 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 ▪ The determination by IGM’s management as to whether securitized statements of earnings. mortgages are derecognized is based on the extent to which the risks and rewards of ownership are transferred (Note 13). ▪ 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. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash, current operating accounts, overnight bank and term deposits and fixed income securities with an original term to maturity of three months or less. 52 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 Basis of Presentation and Summary of Significant Accounting Policies (continued) INVESTMENTS Investments include bonds, mortgage loans, shares, investment properties, profit or loss that support insurance contract liabilities are largely offset by corresponding changes in the fair value of liabilities, except when the bond and loans to policyholders of Lifeco. Investments are classified as either has been deemed impaired. fair value through profit or loss, available for sale, held to maturity, loans The following is a description of the methodologies used to determine and receivables, or as non-financial instruments based on management’s fair value. intention relating to the purpose and nature of the instruments or the characteristics of the investments. The Corporation and its subsidiaries B O N DS AT FAI R VA LU E TH RO U G H P RO FIT currently have not classified any investments as held to maturity. O R LOS S A N D AVAI L A B LE FO R SA LE 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 and are recorded on a trade-date basis. 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. Fair values for bonds recorded 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 dates 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 Fair value through profit or loss investments are recorded at fair value on the such factors as the issuer’s industry, the security’s rating, term, coupon rate Consolidated Balance Sheets (balance sheets) with realized and unrealized and position in the capital structure of the issuer, as well as yield curves, credit gains and losses reported in the statements of earnings. Available-for-sale curves, prepayment rates and other relevant factors. For bonds that are not investments are recorded at fair value on the balance sheets with unrealized traded in active markets, valuations are adjusted to reflect illiquidity, and such gains and losses recorded in other comprehensive income. Realized gains adjustments are generally based on available market evidence. In the absence and losses are reclassified from other comprehensive income and recorded of such evidence, management’s best estimate is used. in the statements of earnings when the available-for-sale investment is sold or impaired. 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 recorded in net investment income in the statements of earnings. S H A R E S AT FAI R VA LU E TH RO U G H P RO FIT O R LOS S A N D AVAI L A B LE FO R SA LE Fair values for publicly traded shares are generally determined by the last bid price for the security from the exchange where it is principally traded. Fair values for shares for which there is no active market are determined by discounting expected future cash flows. The Corporation and its subsidiaries maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Corporation and its subsidiaries obtain Investment properties are real estate held to earn rental income or for quoted prices in active markets, when available, for identical assets at the capital appreciation. Investment properties are initially measured at cost balance sheet dates to measure shares at fair value in its fair value through and subsequently carried at fair value on the balance sheets. Changes profit or loss and available-for-sale portfolios. in fair value are recorded as net investment income in the statements of earnings. Properties held to earn rental income or for capital appreciation M O RTGAG E LOA N S A N D B O N DS C L A S S I FI ED 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. Loans to policyholders of Lifeco are classified as loans and receivables and A S LOA N S A N D R EC EIVA B LE S The fair values disclosed 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. measured at amortized cost. Loans to policyholders are shown at their unpaid I N V E S TM ENT P RO P ERTI E S 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 The carrying values of financial assets necessarily reflect the prevailing market liquidity and the liquidity premiums embedded in the market pricing methods the Corporation and its subsidiaries rely upon. Fair values for investment properties are determined 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 properties requires the use of estimates including future cash flows (such as future leasing assumptions, rental rates, capital and operating expenditures) and discount, reversionary Fair value movement on the assets supporting insurance contract liabilities and overall capitalization rates applicable to the asset based on current is a major factor in the movement of insurance contract liabilities. Changes market conditions. Investment properties under construction are valued in the fair value of bonds designated or classified as fair value through at fair value if such values can be reliably determined; otherwise, they are recorded at cost. POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 53 NOTE 2 Basis of Presentation and Summary of Significant Accounting Policies (continued) Impairment Investments are reviewed regularly on an individual basis at the end of each assets on these contracts do not have fixed maturity dates, their release generally being dependent on the run-off of the corresponding insurance reporting period to determine whether there is any objective evidence that contract liabilities. the investment is impaired. 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 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 affecting an industry or region, decline in fair value not related to interest in order to reduce credit risk. 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. 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. Securities lending Lifeco engages in securities lending through its securities custodians as lending agents. Loaned securities are not derecognized, and continue to be REINSURANCE CONTRACTS 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 certain insurance risks by Lifeco underwritten by another company. Ceded reinsurance refers to the transfer of insurance risk, along with the respective premiums, to one or more reinsurers who will share the risks. To the extent that assuming reinsurers are unable to meet their obligations, Lifeco remains liable to its policyholders for the portion reinsured. Consequently, allowances are made for reinsurance contracts which are deemed uncollectible. 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 impairment. Lifeco considers various factors in the impairment evaluation process, including, but not limited to, collectability of amounts due under the terms of the contract. The carrying amount of a reinsurance asset is adjusted through an allowance account with any impairment loss being recorded in the statements of earnings. reported within investments, as Lifeco retains substantial risks and rewards Any gains or losses on buying reinsurance are recognized in the statement of and economic benefits related to the loaned securities. earnings immediately at the date of purchase in accordance with the CALM. TRANSACTION COSTS 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. FUNDS HELD BY CEDING INSURERS/ FUNDS HELD UNDER REINSURANCE CONTRACTS On the asset side, funds held by ceding insurers are assets that would normally be paid to Lifeco but are retained by the cedant to reduce potential credit risk. Under certain forms of reinsurance contracts it is customary for the cedant to retain amounts on a funds-withheld basis supporting the insurance or investment 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 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. OWNER- OCCUPIED PROPERTIES AND CAPITAL ASSETS Owner-occupied properties and capital assets are carried at cost less accumulated depreciation and impairments. Capital assets include equipment, furniture and fixtures. Depreciation is charged to write off the cost of assets, using the straight-line method, over their estimated useful lives, on the following bases: ▪ Owner-occupied properties ▪ Capital assets 10–50 years 3–17 years Depreciation methods, useful lives and residual values are reviewed at least annually and adjusted if necessary. Owner-occupied properties and capital assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. OTHER ASSETS Other assets include premiums in course of collection, accounts receivable, risk is measured at the fair value of the underlying asset portfolio with the prepaid expenses, deferred acquisition costs and miscellaneous other assets change in fair value recorded in net investment income. See Note 6 for funds which are measured at amortized cost. Deferred acquisition costs relating to held by ceding insurers that are managed by Lifeco. Other funds held by investment contracts are recognized as assets if the costs are incremental ceding insurers are general obligations of the cedant and serve as collateral and incurred due to the contract being issued. Deferred acquisition costs are for insurance contract liabilities assumed from cedants. Funds-withheld amortized on a straight-line basis over the term of the policy, not exceeding 20 years. 54 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 Basis of Presentation and Summary of Significant Accounting Policies (continued) BUSINESS COMBINATIONS, GOODWILL AND INTANGIBLE ASSETS Business combinations are accounted for using the acquisition method. SEGREGATED FUNDS Segregated fund assets and liabilities arise from contracts where all financial risks associated with the related assets are borne by policyholders and are Goodwill represents the excess of purchase consideration over the fair value presented separately in the balance sheets. The assets and liabilities are of net assets acquired. Following initial recognition, goodwill is measured at set equal to the fair value of the underlying asset portfolio. Investment cost less any accumulated impairment losses. income and changes in fair value of the segregated fund assets are offset by 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 reviewed at least annually to determine if there are indicators of corresponding changes in the segregated fund liabilities. INSURANCE AND INVESTMENT CONTRACT LIABILITIES impairment and assess whether the amortization period and method are appropriate. Intangible assets with finite lives are amortized on a straight-line Contract classification When significant insurance risk exists, Lifeco’s products are classified basis over their estimated useful lives on the following basis: i) technology at contract inception as insurance contracts, in accordance with IFRS 4, and software (5 to 10 years); and ii) customer contract-related (9 to 20 years). Insurance Contracts (IFRS 4). Significant insurance risk exists when Lifeco Commissions paid by IGM on the sale of certain mutual funds are deferred and amortized over their estimated useful lives, not exceeding a period of seven years. Commissions paid on the sale of deposits are deferred and amortized 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 over their estimated useful lives, not exceeding a period of five years. When insurance risk. a client redeems units in mutual funds that are subject to a deferred sales In the absence of significant insurance risk, the contract is classified as charge, a redemption fee is paid by the client and is recorded as revenue by an investment contract or service contract. Investment contracts with IGM. Any unamortized deferred selling commission asset recognized on the discretionary participating features are accounted for in accordance with initial sale of these investment fund units or shares is recorded as a disposal. IFRS 4 and investment contracts without discretionary participating features IGM regularly reviews the carrying value of deferred selling commissions with are accounted for in accordance with IAS 39, Financial Instruments: Recognition respect to any events or circumstances that indicate impairment. Among and Measurement. Lifeco has not classified any contracts as investment the tests performed by IGM to assess recoverability is the comparison of the contracts with discretionary participating features. future economic benefits derived from the deferred selling commission asset in relation to its carrying value. Investment contracts may be reclassified as insurance contracts after inception if insurance risk becomes significant. A contract that is classified Indefinite life intangible assets include brands, trademarks and trade as an insurance contract at contract inception remains as such until all rights names, some customer contracts, mutual fund management contracts and and obligations under the contract are extinguished or expire. the shareholders’ portion of acquired future participating account profit. Amounts are classified as indefinite life intangible assets when based on an analysis of all the relevant factors, and when there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows. The identification of indefinite life intangible assets is made by reference to relevant factors such as product life cycles, potential obsolescence, industry stability and competitive position. Following initial recognition, indefinite life intangible assets are measured at cost less accumulated impairment losses. Impairment testing Goodwill and indefinite life intangible assets are tested for impairment annually or more frequently if events indicate that impairment may have occurred. Indefinite life intangible assets that were previously impaired are reviewed at each reporting date for evidence of reversal. Investment contracts are contracts that carry financial risk, which is the risk of a possible future change in one or more of the following: interest rate, commodity price, foreign exchange rate, or credit rating. Refer to Note 21 for a discussion on risk management. Measurement Insurance contract liabilities represent the amounts required, in addition to future premiums and investment income, to provide for future benefit payments, policyholder dividends, commission and policy administrative expenses for all insurance and annuity policies in force with Lifeco. The Appointed Actuaries of Lifeco’s subsidiary companies are responsible for determining the amount of the liabilities in order to make appropriate provisions for Lifeco’s obligations to policyholders. The Appointed Actuaries determine the liabilities for insurance and investment contracts using Goodwill and indefinite life intangible assets have been allocated to cash generally accepted actuarial practices, according to the standards established generating units or to groups of cash generating units (CGU), representing by the Canadian Institute of Actuaries. The valuation uses the CALM. This the lowest level that the assets are monitored for internal reporting purposes. method involves the projection of future events in order to determine the Goodwill and indefinite life intangible assets are tested for impairment amount of assets that must be set aside currently to provide for all future by comparing the carrying value of the CGU to the recoverable amount of obligations and involves a significant amount of judgment. the CGU to which the goodwill and indefinite life intangible assets have been allocated. In the computation of insurance contract liabilities, valuation assumptions have been made regarding rates of mortality and morbidity, investment An impairment loss is recognized for the amount by which the asset’s carrying returns, levels of operating expenses, rates of policy termination and amount exceeds its recoverable amount. The recoverable amount is the rates of utilization of elective policy options or provisions. The valuation higher of the asset’s fair value less cost of disposal or value in use, which is assumptions use best estimates of future experience together with calculated using the present value of estimated future cash flows expected a margin for adverse deviation. These margins are necessary to provide to be generated. 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. POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 55 NOTE 2 Basis of Presentation and Summary of Significant Accounting Policies (continued) Investment contract liabilities are measured at fair value determined using Remeasurements arising from defined benefit plans represent actuarial discounted cash flows utilizing the yield curves of financial instruments with gains and losses, and the actual return on plan assets, less interest calculated similar cash flow characteristics. DERECOGNITION OF SECURITIZED MORTGAGES IGM enters into transactions where it transfers financial assets recognized on its balance sheets. The determination of whether the financial assets are derecognized is based on the extent to which the risks and rewards of ownership are transferred. 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. The accrued benefit asset (liability) represents the plan surplus (deficit) and is included in other assets or other liabilities. Payments to the defined contribution plans are expensed as incurred. 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. INCOME TAXES The income tax expense for the period represents the sum of current income tax and deferred income tax. Income tax is recognized as an expense or income in the statements of earnings, except to the extent that it relates If all or substantially all risks and rewards are retained, the financial assets to items that are not recognized in the statements of earnings (whether in are not derecognized and the transactions are accounted for as secured other comprehensive income or directly in equity), in which case the income financing transactions. tax is also recognized in other comprehensive income or directly in equity. OTHER FINANCIAL LIABILITIES Debentures and other debt instruments, and capital trust debentures are Current income tax Current income tax is based on taxable income for the year. Current tax initially recorded on the balance sheets at fair value and subsequently carried liabilities (assets) for the current and prior periods are measured at the at amortized cost using the effective interest rate method with amortization amount expected to be paid to (recovered from) the taxation authorities using expense recorded in financing charges in the statements of earnings. These the rates that have been enacted or substantively enacted at the balance liabilities are derecognized when the obligation is cancelled or redeemed. sheet date. Current tax assets and current tax liabilities are offset, if a legally Accounts payable, dividends and interest payable, and deferred income reserves are measured at amortized cost. Deferred income reserves related to investment contracts are amortized on a straight-line basis to recognize 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. the initial policy fees over the policy term, not exceeding 20 years. A provision for tax uncertainties which meets the probable threshold for recognition is measured based on the probability weighted average approach. PENSION PLANS AND OTHER POST-EMPLOYMENT BENEFITS The Corporation and its subsidiaries maintain funded defined benefit pension Deferred income tax Deferred income tax is the tax expected to be payable or recoverable on plans for certain employees and advisors, unfunded supplementary employee differences arising between the carrying amounts of assets and liabilities retirement plans for certain employees, and unfunded post-employment in the financial statements and the corresponding tax basis used in the health, dental and life insurance benefits to eligible employees, advisors computation of taxable income and on unused tax attributes, and is and their dependants. The Corporation’s subsidiaries also maintain defined accounted for using the balance sheet liability method. Deferred tax liabilities contribution pension plans for eligible employees and advisors. are generally recognized for all taxable temporary differences and deferred The defined benefit pension plans provide pensions based on length of service and final average earnings. Expenses for the defined benefit plans are actuarially determined using the projected unit credit method prorated 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. on service, based upon management of the Corporation and its subsidiaries’ Deferred tax assets and liabilities are measured at the tax rates expected to assumptions about discount rates, compensation increases, retirement ages apply in the year when the asset is realized or the liability is settled, based on of employees, mortality and expected health care costs. Any changes in these tax rates and tax laws that have been enacted or substantively enacted at the assumptions will impact the carrying amount of defined benefit obligations. balance sheet date. Deferred tax assets and deferred tax liabilities are offset, The Corporation and its subsidiaries’ accrued benefit liability in respect of if a legally enforceable right exists to net current tax assets against current defined benefit plans is calculated separately for each plan by discounting the tax liabilities and the deferred taxes relate to the same taxable entity and the amount of the benefit that employees have earned in return for their service same taxation authority. 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 The Corporation and its subsidiaries determine the net interest component date and reduced to the extent that it is no longer probable that sufficient of the pension expense for the period by applying the discount rate used to future taxable profits will be available to allow all or part of the deferred measure the accrued benefit liability at the beginning of the annual period tax asset to be utilized. Unrecognized deferred tax assets are reassessed at to the net accrued benefit liability. The discount rate used to value liabilities each balance sheet date and are recognized to the extent that it has become is determined using a yield curve of AA corporate debt securities. probable that future taxable profits will allow the deferred tax asset to If the plan benefits are changed, or a plan is curtailed, any past service costs be recovered. or curtailment gains or losses are recognized immediately in net earnings. Deferred tax liabilities are recognized for taxable temporary differences Net interest costs, current service costs, past service costs and curtailment gains or losses are included in operating and administrative expenses. arising on investments in 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. 56 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 Basis of Presentation and Summary of Significant Accounting Policies (continued) DERIVATIVE FINANCIAL INSTRUMENTS The Corporation and its subsidiaries use derivative products as risk comprehensive income are recorded in net investment income in the same period the hedged item affects net earnings. Gains and losses on cash flow management instruments to hedge or manage asset, liability and capital hedges are immediately reclassified from other comprehensive income to net positions, including revenues. The Corporation and its subsidiaries’ policy investment income if and when it is probable that a forecasted transaction guidelines prohibit the use of derivative instruments for speculative is no longer expected to occur. trading purposes. Derivatives are recorded at fair value on the balance sheets. The method of recognizing unrealized and realized fair value gains and losses depends on whether the derivatives are designated as hedging instruments. For derivatives that are not designated as hedging instruments, unrealized and realized gains and losses are recorded in net investment income on the statements of earnings. For derivatives designated as hedging instruments, unrealized and realized gains and losses are recognized according to the nature of the hedged item. Net investment hedges Net investment hedges are used to manage the exposure to changes in the reporting entity’s share in the net share of a foreign operation. 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. The unrealized foreign exchange gains (losses) on the instruments are recorded within other comprehensive income and will be reclassified into net earnings when the instruments are derecognized. Hedge accounting is discontinued Derivatives are valued using market transactions and other market evidence when the hedge no longer qualifies for hedge accounting. whenever possible, including market-based inputs to models, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. When models are used, the selection of a particular model EMBEDDED DERIVATIVES An embedded derivative is a component of a host contract that modifies to value a derivative depends on the contractual terms of, and specific risks the cash flows of the host contract in a manner similar to a derivative, inherent in, the instrument, as well as the availability of pricing information in according to a specified interest rate, financial instrument price, foreign the market. The Corporation and its subsidiaries generally use similar models exchange rate, underlying index or other variable. Embedded derivatives are to value similar instruments. Valuation models require a variety of inputs, treated as separate contracts and are recorded at fair value if their economic including contractual terms, market prices and rates, yield curves, credit curves, characteristics and risks are not closely related to those of the host contract measures of volatility, prepayment rates and correlations of such inputs. and the host contract is not itself recorded at fair value through the statement To qualify for hedge accounting, the relationship between the hedged item and the hedging instrument must meet several strict conditions on documentation, probability of occurrence, hedge effectiveness and reliability of measurement. If these conditions are not met, then the relationship does not qualify for hedge accounting treatment and both the hedged item and the hedging instrument are reported independently, as if there was no hedging relationship. Where a hedging relationship exists, the Corporation and its subsidiaries document all relationships between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedge transactions. This process includes linking derivatives that are used in hedging transactions to specific assets and liabilities on the balance sheets or to specific firm commitments or forecasted transactions. The Corporation and its subsidiaries also assess, both at the hedge’s inception and on an ongoing basis, whether derivatives that are used in hedging transactions are effective in offsetting changes in fair values or cash flows of hedged items. Hedge effectiveness is reviewed quarterly through correlation testing. Fair value hedges Fair value hedges are used to manage the exposure to changes in fair value of a recognized asset or liability or an unrecognized firm commitment, or an identified portion of such an asset, liability or firm commitment, that is attributable to a particular risk and could affect profit or loss. For fair value hedges, changes in fair value of both the hedging instrument and the hedged item are recorded in net investment income and consequently any ineffective portion of the hedge is recorded immediately in net investment income. Cash flow hedges Cash flow hedges are used to manage the exposure to variability in cash of earnings. Embedded derivatives that meet the definition of an insurance contract are accounted for and measured as an insurance contract. EQUITY Financial instruments issued by Power Financial are classified as stated capital if they represent a residual interest in the assets of the Corporation. Preferred shares are classified as equity if they are non-redeemable, or retractable only at the Corporation’s option and any dividends are discretionary. Costs that are directly attributable to the issue of share capital are recognized as a deduction from retained earnings, net of income tax. Reser ves are composed of share-based compensation and other comprehensive income. Share-based compensation reserves represent the vesting of options less options exercised. Other comprehensive income represents the total of the unrealized foreign exchange gains (losses) on translation of foreign operations, the actuarial gains (losses) on benefit plans, the unrealized gains (losses) on available-for-sale assets, the unrealized gains (losses) on cash flow hedges, and the share of other comprehensive income of jointly controlled corporations and associates. Non-controlling interests represent the proportion of equity that is attributable to minority shareholders. SHARE-BASED PAYMENTS The fair value-based method of accounting is used for the valuation of compensation expense for options granted to employees. Compensation expense is recognized as an increase to operating and administrative expenses in the statements of earnings over the vesting period of the granted options, with a corresponding increase in share-based compensation reserves. When the stock options are exercised, the proceeds received, together with the amount recorded in share-based compensation reserve, are added to the flows that is attributable to a particular risk associated with a recognized stated capital of the entity issuing the corresponding shares. asset or liability or a highly probable forecast transaction and could affect profit or loss. 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 The Corporation and its subsidiaries recognize a liability for cash-settled awards, including those granted under Performance Share Unit plans and Deferred Share Unit plans. Compensation expense is recognized as an increase to operating and administrative expenses in the statements of POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 57 NOTE 2 Basis of Presentation and Summary of Significant Accounting Policies (continued) earnings, net of related hedges, and a liability is recognized on the balance except that the weighted average number of common shares outstanding sheets over the period, if any. The liability is remeasured at fair value at each includes the potential dilutive effect of outstanding stock options granted by the reporting period with the change in the liability recorded in operating and Corporation and its subsidiaries, as determined by the treasury stock method. administrative expenses. FOREIGN CURRENCY TRANSLATION The Corporation and its subsidiaries operate with multiple functional FUTURE ACCOUNTING CHANGES The Corporation and its subsidiaries continuously monitor the potential changes proposed by the International Accounting Standards Board (IASB) currencies. The Corporation’s financial statements are prepared in Canadian and analyze the effect that changes in the standards may have on their dollars, which is the functional and presentation currency of the Corporation. consolidated financial statements when they become effective. 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. Translation of net investment in foreign operations Assets and liabilities are translated into Canadian dollars at the rate of exchange prevailing at the balance sheet dates and all revenues and expenses are translated at an average of daily rates. Unrealized foreign currency translation gains and losses on the Corporation’s net investment in its foreign operations, jointly controlled corporations and associates are presented as a component of other comprehensive income. Unrealized foreign currency translation gains and losses are recognized in earnings when there has been a disposal of a foreign operation, jointly controlled corporation or associate. IFRS 9 — Financial Instruments The IASB issued IFRS 9, Financial Instruments, which replaces IAS 39, Financial Instruments: Recognition and Measurement, 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. ▪ 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. In December 2015, the IASB published an exposure draft with proposed amendments to IFRS 4, Insurance Contracts to alleviate the temporary POLICYHOLDER BENEFITS Policyholder benefits include benefits and claims on life insurance contracts, consequences of the different effective dates with IFRS 9. Companies whose business model is to predominantly issue insurance contracts are allowed the maturity payments, annuity payments and surrenders. Gross benefits and option to defer the effective date of IFRS 9 until the earliest of the mandatory claims for life insurance contracts include the cost of all claims arising during effective date of IFRS 4 or January 1, 2021. For companies that do not issue the year and settlement of claims. Death claims and surrenders are recorded insurance contracts, the effective date of January 1, 2018 should remain. The on the basis of notifications received. Maturities and annuity payments are Corporation and its subsidiaries are evaluating the impact of the adoption recorded when due. of this standard. LEASES Leases that do not transfer substantially all the risks and rewards of ownership IFRS 15 — Revenue from Contracts with Customers The IASB issued IFRS 15, Revenue from Contracts with Customers, which provides are classified as operating leases. Payments made under operating leases, a single model for entities to use in accounting for revenue arising from where the Corporation and its subsidiaries are the lessee, are charged to net contracts with customers. The model requires an entity to recognize revenue 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 recognized 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. in the statements of earnings on a straight-line basis over the lease term. The standard will be effective January 1, 2018. The Corporation and its Investments in a lease that transfers substantially all the risks and rewards of ownership to the lessee are classified as a finance lease. Under a finance lease, the investment is recognized as a receivable at an amount equal to the net investment in the lease, which is represented as the present value of the minimum lease payments due from the lessee and is presented within the balance sheets. Payments received from the lessee are apportioned between the recognition of finance lease income and the reduction of the finance lease receivable. Income from the finance leases is recognized in the statements of earnings at a constant periodic rate of return on net investment in the finance lease. EARNINGS PER COMMON SHARE Basic earnings per common share is determined by dividing net earnings available to common shareholders by the weighted average number of common shares outstanding for the year. Diluted earnings per common share is determined using the same method as basic earnings per common share, subsidiaries are evaluating the impact of the adoption of this standard. IFRS 16 — Leases In January 2016, the IASB issued IFRS 16, Leases, which requires a lessee to recognize a right-of-use asset representing its right to use the underlying leased asset and a corresponding lease liability representing its obligation to make lease payments for all leases. A lessee recognizes the related expense as depreciation on the right-of-use asset and interest on the lease liability. Short-term (less than 12 months) and low-value asset leases are exempt from these requirements. The standard will be effective January 1, 2019. The Corporation and its subsidiaries are evaluating the impact of the adoption of this standard. COMPARATIVE FIGURES During the year, the Corporation and its subsidiaries reclassified certain comparative figures to conform to the current year’s presentation (Notes 5, 9, 16 and 25). The reclassifications had no impact on equity or net earnings. 58 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 Business Acquisition LEGAL & GENERAL INTERNATIONAL (IRELAND) LIMITED On July 1, 2015, Lifeco, through its indirect wholly owned subsidiary The At the date of acquisition, Lifeco recognized $5,465 million of unit-linked funds within investments on account of segregated fund policyholders and insurance and investment contracts on account of segregated fund Canada Life Group (UK) Ltd., acquired Legal & General International (Ireland) policyholders (Note 11). Limited (LGII), a provider of investment and wealth management solutions for high net worth individuals primarily in the United Kingdom. Revenues and net earnings from LGII, along with the goodwill from the acquisition, were not significant. NOTE 4 Cash and Cash Equivalents DECEMBER 31 Cash Cash equivalents Cash and cash equivalents 2015 1,900 2,288 4,188 2014 1,698 2,291 3,989 At December 31, 2015, cash amounting to $159 million was restricted for use by subsidiaries ($142 million at December 31, 2014). NOTE 5 Investments CARRYING VALUES AND FAIR VALUES Carrying values and estimated fair values of investments are as follows: DECEMBER 31 Bonds Designated as fair value through profit or loss [1, 3] Classified as fair value through profit or loss [1, 3] 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 83,645 2,815 12,014 16,905 2015 FAIR VALUE 83,645 2,815 12,014 18,253 CARRYING VALUE 77,671 2,286 10,501 13,178 2014 FAIR VALUE 77,671 2,286 10,501 14,659 115,379 116,727 103,636 105,117 29,029 30,712 27,199 29,016 384 384 366 366 29,413 31,096 27,565 29,382 6,692 597 7,289 5,237 8,694 6,692 597 7,289 5,237 8,694 6,697 620 7,317 4,613 7,711 6,697 620 7,317 4,613 7,711 166,012 169,043 150,842 154,140 [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. [3] During the year, Lifeco reclassified $119 million of bonds from designated as fair value through profit or loss to classified as fair value through profit or loss at December 31, 2014 to conform to the current year’s presentation. POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 59 NOTE 5 Investments (continued) BONDS AND MORTGAGES Carrying value of bonds and mortgages due over the current and non-current term is as follows: DECEMBER 31, 2015 Bonds Mortgage loans DECEMBER 31, 2014 Bonds Mortgage loans 1 YEAR OR LESS 1-5 YEARS OVER 5 YEARS TOTAL TERM TO MATURIT Y CARRYING VALUE 12,041 2,522 14,563 25,901 11,879 37,780 77,070 14,600 91,670 115,012 29,001 144,013 CARRYING VALUE 1 YEAR OR LESS 1-5 YEARS OVER 5 YEARS TOTAL TERM TO MATURIT Y 11,107 2,546 13,653 19,520 12,010 31,530 72,644 12,630 85,274 103,271 27,186 130,457 The table shown above excludes the carrying value of impaired bonds and mortgages, as the ultimate timing of collectability is uncertain. IMPAIRED INVESTMENTS AND ALLOWANCE FOR CREDIT LOSSES 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 2015 355 11 33 399 2014 355 14 17 386 The carrying amount of impaired investments includes bonds and mortgages and other loans. The above carrying values for loans and receivables are net of allowances for credit losses of $21 million as at December 31, 2015 ($19 million as at December 31, 2014). The allowance for credit losses is supplemented by the provision for future credit losses included in insurance contract liabilities. NET INVESTMENT INCOME YEAR ENDED DECEMBER 31, 2015 Regular net investment income Investment income earned Net realized gains Other income (expenses) Changes in fair value through profit or loss Net investment income 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 60 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT BONDS MORTGAGE LOANS SHARES INVESTMENT PROPERTIES OTHER TOTAL 4,259 1,021 114 – 4,373 (1,987) 2,386 118 (11) 1,128 4 1,132 280 10 – 290 (412) (122) 356 – (100) 256 249 505 398 – (113) 285 133 418 6,314 242 (224) 6,332 (2,013) 4,319 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 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 Investments (continued) Investment income earned comprises income from investments that properties, ground rent income earned on leased and sub-leased land, fee are classified as available for sale, loans and receivables and classified or recoveries, lease cancellation income, and interest and other investment designated as fair value through profit or loss. Investment income from bonds income earned on investment properties. Other income includes policyholder and mortgage loans includes interest income and premium and discount loan income, foreign exchange gains and losses, income earned from amortization. Income from shares includes dividends and distributions. derivative financial instruments and other miscellaneous income. Investment properties income includes rental income earned on investment INVESTMENT PROPERTIES The carrying value of investment properties and changes in the carrying value of investment properties are as follows: DECEMBER 31 Balance, beginning of year Additions Changes in fair value through profit or loss Disposals Transfer to owner-occupied properties Foreign exchange rate changes and other Balance, end of year 2015 4,613 278 249 (282) – 379 5,237 2014 4,288 127 262 (98) (13) 47 4,613 TRANSFERRED FINANCIAL ASSETS Lifeco engages in securities lending to generate additional income. Lifeco’s cash collateral included in the collateral deposited with Lifeco’s lending agent as at December 31, 2015 ($16 million as at December 31, 2014). In addition, the securities custodians are used as lending agents. Collateral, which exceeds the securities lending agent indemnifies Lifeco against borrower risk, meaning fair value of the loaned securities, is deposited by the borrower with Lifeco’s that the lending agent agrees contractually to replace securities not returned lending agent and maintained by the lending agent until the underlying due to a borrower default. As at December 31, 2015, Lifeco had loaned securities security has been returned. The fair value of the loaned securities is monitored (which are included in investments) having a fair value of $6,833 million on a daily basis by the lending agent, who obtains or refunds additional ($5,890 million as at December 31, 2014). collateral as the fair value of the loaned securities fluctuates. There was no NOTE 6 Funds Held by Ceding Insurers Included in funds held by ceding insurers of $15,512 million at December 31, 2015 In 2014, an indirect wholly owned reinsurance subsidiary of Lifeco entered ($12,154 million at December 31, 2014) are the following agreements. into an agreement to assume by way of indemnity reinsurance a block of In 2015, Canada Life Limited, an indirect wholly owned subsidiary of Lifeco, entered into an agreement with The Equitable Life Assurance Society (Equitable Life) to assume, by way of indemnity reinsurance, the assets and payout annuities. Under the agreement, Lifeco’s subsidiary is required to put 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. liabilities of the annuity business of Equitable Life totalling $1,620 million. In 2008, Canada Life International Re Limited (CLIRE), Lifeco’s indirect wholly In December 2015, an indirect wholly owned subsidiary of Lifeco entered into a retrocession agreement to assume a block of investment contract liabilities totaling $1,323 million in the form of structured settlements with fixed terms and amounts. Lifeco’s subsidiary has assumed the credit risk on the portfolio of assets, included in funds held by the ceding reinsurer, that back the related investment contract liabilities. The ceding reinsurer has the right to recapture owned Irish reinsurance subsidiary, signed an agreement with Standard Life, a U.K.-based provider of life, pension and investment products, to assume by way of indemnity reinsurance a large block of payout annuities. Under the agreement, CLIRE is required to put amounts on deposit with Standard Life and CLIRE has assumed the credit risk on the portfolio of assets included in the amounts on deposit. the retrocession transaction if certain conditions are not met. The assets for these agreements are included in funds held by ceding insurers on the balance sheets. Revenue and expenses arising from the agreements are included in net investment income on the statements of earnings. POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 61 NOTE 6 Funds Held by Ceding Insurers (continued) At December 31, 2015 Lifeco had amounts on deposit of $13,830 million ($10,758 million at December 31, 2014) for these four 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 180 2015 FAIR VALUE 180 CARRYING VALUE 200 2014 FAIR VALUE 200 13,472 13,472 10,397 10,397 178 178 161 161 13,830 13,830 10,758 10,758 13,222 13,222 10,386 10,386 608 608 372 372 13,830 13,830 10,758 10,758 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 180 – 180 – 13,472 13,472 – – – 2015 TOTAL 180 13,472 13,652 LEVEL 1 LEVEL 2 LEVEL 3 200 – 200 – 10,397 10,397 – – – 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 62 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 2015 – 5 72 3,224 561 195 319 117 1,967 1,098 134 176 1,117 398 531 932 328 1,762 512 24 13,472 2014 TOTAL 200 10,397 10,597 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 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 Funds Held by Ceding Insurers (continued) 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 2015 3,697 3,405 5,186 798 386 13,472 2014 2,312 2,944 4,194 596 351 10,397 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, 2014), held through its wholly 2015, Parjointco held a 55.5% equity interest in Pargesa (same as December 31, owned subsidiary Irish Life, in Allianz Ireland, an unlisted general insurance 2014), representing 75.4% of the voting rights. company operating in Ireland. The carrying values of the investments in jointly controlled corporations and associates are as follows: 2015 DECEMBER 31 PARJOINTCO OTHER TOTAL PARJOINTCO OTHER Carrying value, beginning of year 2,440 237 2,677 2,437 Investments Share of earnings Share of other comprehensive income (loss) Dividends Other – 205 24 (69) 10 18 19 22 (4) 3 18 224 46 (73) 13 – 187 (97) (75) (12) Carrying value, end of year 2,610 295 2,905 2,440 227 – 24 (20) (24) 30 237 2014 TOTAL 2,664 – 211 (117) (99) 18 2,677 The net asset value of the Corporation’s indirect interest in Pargesa is approximately $3,056 million as at December 31, 2015. The carrying value of the investment in Pargesa is $2,610 million, or $2,290 million excluding the unrealized net gains of its underlying investments. Pargesa’s financial information as at and for the year ended December 31, 2015 can be obtained in its publicly available information. POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 63 NOTE 8 Owner-Occupied Properties and Capital Assets The carrying value and the changes in the carrying value of owner-occupied properties and capital assets are as follows: DECEMBER 31 Cost, beginning of year Additions Transferred from investment properties Disposal/retirements Changes in foreign exchange rates OWNER- OCCUPIED PROPERTIES CAPITAL ASSETS 2015 TOTAL OWNER- OCCUPIED PROPERTIES 732 1,062 1,794 11 – (2) 35 159 – (13) 32 170 – (15) 67 693 15 13 – 11 2014 TOTAL 1,661 120 13 (17) 17 CAPITAL ASSETS 968 105 – (17) 6 Cost, end of year 776 1,240 2,016 732 1,062 1,794 Accumulated amortization, beginning of year Amortization Disposal/retirements Changes in foreign exchange rates Accumulated amortization, end of year Carrying value, end of year (61) (12) 1 – (72) 704 (747) (88) 8 (11) (838) 402 (808) (100) 9 (11) (910) 1,106 (52) (9) – – (61) 671 (684) (72) – 9 (747) 315 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 NOTE 9 Other Assets DECEMBER 31 Premiums in course of collection, accounts receivable and interest receivable Deferred acquisition costs [1] Pension benefits [Note 24] Income taxes receivable Trading account assets Finance leases receivable Prepaid expenses Other [1] 2015 680 277 149 1,106 2015 4,120 704 250 79 590 293 146 726 (736) (81) – 9 (808) 986 2014 638 212 136 986 2014 3,527 685 275 71 405 285 132 652 [1] During the year, Lifeco reclassified $41 million of other assets from other to deferred acquisition costs at December 31, 2014 to conform to the current year’s presentation. Total other assets of $5,636 million as at December 31, 2015 ($4,811 million as at December 31, 2014) are to be realized within 12 months. 6,908 6,032 64 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 Goodwill and Intangible Assets GOODWILL The carrying value and changes in the carrying value of goodwill are as follows: DECEMBER 31 Balance, beginning of year Business acquisitions Changes in foreign exchange rates Balance, end of year 2015 2014 COST ACCUMUL ATED IMPAIRMENT CARRYING VALUE COST ACCUMUL ATED IMPAIRMENT CARRYING VALUE 10,192 (1,043) 9,149 10,058 3 256 – (198) 3 58 51 83 (953) – (90) 9,105 51 (7) 10,451 (1,241) 9,210 10,192 (1,043) 9,149 INTANGIBLE ASSETS The carrying value and changes in the carrying value of the intangible assets are as follows: Indefinite life intangible assets DECEMBER 31, 2015 Cost, beginning of year Additions Changes in foreign exchange rates Cost, end of year Accumulated impairment, beginning of year Changes in foreign exchange rates Accumulated impairment, end of year Carrying value, end of year 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 Accumulated impairment, end of year Carrying value, end of year BRANDS, TRADEMARKS AND TRADE NAMES CUSTOMER CONTRAC T- REL ATED MUTUAL FUND MANAGEMENT CONTRAC TS 1,206 2,592 – 99 3 424 1,305 3,019 (140) (22) (162) 1,143 (939) (177) (1,116) 1,903 SHAREHOLDERS’ PORTION OF ACQUIRED FUTURE PARTICIPATING ACCOUNT PROFIT TOTAL 354 4,893 – – 3 523 354 5,419 741 – – 741 – – – – – – 741 354 BRANDS, TRADEMARKS AND TRADE NAMES CUSTOMER CONTRAC T- REL ATED MUTUAL FUND MANAGEMENT CONTRAC TS 1,178 28 1,206 (132) (8) (140) 2,398 194 2,592 (858) (81) (939) 741 – 741 – – – SHAREHOLDERS’ PORTION OF ACQUIRED FUTURE PARTICIPATING ACCOUNT PROFIT 354 – 354 – – – 1,066 1,653 741 354 (1,079) (199) (1,278) 4,141 TOTAL 4,671 222 4,893 (990) (89) (1,079) 3,814 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 65 NOTE 10 Goodwill and Intangible Assets (continued) Finite life intangible assets DECEMBER 31, 2015 Cost, beginning of year Additions Disposal/redemption Changes in foreign exchange rates Other, including write-off of assets fully amortized TECHNOLOGY AND SOFT WARE CUSTOMER CONTRAC T- REL ATED DEFERRED SELLING COMMISSIONS OTHER TOTAL 1,017 233 – 81 – 745 1,347 221 3,330 – – 65 – 250 (64) – (177) 2 (1) 9 – 485 (65) 155 (177) Cost, end of year 1,331 810 1,356 231 3,728 (574) (101) (2) – (50) – (727) 604 (338) (49) – – (31) – (418) 392 (637) (203) – 34 – 177 (629) 727 (98) (11) – – (3) – (112) 119 (1,647) (364) (2) 34 (84) 177 (1,886) 1,842 TECHNOLOGY AND SOFT WARE CUSTOMER CONTRAC T- REL ATED DEFERRED SELLING COMMISSIONS OTHER TOTAL 1,379 221 3,132 825 – 157 (16) 32 19 707 18 – – 20 – – 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 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 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 Cost, end of year 1,017 745 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 (474) (87) (7) 14 (20) – (574) 443 (280) (47) – – (11) – (338) 407 (691) (203) – 38 – 219 (637) 710 66 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 Goodwill and Intangible Assets (continued) ALLOCATION TO CASH GENERATING UNITS Goodwill and indefinite life intangible assets have been assigned to 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 RECOVERABLE AMOUNT GOODWILL INTANGIBLE ASSETS TOTAL GOODWILL INTANGIBLE ASSETS 2015 2014 TOTAL 1,156 3,028 1,978 1 210 – 1,443 1,251 143 9,210 – 973 1,156 4,001 1,156 3,028 – 973 1,156 4,001 246 2,224 1,950 221 2,171 – – 1,896 – 1,003 23 1 210 1,896 1,443 2,254 166 4,141 13,351 1 180 – 1,443 1,251 140 9,149 – – 1,594 – 1,003 23 1 180 1,594 1,443 2,254 163 3,814 12,963 Lifeco For purposes of annual impairment testing, Lifeco allocates goodwill and IGM Financial IGM tests whether goodwill and indefinite life intangible assets are impaired indefinite life intangible assets to its CGUs. Any potential impairment of by assessing the carrying amounts with the recoverable amounts. The goodwill or indefinite life intangible assets is identified by comparing the recoverable amount of IGM’s CGUs is based on the best available evidence of recoverable amount to its carrying value. Recoverable amount is based on fair value less cost of disposal. Fair value is initially assessed with reference fair value less cost of disposal. Fair value is initially assessed with reference to valuation multiples of comparable publicly traded financial institutions and previous business acquisition transactions. These valuation multiples may include price-to- earnings or price-to-book measures for life insurers and asset managers. This assessment may give regard to a variety of relevant considerations, including expected growth, risk and capital market conditions, among other factors. The valuation multiples used in assessing fair value represent Level 2 inputs. In the fourth quarter of 2015, Lifeco conducted its annual impairment testing of goodwill and indefinite life intangible assets based on September 30, 2015 asset balances. It was determined that the recoverable amounts of cash generating unit groupings were in excess of their carrying values and there was no evidence of impairment. Any reasonable changes in assumptions and estimates used in determining the recoverable amounts of the CGUs is unlikely to cause the carrying values to exceed their recoverable amounts. to valuation multiples of comparable publicly traded financial institutions and previous 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). This assessment may give regard to a variety of relevant considerations, including expected growth, risk and capital market conditions, among other factors. The valuation multiples used in assessing fair value represent Level 2 fair value inputs. 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. Any reasonable changes in assumptions and estimates used in determining the recoverable amounts of the CGUs is unlikely to cause the carrying values to exceed their recoverable amounts. POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 67 NOTE 11 Segregated Funds and Other Structured Entities Lifeco offers segregated fund products in Canada, the U.S. and Europe that are referred to as segregated funds, separate accounts and unit-linked funds SEGREGATED FUNDS AND GUARANTEE EXPOSURE 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 has legal title to the investments, there is a contractual obligation to pass for these guarantees within insurance and investment contract liabilities in along the investment results to the segregated fund policyholder and Lifeco the financial statements. In addition to Lifeco’s exposure on the guarantees, segregates these investments from those of the corporation itself. the fees earned by Lifeco on these products are impacted by the fair 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 $1,390 million at December 31, 2015 ($1,012 million at December 31, 2014). Within the statements 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. Lifeco’s exposure to these guarantees is set out as follows: 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 through Canada Life and unit-linked products with investment guarantees through Irish Life. These products are similar to segregated fund products, but include pooling of policyholders’ funds and minimum credited interest rates. Lifeco also offers guaranteed minimum withdrawal benefits products in Canada, the U.S. and Germany. The guaranteed minimum withdrawal benefits products offered by Lifeco offer levels of death and maturity guarantees. At December 31, 2015, the amount of guaranteed minimum withdrawal benefits products in force in Canada, the U.S., Ireland and Germany was $3,488 million ($3,016 million at December 31, 2014). INVESTMENT DEFICIENCY BY BENEFIT T YPE INCOME MATURIT Y DEATH TOTAL [1] – 28 444 472 48 – – 48 213 55 473 741 213 83 914 1,210 INVESTMENT DEFICIENCY BY BENEFIT T YPE INCOME MATURIT Y DEATH TOTAL [1] – 1 351 352 30 – 36 66 97 43 72 212 97 44 422 563 DECEMBER 31, 2015 Canada United States Europe Total DECEMBER 31, 2014 Canada United States Europe Total [1] A policy can only receive a payout for one of the three trigger events (income election, maturity, or death). 68 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 11 Segregated Funds and Other Structured Entities (continued) 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, 2015. The actual cost to Lifeco will depend on the trigger event in the Lifeco section of the Corporation’s December 31, 2015 Management’s having occurred and the fair values at that time. The actual claims before Discussion and Analysis. tax associated with these guarantees were approximately $15 million for the year ended December 31, 2015 ($10 million in 2014), with the majority arising in the Europe segment. 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: INVESTMENTS ON ACCOUNT OF SEGREGATED FUND POLICYHOLDERS DECEMBER 31 Cash and cash equivalents Bonds Mortgage loans Shares and units in unit trusts Mutual funds Investment properties Accrued income Other liabilities Non-controlling mutual fund interest 2015 11,656 42,160 2,596 80,829 50,101 10,839 198,181 382 (1,759) 1,390 198,194 INSURANCE AND INVESTMENT CONTRACTS ON ACCOUNT OF SEGREGATED FUND POLICYHOLDERS 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 (losses) on investments Unrealized gains due to changes in foreign exchange rates Policyholder withdrawals Business acquisition [Note 3] Segregated fund investment in General Fund General fund investment in Segregated Fund Net transfer from General Fund Non-controlling mutual fund interest Balance, end of year INVESTMENT INCOME ON ACCOUNT OF SEGREGATED FUND POLICYHOLDERS YEARS ENDED DECEMBER 31 Net investment income Net realized capital gains on investments Net unrealized capital gains (losses) 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 2015 174,966 21,592 2,855 4,780 (2,938) 12,933 (21,934) 5,465 43 (11) 65 378 23,228 198,194 2015 2,855 4,780 (2,938) 12,933 17,630 17,630 – 2014 11,052 37,912 2,508 68,911 46,707 9,533 176,623 364 (3,033) 1,012 174,966 2014 160,779 20,909 2,997 5,683 5,301 826 (21,057) – (382) (401) 71 240 14,187 174,966 2014 2,997 5,683 5,301 826 14,807 14,807 – POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 69 NOTE 11 Segregated Funds and Other Structured Entities (continued) INVESTMENTS ON ACCOUNT OF SEGREGATED FUND POLICYHOLDERS (by fair value hierarchy level) DECEMBER 31, 2015 LEVEL 1 LEVEL 2 LEVEL 3 TOTAL Investments on account of segregated fund policyholders [1] 120,283 67,333 11,765 199,381 [1] Excludes other liabilities, net of other assets, of $1,187 million. 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. In 2015 certain foreign equity holdings valued at $412 million have been Level 2 assets include those assets where fair value is not available from transferred from Level 1 to Level 2 ($2,234 million were transferred from Level normal market pricing sources and where Lifeco does not have visibility 1 to Level 2 at December 31, 2014), based on Lifeco’s ability to utilize observable, through to the underlying assets. 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 Purchases Sales Transfers into Level 3 Transfers out of Level 3 Balance, end of year 2015 10,390 1,039 944 (607) – (1) 2014 9,298 782 919 (603) 4 (10) 11,765 10,390 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 $4,291 million for the year ended December 31, 2015 Some of these funds are managed by related parties of Lifeco and Lifeco ($3,813 million in 2014). receives management fees related to these services. In addition, certain Included within other assets (Note 9) at December 31, 2015 is $501 million of these segregated funds are invested in mutual funds of related parties. ($327 million at December 31, 2014) of investments by Lifeco in bonds and Management fees can be variable due to the performance of factors – such shares of Putnam-sponsored funds and $89 million ($78 million at December 31, as markets or industries – in which the fund invests. Fee income derived in 2014) of investments in shares of sponsored unit trusts in Europe. connection with the management of investment funds generally increases or decreases in direct relationship with changes of assets under management, which is affected by prevailing market conditions, and the inflow and outflow of client assets. 70 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 12 Insurance and Investment Contract Liabilities INSURANCE AND INVESTMENT CONTRACT LIABILITIES DECEMBER 31, 2015 Insurance contract liabilities Investment contract liabilities DECEMBER 31, 2014 Insurance contract liabilities Investment contract liabilities GROSS LIABILIT Y 158,492 2,180 160,672 GROSS LIABILIT Y 145,198 857 146,055 REINSURANCE ASSETS 5,131 – 5,131 REINSURANCE ASSETS 5,151 – 5,151 NET 153,361 2,180 155,541 NET 140,047 857 140,904 COMPOSITION OF INSURANCE AND INVESTMENT CONTRACT LIABILITIES AND RELATED SUPPORTING ASSETS 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 32,072 12,278 1,519 28,162 27,625 59,016 160,672 (419) 16 – 794 339 4,401 5,131 The composition of the assets supporting liabilities and equity of Lifeco is as follows: GROSS LIABILIT Y REINSURANCE ASSETS 2014 NET 31,181 10,362 1,377 28,094 22,611 52,430 (156) 12 – 31,337 10,350 1,377 832 233 4,230 5,151 27,262 22,378 48,200 140,904 155,541 146,055 DECEMBER 31, 2015 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 15,332 5,887 1,087 18,848 23,023 32,985 12,045 5,736 7,816 485 40 3,839 3,813 4,358 941 729 114,943 22,021 4,112 1,341 3,471 5,906 167 3,736 789 – 71 7 – 32,072 12,278 1,519 28,162 27,625 59,016 3,342 18,105 65 411 200,952 214,003 16,735 25,260 5,237 249,861 399,935 116,291 23,446 7,305 5,237 249,861 402,140 [1] Fair value excludes shares classified as available for sale and carried at cost when a fair value cannot be reliably measured. POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 71 2015 NET 32,491 12,262 1,519 27,368 27,286 54,615 – 154 1,732 – 226 – 1,649 7,873 NOTE 12 Insurance and Investment Contract Liabilities (continued) 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 – 144 1,740 – 191 4 1,471 7,820 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 [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. CHANGE IN INSURANCE CONTRACT LIABILITIES The change in insurance contract liabilities during the year was the result of the following business activities and changes in actuarial estimates: PARTICIPATING NON-PARTICIPATING GROSS LIABILIT Y REINSURANCE ASSETS NET GROSS LIABILIT Y REINSURANCE ASSETS NET TOTAL NET DECEMBER 31, 2015 Balance, beginning of year Impact of new business Normal change in in-force business Management actions and changes in assumptions Business movement from/to external parties Impact of foreign exchange rate changes Balance, end of year 23 1,046 (276) – 2,158 45,844 42,893 (144) 43,037 102,305 5,295 – (70) (192) – 3 23 1,116 (84) – 2,155 4,380 (5,711) (489) 1,588 10,575 126 (178) (78) (2) 371 97,010 4,254 (5,533) (411) 1,590 10,204 140,047 4,277 (4,417) (495) 1,590 12,359 (403) 46,247 112,648 5,534 107,114 153,361 DECEMBER 31, 2014 Balance, beginning of year Impact of new business Normal change in in-force business Management actions 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 72 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 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 $84 million in 2015 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 provisions for future policyholder dividends of $4,991 million, in the fair value of liabilities. The change in the value of the insurance contract updated expense and tax assumptions of $545 million and updated liabilities associated with the change in the value of the supporting assets is mortality assumptions of $412 million, partially offset by increases due to included in the normal change in force above. lower investment returns of $5,527 million, updated policyholder behaviour On May 15, 2014, the Canadian Actuarial Standards Board published the assumptions of $188 million, and modelling refinements of $149 million. Standards of Practice (Standards) effective October 15, 2014, reflecting In 2014, the major contributors to the increase in net insurance contract revisions to economic reinvestment assumptions used in the valuation of liabilities were the impact of new business of $5,930 million, the normal insurance contract liabilities. In 2015, the major contributors to the increase in net insurance contract liabilities were the impact of foreign exchange rate changes of $12,359 million, the impact of new business of $4,277 million, and business movement change in the in-force business of $4,730 million which was primarily due to the change in fair value and the impact of foreign exchange rate changes of $3,784 million. This was partially offset by decreases due to management actions and assumption changes of $426 million. from/to external parties of $1,590 million, which was primarily due to the Net non-participating insurance contract liabilities decreased by $416 million acquisition of Equitable Life’s annuity business during the first quarter of in 2014 due to management actions and assumption changes, including a 2015, partially offset by decreases due to the normal changes in the in-force $193 million decrease in Canada, a $135 million decrease in Europe and an business of $4,417 million, which were primarily due to the change in fair $88 million decrease in the United States. value, and management actions and assumption changes of $495 million. The decrease in Canada was primarily due to modelling refinements of Net non-participating insurance contract liabilities decreased by $411 million $83 million, updated economic assumptions, including the change in in 2015 due to management actions and assumption changes including Standards of $77 million, updated policyholder behaviour assumptions of a $50 million decrease in Canada, a $331 million decrease in Europe and a $60 million, updated morbidity assumptions of $44 million, updated expenses $30 million decrease in the United States. and taxes of $10 million and updates to other provisions of $6 million, partially The decrease in Canada was primarily due to updated mortality assumptions of $159 million, updated economic assumptions of $15 million and updated offset by increases due to updated mortality assumptions of $62 million and updated longevity assumptions of $25 million. expense and tax assumptions of $12 million, partially offset by increases due The decrease in Europe was primarily due to updated longevity assumptions to updated policyholder behaviour assumptions of $85 million, and modelling of $110 million, updated economic assumptions, including the change in refinements of $49 million. The decrease in Europe was primarily due to updated longevity assumptions of $292 million, updated economic assumptions of $184 million, updated morbidity assumptions of $12 million and updates to other provisions of Standards of $107 million, modelling refinements of $63 million and updated morbidity assumptions of $22 million, partially offset by increases due to updated policyholder behaviour assumptions of $142 million, updated mortality assumptions of $20 million and updates to other provisions of $10 million, partially offset by increases due to updated mortality assumptions $5 million. of $64 million, updated expense and tax assumptions of $55 million, modelling The decrease in the United States was primarily due to updated mortality refinements of $37 million and updated policyholder behaviour assumptions assumptions of $103 million, updated policyholder behaviour assumptions of of $11 million. The decrease in the United States was primarily due to updated economic assumptions of $30 million and updated mortality assumptions of $8 million, $67 million and updated longevity assumptions of $6 million, partially offset by increases due to modelling refinements of $51 million and updated economic assumptions, including the change in Standards, of $37 million. partially offset by increases due to updated policyholder behaviour Net participating insurance contract liabilities decreased by $10 million in 2014 assumptions of $6 million. due to management actions and assumption changes. The decrease was primarily due to higher investment returns of $152 million, updated expenses and taxes of $144 million, modelling refinements of $68 million and updated mortality assumptions of $20 million, partially offset by increases due to increased provisions for future policyholder dividends of $360 million, updated policyholder behavior assumptions of $13 million and updated morbidity assumptions of $1 million. POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 73 NOTE 12 Insurance and Investment Contract Liabilities (continued) CHANGE IN INVESTMENT CONTRACT LIABILITIES MEASURED AT FAIR VALUE DECEMBER 31 Balance, beginning of year Normal change in in-force business Investment experience Management actions and changes in assumptions Business movement from/to external parties Impact of foreign exchange rate changes Balance, end of year 2015 857 (89) 18 7 1,330 57 2,180 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. In 2015, business movement from/to external parties is primarily due to a retrocession agreement to assume a block of investment contract liabilities in the form of structured settlements with fixed terms and amount. See Note 6 for more information. PREMIUM INCOME DECEMBER 31 Direct premiums Assumed reinsurance premiums Total POLICYHOLDER BENEFITS DECEMBER 31 Direct Assumed reinsurance Total 2015 22,120 6,009 28,129 2015 15,880 6,673 22,553 2014 19,926 4,760 24,686 2014 14,892 4,471 19,363 ACTUARIAL ASSUMPTIONS In the computation of insurance contract liabilities, valuation assumptions Morbidity Lifeco uses industry-developed experience tables modified to reflect emerging have been made regarding rates of mortality/morbidity, investment Lifeco experience. Both claim incidence and termination are monitored returns, levels of operating expenses, rates of policy termination and regularly and emerging experience is factored into the current valuation. Property and casualty reinsurance Insurance contract liabilities for property and casualty reinsurance written by London Reinsurance Group Inc. (LRG), a subsidiary of London Life, are determined using accepted actuarial practices for property and casualty insurers in Canada. 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 instances, LRG management adjusts cession statement amounts to reflect management’s interpretation of the treaty. Differences will be resolved via audits and other loss mitigation activities. In addition, insurance contract liabilities also include an amount for incurred but not reported losses which may differ significantly from the 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. rates of utilization of elective policy options or provisions. The valuation assumptions use best estimates of future experience together with a margin for adverse deviation. These margins are necessary to provide for possibilities of misestimation and/or future deterioration in the best estimate assumptions and provide reasonable assurance that insurance contract liabilities cover a range of possible outcomes. Margins are reviewed periodically for continued appropriateness. The methods for arriving at these valuation assumptions are outlined below: 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. 74 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 12 Insurance and Investment Contract Liabilities (continued) Investment returns The assets which correspond to the different liability categories are assumed rates of utilization are based on Lifeco or industry experience when it exists and, when not, on judgment considering incentives to utilize the segmented. For each segment, projected cash flows from the current assets option. Generally, whenever it is clearly in the best interests of an informed and liabilities are used in the CALM to determine insurance contract liabilities. policyholder to utilize an option, then it is assumed to be elected. 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). Expenses Contractual policy expenses (e.g., sales commissions) and tax expenses are Policyholder dividends and adjustable policy features Future policyholder dividends and other adjustable policy features are included in the determination of insurance contract liabilities with the assumption that policyholder dividends or adjustable benefits will change in the future in response to the relevant experience. The dividend and policy adjustments reflected on a best estimate basis. Expense studies for indirect operating are determined consistent with policyholders’ reasonable expectations, such expenses are updated regularly to determine an appropriate estimate of expectations being influenced by the participating policyholder dividend future operating expenses for the liability type being valued. Improvements policies and/or policyholder communications, marketing material and past in unit operating expenses are not projected. An inflation assumption is practice. It is Lifeco’s expectation that changes will occur in policyholder incorporated in the estimate of future operating expenses consistent with dividend scales or adjustable benefits for participating or adjustable business the interest rate scenarios projected under the CALM as inflation is assumed respectively, corresponding to changes in the best estimate assumptions, to be correlated with new money interest rates. Policy termination Studies to determine rates of policy termination are updated regularly to 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 form the basis of this estimate. Industry data is also available and is useful assumptions above. 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 RISK MANAGEMENT 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 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 Lifeco. Examples include term renewals, conversion to whole life insurance liabilities. Lifeco’s objective is to mitigate its exposure to risk arising from these (term insurance), settlement annuity purchase at guaranteed rates (deposit contracts through product design, product and geographical diversification, annuities) and guarantee resets (segregated fund maturity guarantees). The 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 its 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 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 2015 (282) (314) (225) – – 109 (430) 45 (108) 433 (457) (108) (602) 2014 (238) (272) (220) – – 41 (383) 34 (113) 355 (372) (99) (568) POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 75 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 60,234 39,903 60,535 160,672 375 355 4,401 5,131 2015 NET 59,859 39,548 56,134 GROSS LIABILIT Y REINSURANCE ASSETS 59,275 32,973 53,807 676 245 4,230 5,151 2014 NET 58,599 32,728 49,577 140,904 155,541 146,055 Reinsurance risk Maximum limits per insured life benefit amount (which vary by line of Reinsurance contracts do not relieve Lifeco from its obligations to policyholders. Failure of reinsurers to honour their obligations could result business) are established for life and health insurance and reinsurance is in losses to Lifeco. Lifeco evaluates the financial condition of its reinsurers purchased for amounts in excess of those limits. to minimize its exposure to significant losses from reinsurer insolvencies. Reinsurance costs and recoveries as defined by the reinsurance agreement are Certain of the reinsurance contracts are on a funds-withheld basis where reflected in the valuation with these costs and recoveries being appropriately Lifeco retains the assets supporting the reinsured insurance contract calibrated to the direct assumptions. 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 mortgage principal. A component of this swap, related to the obligation Housing Corporation (CMHC) sponsored National Housing Act Mortgage- to pay CMB coupons and receive investment returns on repaid mortgage Backed Securities (NHA MBS) Program and Canada Mortgage Bond (CMB) principal, is recorded as a derivative and had a negative fair value of $47 million Program and through Canadian bank-sponsored asset-backed commercial at December 31, 2015 (a negative fair value of $26 million in 2014). 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 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 2015 SECURITIZED MORTGAGES OBLIGATIONS TO SECURI TIZATION ENTITIES NET SECURITIZED MORTGAGES OBLIGATIONS TO SECURITIZATION ENTITIES 4,612 2,369 6,981 4,670 2,422 7,092 (58) (53) (111) 4,611 2,013 6,624 4,692 2,062 6,754 7,238 7,272 (34) 6,820 6,859 2014 NET (81) (49) (130) (39) 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. 76 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 14 Debentures and Other Debt Instruments DECEMBER 31 DEBENTURES POWER FINANCIAL CARRYING VALUE 2015 FAIR VALUE CARRYING VALUE 2014 FAIR VALUE 6.90% debentures, due March 11, 2033, unsecured 250 328 250 335 LIFECO 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 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 OTHER DEBT INSTRUMENTS LIFECO Commercial paper and other short-term debt instruments with interest rates from 0.213% to 0.223% (0.21% to 0.22% in 2014), unsecured Revolving credit facility with interest equal to LIBOR rate plus 0.70% or U.S. prime rate loan (US$245 million; US$355 million at December 31, 2014), unsecured 2.3% mortgage payable (€50 million), matured June 30, 2015 Total other debt instruments 311 200 499 745 100 192 391 238 342 414 324 220 561 798 127 264 527 282 438 412 298 200 498 695 100 192 391 200 342 348 313 226 557 773 129 268 536 230 450 354 998 1,052 997 1,087 498 150 375 125 150 175 150 200 560 166 439 160 207 234 202 253 498 150 375 125 150 175 150 200 583 171 450 160 208 236 205 252 (43) 6,460 (57) 7,497 (43) 6,291 (54) 7,469 129 338 – 467 129 338 – 467 114 412 70 596 114 412 70 596 6,927 7,964 6,887 8,065 The principal payments on debentures and other debt instruments in each of the next five years and thereafter are as follows: 2016 2017 2018 2019 2020 Thereafter 467 300 350 375 500 4,957 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 77 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 2015 479 2,072 420 545 437 161 310 356 1,607 1,299 7,686 Total other liabilities of $5,067 million as at December 31, 2015 ($4,468 million as at December 31, 2014) are expected to be settled within 12 months. DEFERRED INCOME RESERVE 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 CAPITAL TRUST DEBENTURES DECEMBER 31 CANADA LIFE CAPITAL TRUST (CLCT) 7.529% capital trust debentures due June 30, 2052, unsecured Acquisition-related fair value adjustment 2015 429 42 (39) 51 (46) 437 2015 FAIR VALUE 215 – 215 CARRYING VALUE 150 12 162 CARRYING VALUE 150 11 161 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 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. 78 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 16 Income Taxes EFFECTIVE INCOME TAX RATE The Corporation’s effective income tax rate is derived as follows: YEARS ENDED DECEMBER 31 PERCENTAGE [%] 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 jointly controlled corporations and in associates Other Effective income tax rate INCOME TAXES 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 Recognition of previously unrecognized tax losses, tax credits or temporary differences Other Deferred taxes Origination and reversal of temporary differences [1] Effect of change in tax rates or imposition of new taxes Write-down or reversal of previous write-down of deferred tax assets [1] Recognition of previously unrecognized tax losses, tax credits or temporary differences Other [1] During the year, Lifeco reclassified $61 million of deferred tax from origination and reversal of temporary differences to write-down or reversal of previous write-down of deferred tax assets for the year ended December 31, 2014 to conform to the current year’s presentation. The following table shows current and deferred taxes relating to items not recognized in the statements of earnings: DECEMBER 31 Current taxes Deferred taxes 2015 OTHER COMPREHENSIVE INCOME OTHER COMPREHENSIVE INCOME EQUITY (2) (89) (91) – (2) (2) 29 (168) (139) 2015 26.7 (4.9) (5.1) (1.3) (0.2) 15.2 2014 26.5 (3.4) (4.0) (1.3) 1.4 19.2 2015 2014 524 – (15) 509 198 1 – (7) (22) 170 679 585 9 (33) 561 285 13 (1) (29) 5 273 834 2014 EQUITY – (1) (1) POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 79 NOTE 16 Income Taxes (continued) DEFERRED TAXES Deferred taxes are attributable to the following items: DECEMBER 31 Loss carry forwards Investments [1] Insurance and investment contract liabilities Deferred selling commissions Intangible assets Other [1] Presented on the balance sheets as follows: Deferred tax assets Deferred tax liabilities 2015 1,794 (636) (1,126) (195) (444) 593 (14) 1,961 (1,975) (14) 2014 1,507 (835) (594) (190) (294) 352 (54) 1,707 (1,761) (54) [1] During the year, Lifeco reclassified $39 million of deferred tax asset from investments to other at December 31, 2014 to conform to the current year’s presentation. 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 $1,303 million (US$944 million) as at tax benefit through future taxable profits is probable. December 31, 2015 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, 2015 are recoverable. At December 31, 2015, Lifeco had tax loss carry forwards totalling $5,073 million ($4,200 million in 2014). Of this amount, $4,828 million expires between 2016 and 2035, while $245 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, 2015, the Corporation and its subsidiaries have non-capital losses of $150 million ($201 million in 2014) available to reduce future taxable income for which the benefits have not been recognized. These losses expire from 2016 to 2035. In addition, the Corporation and its subsidiaries have capital loss carry forwards of $167 million ($133 million in 2014) that can be used indefinitely to offset future capital gains for which the benefits have not been recognized. As at December 31, 2015 a deferred tax liability of $7 million (nil in 2014) has been recognized with respect to a portion of the temporary difference associated with the investment in a subsidiary. No other deferred tax liability has been recognized in respect of the remaining temporary differences associated with investments in subsidiaries, 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. 80 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 17 Stated Capital AUTHORIZED The authorized capital of Power Financial consists of an unlimited number of First Preferred Shares, issuable in series; an unlimited number of Second Preferred Shares, issuable in series; and an unlimited number of common shares. ISSUED AND OUTSTANDING DECEMBER 31 FIRST PREFERRED SHARES (PERPETUAL) Series A [i] Series D [ii] Series E [ii] Series F [ii] Series H [ii] Series I [ii] Series K [ii] Series L [ii] Series O [ii] Series P [ii] [iii] Series R [ii] Series S [ii] Series T [ii] COMMON SHARES Balance, beginning of year Issued under Stock Option Plan Balance, end of year 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 2015 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 6,000,000 11,200,000 10,000,000 12,000,000 8,000,000 711,723,680 1,515,000 713,238,680 743 61 804 711,173,680 550,000 711,723,680 2014 STATED CAPITAL 100 150 200 150 150 200 250 200 150 280 250 300 200 2,580 721 22 743 First Preferred Shares [i] The Series A First Preferred Shares are entitled to a quarterly cumulative dividend, at a floating rate equal to one quarter of 70% of the average prime rates quoted by two major Canadian chartered banks and are redeemable, at the Corporation’s option, at $25.00 per share, together with all declared and unpaid dividends to, but excluding, the date of redemption. [ii] The First Preferred Shares series are entitled to fixed non-cumulative preferential cash dividends payable quarterly. The Corporation may redeem for cash the First Preferred Shares, in whole or in part, at the Corporation’s option, with all declared and unpaid dividends to, but excluding, the date of redemption. FIRST PREFERRED SHARES Non-cumulative, fixed rate Series D, Series E, Series F, 5.50% 5.25% 5.90% Series H, 5.75% Series I, Series K, Series L, 6.00% 4.95% 5.10% Series O, 5.80% Series R, 5.50% Series S, 4.80% Non-cumulative, 5-year rate reset [1] Series P, 4.40% [iii] Series T, 4.20% CASH DIVIDENDS PAYABLE QUARTERLY EARLIEST ISSUER REDEMPTION DATE ($/SHARE) 0.343750 0.328125 0.368750 0.359375 0.375000 0.309375 0.318750 0.362500 0.343750 0.300000 0.275000 0.262500 Currently redeemable Currently redeemable Currently redeemable Currently redeemable Currently redeemable Currently redeemable Currently redeemable Currently redeemable April 30, 2017 April 30, 2018 January 31, 2016 January 31, 2019 REDEMPTION PRICE ($/SHARE) 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.75 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 February 1, 2016, 2,234,515 of its outstanding 11,200,000 Non-Cumulative 5-year Rate Reset First Preferred Shares, Series P were converted, on a one-for-one basis, into Non-Cumulative Floating Rate First Preferred Shares, Series Q. The Series Q First Preferred shares are entitled to an annual non- cumulative dividend, payable quarterly at a floating rate equal to the 3-month Government of Canada Treasury Bill rate plus 1.60%. The dividend rate for the remaining 8,965,485 Series P shares was reset to an annual fixed rate of 2.31% or $0.144125 per share in cash dividends payable quarterly. POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 81 NOTE 17 Stated Capital (continued) Common Shares During the year 2015, 1,515,000 common shares (550,000 in 2014) were issued under the Corporation’s Employee Stock Option Plan for a consideration of $49 million ($17 million in 2014). Dividends declared on the Corporation’s common shares in 2015 amounted to $1.49 per share ($1.40 per share in 2014). NOTE 18 Share-Based Compensation STOCK OPTION PLAN Under Power Financial’s Employee Stock Option Plan, 12,356,600 common 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 shares are reserved for issuance. The plan requires that the exercise price of no later than five years from the date of grant. Outstanding options, which the option must not be less than the market value of a share on the date of are not fully vested, have the following vesting conditions: YEAR OF GRANT OPTIONS VESTING CONDITIONS 2011 2012 2012 2013 2013 2014 2014 2015 2015 148,616 239,330 35,127 421,628 53,476 451,103 1,092,062 735,561 925,044 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, 2015 and 2014, and changes during the years ended on those dates is as follows: Outstanding at beginning of year Granted Exercised Forfeited Outstanding at end of year Options exercisable at end of year 2015 2014 OPTIONS WEIGHTED-AVERAGE EXERCISE PRICE OPTIONS WEIGHTED-AVERAGE EXERCISE PRICE 8,630,477 1,662,585 (1,515,000) (4,130) 8,773,932 $ 31.18 36.83 32.24 36.09 32.06 7,522,386 1,658,091 (550,000) – 8,630,477 4,671,985 30.23 5,483,586 $ 30.56 34.15 31.76 – 31.18 30.93 82 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 18 Share-Based Compensation (continued) The following table summarizes information about stock options outstanding at December 31, 2015: 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 32.46 – 32.58 33.37 – 34.42 34.46 – 37.13 38.35 1,525,467 1,532,879 602,383 741,006 2,088,390 1,358,763 925,044 8,773,932 [YRS] 5.8 3.5 3.2 7.4 8.7 3.8 9.2 6.1 $ 25.84 28.96 31.42 32.57 33.99 35.33 38.35 32.06 1,113,581 1,521,692 548,907 319,378 112,776 1,055,651 – 4,671,985 $ 25.93 28.95 31.50 32.56 34.42 34.81 – 30.23 Compensation expense During the year ended December 31, 2015, Power Financial granted 1,662,585 options (1,658,091 options in 2014) 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] 2015 4.5% 19.8% 1.2% 9 3.30 36.83 2014 4.8% 19.8% 2.1% 9 3.27 34.15 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 options may be granted to certain officers and employees. In addition, other DEFERRED SHARE UNIT PLAN 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 $67 million in 2015 ($50 million in 2014) and is recorded in operating and cash and deferred share units. The number of deferred share units granted administrative expenses in the statements of earnings. is determined by dividing the amount of remuneration payable by the five- PERFORMANCE SHARE UNIT PLAN 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 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 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, 2015, the value of the deferred share units outstanding was $17 million ($19 million in 2014). Alternatively, Directors may participate in the Share Purchase Plan its affiliates, or in the event of the death of the participant, by a lump-sum for Directors. payment based on the value of the PDSU at that time. Additional PSUs and PDSUs are issued in respect of dividends payable on common shares based on the value of the PSU or PDSU at the dividend payment date. The carrying value of the PSU liability is $7 million ($4 million in 2014) recorded within other liabilities. POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 83 NOTE 18 Share-Based Compensation (continued) EMPLOYEE SHARE PURCHASE PROGRAM Power Financial established an Employee Share Purchase Program, giving OTHER SHARE-BASED AWARDS OF SUBSIDIARIES 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, 2015 and December 31, 2014. The non-controlling interests of Lifeco and IGM and their subsidiaries reflected in the balance sheets are as follows: DECEMBER 31 LIFECO IGM 2015 TOTAL LIFECO IGM 2014 TOTAL Non-controlling interests, beginning of year Earnings allocated to non-controlling interests Other comprehensive income (loss) allocated to non-controlling interests Dividends Issuance of preferred shares Change in ownership interest and other [1] 9,973 1,039 1,910 298 11,883 1,337 9,064 957 1,877 291 10,941 1,248 611 (500) – (112) 5 (211) – (161) 616 (711) – (273) 121 (478) 200 109 (22) (215) – (21) 99 (693) 200 88 Non-controlling interests, end of year 11,011 1,841 12,852 9,973 1,910 11,883 [1] Changes in ownership interest and other includes: repurchase and issuance of common shares by subsidiaries. The carrying value of non-controlling interests consists of the following: DECEMBER 31 Common shareholders Preferred shareholders Participating account surplus LIFECO IGM 5,886 2,514 2,611 1,691 150 – 2015 TOTAL 7,577 2,664 2,611 11,011 1,841 12,852 LIFECO IGM 4,979 2,514 2,480 9,973 1,760 150 – 1,910 11,883 2014 TOTAL 6,739 2,664 2,480 As at December 31, 2015, Power Financial and IGM held 67.4% and 4.0%, respectively, of Lifeco’s common shares, representing approximately 65.0% of the voting rights attached to the outstanding Lifeco voting shares. 84 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 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, 2015 can be obtained from their publicly available financial statements. Summarized financial information for Lifeco and IGM is as follows: BALANCE SHEET Assets Liabilities Equity COMPREHENSIVE INCOME Net earnings Other comprehensive income (loss) CASH FLOWS Operating activities Financing activities Investing activities NOTE 20 Capital Management 2015 LIFECO IGM LIFECO 2014 IGM 399,935 374,675 25,260 14,831 9,983 4,848 356,709 334,812 21,897 14,417 9,576 4,841 3,011 1,897 5,123 (1,683) (3,424) 781 78 622 (420) (434) 2,761 325 5,443 (1,685) (4,129) 762 (28) 741 625 (1,232) As a holding company, Power Financial’s objectives in managing its capital are to: ▪ provide attractive long-term returns to shareholders of the Corporation; ▪ provide sufficient financial flexibility to pursue its growth strategy to invest on a timely basis in its operating companies and other investments as opportunities present; 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 LIFECO 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. to shareholders, return capital to shareholders or issue capital. Lifeco has established policies and procedures designed to identify, The capital structure of the Corporation consists of perpetual preferred shares, debentures, common shareholders’ equity and non-controlling interests. The Corporation views perpetual preferred shares as a permanent and cost- measure and report all material risks. Management of Lifeco is responsible for establishing capital management procedures for implementing and monitoring the capital plan. effective source of capital. The Corporation is a long-term investor and as such Lifeco’s subsidiaries Great-West Life, Great-West Life & Annuity and Canada holds positions in long-term investments as well as cash and fixed income Life Limited are subject to minimum regulatory capital requirements. securities for liquidity purposes. The Board of Directors of the Corporation is responsible for capital management. Management of the Corporation is responsible for establishing 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 relevant jurisdictions in which they operate: capital management procedures and for implementing and monitoring its ▪ In Canada, the Office of the Superintendent of Financial Institutions capital plans. The Board of Directors of the Corporation reviews and approves has established a capital adequacy measurement for life insurance capital transactions such as the issuance, redemption and repurchase of companies incorporated under the Insurance Companies Act (Canada) and common shares, perpetual preferred shares and debentures. The boards their subsidiaries, known as the Minimum Continuing Capital and Surplus of directors of the public subsidiaries, as well as those of Pargesa and Requirements (MCCSR). As at December 31, 2015, the MCCSR ratio for Groupe Bruxelles Lambert, are responsible for their respective company’s Great-West Life was 238% (224% at December 31, 2014). capital management. ▪ At December 31, 2015, the Risk-Based Capital ratio (RBC) of Great-West The Corporation itself is not subject to externally imposed regulatory capital Life & Annuity, Lifeco’s regulated U.S. operating company, was estimated requirements. However, Lifeco and certain of its main subsidiaries and IGM’s to be 441% of the Company Action Level set by the National Association of subsidiaries are subject to regulatory capital requirements and they manage Insurance Commissioners. Great-West Life & Annuity reports its RBC ratio their capital as described below. annually to U.S. insurance regulators. POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 85 NOTE 20 Capital Management (continued) ▪ In the United Kingdom, Canada Life Limited is required to satisfy the capital resources requirements set out in the Integrated Prudential Sourcebook, IGM FINANCIAL 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 the assess an appropriate amount of capital it should hold, based on the risks quality of its financial position by maintaining a solid capital base and a strong encountered from its business activities. At the end of 2015, Canada Life balance sheet. IGM regularly assesses its capital management practices in Limited complied with the minimum capital resource requirements in the response to changing economic conditions. United Kingdom. During the year, Lifeco’s European-regulated insurance and reinsurance businesses have been preparing for the implementation of the new Solvency II regulations, effective January 1, 2016. ▪ Other foreign operations and foreign subsidiaries of Lifeco are required to comply with local capital or solvency requirements in their respective jurisdictions. At December 31, 2015 and 2014, Lifeco maintained capital levels above the minimum local regulatory requirements in each of its other foreign operations. IGM’s capital is primarily used in its ongoing business operations to support working capital requirements, long-term investments made by IGM, business expansion and other strategic objectives. The IGM subsidiaries that are subject to regulatory capital requirements include investment dealers, mutual fund dealers, exempt market dealers, portfolio managers, investment fund managers and a trust company. These 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 to the financial statements includes estimates of sensitivities and and procedures designed to identify, measure, monitor and mitigate risks risk exposure measures for certain risks, such as the sensitivity due to specific associated with financial instruments. The key risks related to financial changes in interest rate levels projected and market prices as at the valuation instruments are liquidity risk, credit risk and market risk. date. Actual results can differ significantly from these estimates for a variety ▪ Liquidity risk is the risk that the Corporation and its subsidiaries will not be of reasons, including: able to meet all cash outflow obligations as they come due. ▪ assessment of the circumstances that led to the scenario may lead ▪ Credit risk is the potential for financial loss to the Corporation and its to changes in (re)investment approaches and interest rate scenarios subsidiaries if a counterparty in a transaction fails to meet its obligations. considered; ▪ Market risk is the risk that the fair value or future cash flows of a financial ▪ changes in actuarial, investment return and future investment activity instrument will fluctuate as a result of changes in market factors. Market assumptions; factors include three types of risks: currency risk, interest rate risk and ▪ actual experience differing from the assumptions; equity price risk. ▪ Currency risk relates to the Corporation, its subsidiaries and its jointly 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. ▪ changes in business mix, effective tax rates and other market factors; ▪ interactions among these factors and assumptions when more than one changes; and ▪ the general limitations of internal models. For these reasons, the sensitivities should only be viewed as directional estimates of the underlying sensitivities for the respective factors based on the assumptions outlined above. Given the nature of these calculations, the Corporation cannot provide assurance that the actual impact on net earnings will be as indicated. POWER FINANCIAL LIQUIDITY RISK Power Financial is a holding company. As such, corporate cash flows are The Corporation regularly reviews its liquidity requirements and seeks to maintain a sufficient level of liquidity to meet its operating expenses, principally made up of dividends received from its subsidiaries and jointly financing charges and payment of preferred share dividends for a reasonable controlled corporation, and income from investments, less operating period of time. If required, the ability of Power Financial to arrange additional expenses, financing charges, income taxes and payment of dividends to financing in the future will depend in part upon prevailing market conditions its common and preferred shareholders. The ability of Lifeco and IGM, as well as the business performance of Power Financial and its subsidiaries. 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 has not changed materially since December 31, 2014. 86 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 21 Risk Management (continued) CREDIT RISK Fixed income securities and derivatives are subject to credit risk. The Currency risk In managing its own cash and cash equivalents as well as fixed income Corporation mitigates credit risk on its fixed income securities by adhering to securities Power Financial may hold cash balances denominated in foreign an investment policy that establishes guidelines which provide exposure limits currencies and thus be exposed to fluctuations in exchange rates. In order by defining admissible securities, minimum rating and concentration limits. to protect against such fluctuations, Power Financial may from time to 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, time enter into currency-hedging transactions with highly rated financial institutions. As at December 31, 2015, approximately 88% of Power Financial’s cash and cash equivalents and fixed income securities were denominated in Canadian dollars. or guaranteed by, the Canadian or U.S. governments. The Corporation regularly Power Financial is exposed through Parjointco to foreign exchange risk as reviews the credit ratings of its counterparties. The maximum exposure to credit a result of Parjointco’s investment in Pargesa, a company whose functional risk on these financial instruments is their carrying value. currency is the Swiss franc. Pargesa itself is exposed to foreign exchange Derivatives continue to be used 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 credit ratings of derivative financial instrument counterparties. Derivative contracts are over-the-counter with counterparties that are highly rated financial institutions. Power Financial’s exposure to and management of credit risk related to through its subsidiary to Euros. Foreign currency translation gains and losses from Pargesa are recorded in other comprehensive income. Interest rate risk Power Financial’s financial instruments do not have significant exposure to interest rate risk. Equity price risk Power Financial’s financial instruments do not have significant exposure to cash and cash equivalents, fixed income securities and derivatives have not equity price risk. changed materially since December 31, 2014. MARKET RISK Power Financial’s financial instruments are comprised of cash and cash equivalents, fixed income securities and debentures. 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 closely monitors the solvency and capital positions oversight of Lifeco’s key risks. LIQUIDITY RISK The following policies and procedures are in place to manage liquidity risk: 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 ▪ Lifeco closely manages operating liquidity through cash flow matching chartered banks. As well, Lifeco maintains a $150 million liquidity facility of assets and liabilities and forecasting earned and required yields, to at Great-West Life, a US$500 million revolving credit agreement with a ensure consistency between policyholder requirements and the yield syndicate of banks for use by Putnam, and a US$50 million line of credit at of assets. Approximately 69% (approximately 70% in 2014) of insurance Great-West Life & Annuity. and investment contract liabilities are non-cashable prior to maturity or subject to fair value adjustments. 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. PAYMENTS DUE BY PERIOD DECEMBER 31, 2015 1 YEAR 2 YEARS 3 YEARS 4 YEARS 5 YEARS Debentures and other debt instruments Capital trust debentures [1] Purchase obligations Pension contributions 467 – 85 198 750 300 – 45 – 345 200 – 33 – 233 – – 30 – 30 500 – 27 – OVER 5 YEARS 3,950 150 7 – TOTAL 5,417 150 227 198 527 4,107 5,992 [1] Payments due have not been reduced to reflect that Lifeco held capital trust securities of $37 million principal amount ($50 million carrying value). POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 87 NOTE 21 Risk Management (continued) CREDIT RISK The following policies and procedures are in place to manage credit risk: ▪ Investment guidelines are in place that require only the purchase of ▪ Credit risk associated with derivative instruments is evaluated quarterly based on conditions that existed at the balance sheet date, using practices that are at least as conservative as those recommended by regulators. 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 agencies and/or internal credit review. ▪ 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. during the grace period specified by the insurance policy or until the policy is paid up or terminated. Commissions paid to agents and brokers are netted against amounts receivable, if any. ▪ Reinsurance is placed with counterparties that have a good credit rating and concentration of credit risk is managed by following policy guidelines set each year by the board of directors of Lifeco. Management of Lifeco continuously monitors and performs an assessment of 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 2015 2,813 86,503 11,535 16,905 22,021 8,694 15,512 5,131 1,430 1,420 703 590 293 772 461 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 Total balance sheet maximum credit exposure 174,783 156,341 [1] Includes $13,830 million as at December 31, 2015 ($10,758 million as at December 31, 2014) 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 amount and type of collateral required depends on an assessment of the credit risk of the Concentration of credit risk for Lifeco Concentrations of credit risk arise from exposures to a single debtor, a counterparty. Guidelines have been implemented regarding the acceptability group of related debtors or groups of debtors that have similar credit risk of types of collateral and the valuation parameters. Management of Lifeco characteristics in that they operate in the same geographic region or in monitors the value of the collateral, requests additional collateral when needed similar industries. The characteristics of such debtors are similar in that and performs an impairment valuation when applicable. Lifeco has $107 million changes in economic or political environments may impact their ability to of collateral received as at December 31, 2015 ($52 million as at December 31, 2014) meet obligations as they come due. relating to derivative assets. 88 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 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: DECEMBER 31, 2015 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, 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 CANADA UNITED STATES EUROPE TOTAL 5,745 7,075 429 206 3,242 415 2,607 64 1,852 834 416 596 2,217 1,210 1,453 1,502 2,406 6,200 1,410 3,241 4 3,186 5,835 7 – 5 3,581 204 382 2,061 1,228 373 2,947 1,708 1,444 786 1,298 4,910 1,876 216 31 46 1,306 12,470 2,112 680 595 230 2,854 2,644 542 771 2,958 1,170 820 3,228 1,100 4,341 538 1,336 5,780 10,307 7,570 12,683 5,354 1,100 6,783 498 5,088 5,539 2,186 1,740 8,122 4,088 3,717 5,516 4,804 15,451 3,824 4,793 43,120 32,051 39,772 114,943 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 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 89 NOTE 21 Risk Management (continued) The following table provides details of the carrying value of mortgage loans of Lifeco by geographic location: DECEMBER 31, 2015 Canada United States Europe DECEMBER 31, 2014 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 Exchange-traded Total SINGLE-FAMILY RESIDENTIAL MULTI-FAMILY RESIDENTIAL COMMERCIAL TOTAL 1,962 – – 1,962 3,674 1,770 377 5,821 7,055 3,162 4,021 12,691 4,932 4,398 14,238 22,021 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 2015 36,434 20,364 35,623 20,984 1,538 114,943 2015 – 209 248 4 461 2014 34,332 18,954 31,133 17,370 1,379 103,168 2014 10 66 576 – 652 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 2015 33 2 3 38 2014 7 5 3 15 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 90 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 2015 1,395 2,163 3,558 2014 1,186 1,947 3,133 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 21 Risk Management (continued) MARKET RISK Currency risk If the assets backing insurance and investment contract liabilities are not matched by currency, changes in foreign exchange rates can expose Lifeco to the risk of foreign exchange losses not offset by liability decreases. Lifeco has net investments in foreign operations. In addition, Lifeco’s debt obligations ▪ For products with less predictable timing of benefit payments, investments are made in fixed income assets with cash flows of a shorter duration than the anticipated timing of benefit payments or equities, as described below. ▪ The risks associated with the mismatch in portfolio duration and cash flow, asset prepayment exposure and the pace of asset acquisition are quantified and reviewed regularly. are mainly denominated in Canadian dollars. In accordance with IFRS, Projected cash flows from the current assets and liabilities are used in the foreign currency translation gains and losses from net investments in foreign CALM to determine insurance contract liabilities. Valuation assumptions operations, net of related hedging activities and tax effects, are recorded in have been made regarding rates of returns on supporting assets, fixed other comprehensive income. Strengthening or weakening of the Canadian income, equity and inflation. The valuation assumptions use best estimates dollar spot rate compared to the U.S. dollar, British pound and euro spot of future reinvestment rates and inflation assumptions with an assumed rates impacts Lifeco’s total equity. Correspondingly, Lifeco’s book value per correlation together with margins for adverse deviation set in accordance share and capital ratios monitored by rating agencies are also impacted. The with professional standards. These margins are necessary to provide following policies and procedures are in place to mitigate Lifeco’s exposure for possibilities of misestimation and/or future deterioration in the best to currency risk: ▪ Lifeco uses financial measures such as constant currency calculations to monitor the effect of currency translation fluctuations. ▪ Investments are normally made in the same currency as the liabilities supported by those investments. Segmented investment guidelines include maximum tolerances for unhedged currency mismatch exposures. ▪ Foreign currency assets acquired to back liabilities are normally converted back to the currency of the liability using foreign exchange contracts. ▪ A 10% weakening of the Canadian dollar against foreign currencies would be expected to increase non-participating insurance and investment contract liabilities and their supporting assets by approximately the same amount, resulting in an immaterial change to net earnings. A 10% strengthening of the Canadian dollar against foreign currencies would be expected to decrease non-participating insurance and investment contract liabilities and their supporting assets by approximately the same amount, resulting in an immaterial change in net earnings. Interest rate risk The following policies and procedures are in place to mitigate Lifeco’s exposure to interest rate risk: estimate assumptions and provide reasonable assurance that insurance contract liabilities cover a range of possible outcomes. Margins are reviewed periodically for continued appropriateness. Projected cash flows from fixed income assets used in actuarial calculations are reduced to provide for potential asset default losses. The net effective yield rate reduction averaged 0.18% (0.18% in 2014). The calculation for future credit losses on assets is based on the credit quality of the underlying asset portfolio. Testing under a number of interest rate scenarios (including increasing, decreasing and fluctuating rates) is done to assess reinvestment risk. The total provision for interest rates is sufficient to cover a broader or more severe set of risks than the minimum arising from the current Canadian Institute of Actuaries-prescribed scenarios. 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 material impact on Lifeco’s view of the range of interest rates to be covered by the provisions. If sustained however, the parallel shift could impact Lifeco’s range of scenarios covered. The total provision for interest rates also considers the impact of the Canadian Institute of Actuaries-prescribed scenarios: ▪ Lifeco uses a formal process for managing the matching of assets and ▪ The effect of an immediate 1% parallel increase in the yield curve on the liabilities. This involves grouping general fund assets and liabilities into prescribed scenarios would not change the total provision for interest rates. segments. Assets in each segment are managed in relation to the liabilities in the segment. ▪ Interest rate risk is managed by investing in assets that are suitable for the products sold. ▪ The effect of an immediate 1% parallel decrease in the yield curve on the prescribed scenarios would not change the total provision for interest rates. Another way of measuring the interest rate risk associated with this assumption is to determine the effect on the insurance and investment ▪ Where these products have benefit or expense payments that are contract liabilities impacting the shareholders’ earnings of Lifeco of a dependent on inflation (inflation-indexed annuities, pensions and disability 1% change in Lifeco’s view of the range of interest rates to be covered by claims), Lifeco generally invests in real return instruments to hedge its real these provisions: dollar liability cash flows. Some protection against changes in the inflation index is achieved as any related change in the fair value of the assets will be largely offset by a similar change in the fair value of the liabilities. ▪ 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 $163 million, ▪ For products with fixed and highly predictable benefit payments, causing an increase in net earnings of approximately $109 million. 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% 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 $614 million, causing a decrease in net earnings of approximately $430 million. POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 91 NOTE 21 Risk Management (continued) Equity price risk Lifeco has investment policy guidelines in place that provide for prudent additional impacts on these liabilities as equity values fluctuate. A 10% increase in equity values would be expected to additionally decrease non- investment in equity markets with clearly defined limits to mitigate price risk. participating insurance and investment contract liabilities by approximately 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 derivatives. For policies with segregated fund guarantees, Lifeco generally $53 million, causing an increase in net earnings of approximately $45 million. A 10% decrease in equity values would be expected to additionally increase non- participating insurance and investment contract liabilities by approximately $139 million, causing a decrease in net earnings of approximately $108 million. determines insurance contract liabilities at a conditional tail expectation The best estimate return assumptions for equities are primarily based on of 75 (CTE75) level. In other words, Lifeco determines insurance contract long-term historical averages. Changes in the current market could result in liabilities at a level that covers the average loss in the worst 25% part of the changes to these assumptions and will impact both asset and liability cash loss distribution. 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 fair values. There will be flows. A 1% increase in the best estimate assumption would be expected to decrease non-participating insurance contract liabilities by approximately $534 million, causing an increase in net earnings of approximately $433 million. A 1% decrease in the best estimate assumption would be expected to increase non-participating insurance contract liabilities by approximately $573 million, causing a decrease in net earnings of approximately $457 million. IGM FINANCIAL The board of directors of IGM provides oversight and carries out its risk A key liquidity requirement for IGM is the funding of commissions paid on management mandate through various committees. the sale of investment funds. Commissions on the sale of investment funds LIQUIDITY RISK IGM’s liquidity management practices include: ▪ Maintaining liquid assets and lines of credit to satisfy near-term liquidity needs. continue to be paid from operating cash flows. IGM also maintains sufficient liquidity to fund and temporarily hold mortgages pending sale or securitization to long-term funding sources. Through its mortgage banking operations, residential mortgages are sold to third parties including certain mutual funds, institutional investors through ▪ Ensuring effective controls over liquidity management processes. private placements, Canadian bank-sponsored securitization trusts, and ▪ Performing regular cash forecasts and stress testing. ▪ Regular assessment of capital market conditions and IGM’s ability to access bank and capital market funding. ▪ Ongoing ef for ts to diversif y and e xpand long-term mor tgage funding sources. by issuance and sale of National Housing Act Mortgage-Backed Securities (NHA MBS) securities including sales to Canada Housing Trust under the Canada Mortgage Bond Program (CMB Program). Certain subsidiaries of IGM are approved issuers of NHA MBS and are approved sellers into the CMB Program. Capacity for sales under the CMB Program consists of participation in new CMB issues and reinvestment ▪ Oversight of liquidity by management and by committees of the board of of principal repayments held in principal reinvestment accounts. IGM directors of IGM. maintains committed capacity within certain Canadian bank-sponsored securitization trusts. IGM’s contractual maturities of certain liabilities were as follows: DECEMBER 31, 2015 Derivative financial instruments Deposits and certificates Obligations to securitization entities Long-term debt Pension contributions [1] Total contractual obligations DEMAND LESS THAN 1 YEAR 1–5 YEARS AFTER 5 YEARS – 292 – – – 19 7 39 8 1,235 5,799 – 19 525 – 292 1,280 6,371 – 3 58 800 – 861 TOTAL 58 310 7,092 1,325 19 8,804 [1] The next required actuarial valuation will be completed based on a measurement date of December 31, 2016. Pension funding requirements beyond 2016 are subject to significant variability and will be determined based on future actuarial valuations. Pension contribution decisions are subject to change, as contributions are affected by many factors, including market performance, regulatory requirements, changes in assumptions and management’s ability to change funding policy. 92 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 21 Risk Management (continued) In addition to IGM’s current balance of cash and cash equivalents, liquidity ▪ Credit risk for mortgages securitized by transfer to bank-sponsored is available through IGM’s lines of credit. IGM’s lines of credit with securitization trusts totalling $2.4 billion ($2.0 billion in 2014) is limited to various Schedule I Canadian chartered banks totalled $525 million as at amounts held in cash reserve accounts and future net interest income, the December 31, 2015, unchanged from December 31, 2014. The lines of credit as fair values of which were $48 million ($35 million in 2014) and $39 million at December 31, 2015 consisted of committed lines of $350 million ($350 million ($30 million in 2014), respectively, at December 31, 2015. Cash reserve in 2014) and uncommitted lines of $175 million ($175 million in 2014). IGM accounts are reflected on the balance sheets, whereas rights to future has accessed its uncommitted lines of credit in the past; however, any net interest income are not reflected on the balance sheets and will be advances made by the banks under the uncommitted lines are at the banks’ recorded over the life of the mortgages. This risk is further mitigated sole discretion. As at December 31, 2015 and 2014, IGM was not utilizing its by insurance with 36.6% of mortgages held in ABCP Trusts insured at committed lines of credit or its uncommitted lines of credit. December 31, 2015 (51.0% in 2014). IGM’s liquidity position and its management of liquidity and funding risk have At December 31, 2015, residential mortgages recorded on the balance sheet not changed materially since December 31, 2014. were 76.8% insured (83.7% in 2014). At December 31, 2015, impaired mortgages CREDIT RISK IGM’s cash and cash equivalents, securities holdings, mortgage and investment loan portfolios, and derivatives are subject to credit risk. IGM monitors its credit risk management practices continuously to evaluate their effectiveness. At December 31, 2015, IGM’s cash and cash equivalents of $983 million ($1,216 million in 2014) consisted of cash balances of $105 million ($107 million in 2014) on deposit with Canadian chartered banks and cash equivalents of $878 million ($1,109 million in 2014). Cash equivalents are composed of Government of Canada treasury bills totalling $132 million ($191 million in 2014), provincial government and government-guaranteed commercial paper of $447 million ($666 million in 2014) and bankers’ acceptances issued by Canadian chartered banks of $299 million ($252 million in 2014). IGM manages credit risk related to cash and cash equivalents by adhering to its investment policy that outlines credit risk parameters and concentration limits. IGM regularly reviews the credit ratings of its counterparties. The maximum exposure to credit risk on these financial instruments is their carrying value. As at December 31, 2015, residential mortgages, recorded on IGM’s balance sheet, of $7.4 billion ($7.0 billion in 2014) consisted of $7.0 billion sold to securitization programs ($6.6 billion in 2014), $384 million held pending on these portfolios were $3 million, compared to $2 million at December 31, 2014. Uninsured nonperforming mortgages over 90 days on these portfolios were $1 million at December 31, 2015, compared to nil at December 31, 2014. IGM also retains certain elements of credit risk on mortgage loans sold to the Investors Mortgage and Short Term Income Fund and to the Investors Canadian Corporate Bond Fund through an agreement to repurchase mortgages in certain circumstances benefiting the funds. These loans are not recorded on IGM’s balance sheet as IGM has transferred substantially all of the risks and rewards of ownership associated with these loans. IGM regularly reviews the credit quality of the mortgages and the adequacy of the collective allowance for credit losses. IGM’s collective allowance for credit losses was $1 million at December 31, 2015 ($1 million as at December 31, 2014), and is considered adequate by management to absorb all credit-related losses in the mortgage portfolios based on: i) historical credit performance experience and recent trends, ii) current portfolio credit metrics and other relevant characteristics, and iii) regular stress testing of losses under adverse real estate market conditions. 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, 2014. sale or securitization ($366 million in 2014) and $28 million related to IGM’s IGM is exposed to credit risk through the derivative contracts it utilizes to intermediary operations ($30 million in 2014). hedge interest rate risk, to facilitate securitization transactions, and to hedge IGM manages credit risk related to residential mortgages through: ▪ Adhering to its lending policy and underwriting standards; ▪ Its loan servicing capabilities; market risk related to certain stock-based compensation arrangements. These derivatives are discussed more fully under the market risk section below. 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 ▪ Use of client-insured mortgage default insurance and mortgage portfolio under these arrangements. default insurance held by IGM; and ▪ Its practice of originating its mortgages exclusively through its own network of Mortgage Planning Specialists and Investors Group Consultants as part of a client’s comprehensive financial plan. IGM’s derivative activities are managed in accordance with its investment policy, which includes counterparty limits and other parameters to manage counterparty risk. The aggregate credit risk exposure related to derivatives that are in a gain position of $58 million ($43 million in 2014) does not give In certain instances, credit risk is also limited by the terms and nature of effect to any netting agreements or collateral arrangements. The exposure securitization transactions as described below: ▪ Under the NHA MBS program totalling $4.6 billion ($4.6 billion in 2014), IGM is obligated to make timely payment of principal and coupons irrespective of whether such payments were received from the mortgage borrower. However, as required by the NHA MBS program, 100% of the loans are insured by an approved insurer. to credit risk, considering netting agreements and collateral arrangements and including rights to future net interest income, was $1 million at December 31, 2015 ($3 million in 2014). Counterparties are all Canadian Schedule I chartered banks and, as a result, management has determined that IGM’s overall credit risk related to derivatives was not significant at December 31, 2015. Management of credit risk related to derivatives has not changed materially since December 31, 2014. POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 93 NOTE 21 Risk Management (continued) MARKET RISK Currency risk IGM’s financial instruments are generally denominated in Canadian dollars, and do not have significant exposure to changes in foreign exchange rates. Interest rate risk IGM is exposed to interest rate risk on its loan portfolio and on certain of the derivative financial instruments used in IGM’s mortgage banking and intermediary operations. IGM manages interest rate risk associated with its mortgage banking operations by entering into interest rate swaps with Canadian Schedule I chartered banks as follows: ▪ IGM has in certain instances funded floating rate mortgages with fixed rate ▪ IGM is exposed to the impact that changes in interest rates may have on the value of mortgages committed to or held pending sale or securitization to long-term funding sources. IGM enters into interest rate swaps to hedge the interest rate risk related to funding costs for mortgages held by IGM pending sale or securitization. The fair value of these swaps was nil (nil in 2014) on an outstanding notional amount of $88 million at December 31, 2015 ($101 million in 2014). As at December 31, 2015, the impact to annual net earnings of a 100-basis- point change in interest rates would have been a decrease of approximately $1 million (a decrease of $2 million in 2014). IGM’s exposure to and management of interest rate risk has not changed materially since December 31, 2014. Equity price risk IGM is exposed to equity price risk on its proprietary investment funds Canada Mortgage Bonds as part of the securitization transactions under which are classified as available-for-sale securities and its equity securities the CMB Program. As previously discussed, as part of the CMB Program, and proprietary investment funds which are classified as fair value through IGM is party to a swap whereby it is entitled to receive investment returns profit or loss. Unrealized gains and losses on available-for-sale securities on reinvested mortgage principal and is obligated to pay Canada Mortgage are recorded in other comprehensive income until they are realized or until Bond coupons. This swap had a negative fair value of $47 million (negative management of IGM determines there is objective evidence of impairment in $26 million in 2014) and an outstanding notional value of $740 million value, at which time they are recorded in the statements of earnings. at December 31, 2015 ($437 million in 2014). 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 and reinvestment returns decline. The fair value of these swaps totalled $54 million ($35 million in 2014), on an outstanding notional amount of $1.8 billion at December 31, 2015 ($2.0 billion in 2014). The net fair value of these swaps of $7 million at December 31, 2015 ($9 million in 2014) is recorded on the balance sheet and has an outstanding notional amount of $2.6 billion at December 31, 2015 ($2.4 billion in 2014). 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. RISKS RELATED TO ASSETS UNDER MANAGEMENT Risks related to the performance of the equity markets, changes in interest rates and changes in foreign currencies relative to the Canadian dollar can have a significant impact on the level and mix of assets under management. These changes in assets under management directly impact earnings of IGM. NOTE 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] 2015 3,352 1,863 263 339 66 – 5,883 2014 2,934 1,525 233 339 50 81 5,162 [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. 94 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 23 Financing Charges YEARS ENDED DECEMBER 31 Interest on debentures and other debt instruments Interest on capital trust debentures Other 2015 370 11 32 413 2014 374 11 28 413 NOTE 24 Pension Plans and Other Post-Employment Benefits CHARACTERISTICS, FUNDING AND RISK The Corporation and its subsidiaries maintain funded defined benefit pension The Corporation and its subsidiaries also provide post-employment health, 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 The significant defined benefit plans of Lifeco’s subsidiaries and IGM are Corporation and its subsidiaries determine if an economic benefit exists in closed to new entrants. New hires are only eligible for defined contribution the form of potential reductions in future contributions and in the form of benefits. As a result, defined benefit plan exposure will continue to be reduced surplus refunds, where permitted by applicable regulation and plan provisions. in future years. By their design, the defined benefit plans expose the Corporation and The defined contribution pension plans provide pension benefits based on its subsidiaries to the typical risks faced by defined benefit plans, such accumulated employee and employer contributions. Contributions to these as investment performance, changes to the discount rates used to value plans are a set percentage of employees’ annual income and may be subject the obligations, longevity of plan members, and future inflation. Pension to certain vesting requirements. and benefit risk is managed by regular monitoring of the plans, applicable regulations and other factors that could impact the expenses and cash flows of the Corporation and its subsidiaries. POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 95 NOTE 24 Pension Plans and Other Post-Employment Benefits (continued) PLAN ASSETS, BENEFIT OBLIGATION AND FUNDED STATUS 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 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 Foreign exchange and other Defined benefit obligation, end of year FUNDED STATUS Fund deficit Unrecognized amount due to asset ceiling (see below) 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 2015 2014 PENSION PL ANS OTHER POST- EMPLOYMENT BENEFITS PENSION PL ANS OTHER POST- EMPLOYMENT BENEFITS 5,960 214 25 130 86 (231) (7) 275 6,452 6,866 167 25 246 (150) (5) 1 (231) 15 338 7,272 (820) (83) (903) – – – 21 – (21) – – – 457 3 – 18 (5) (9) 4 (21) 2 5 5,349 251 25 164 438 (238) (6) (23) 5,960 5,653 133 25 261 938 114 (3) (238) 21 (38) 454 6,866 (454) – (454) (906) (23) (929) 2015 6,803 469 – – – 20 – (20) – – – 438 3 – 20 40 (14) (13) (20) – 3 457 (457) – (457) 2014 6,406 460 2014 TOTAL 275 (1,661) (1,386) The net accrued benefit asset (liability) shown above is presented in these financial statements as follows: DECEMBER 31 Pension benefit assets [Note 9] Pension and other post-employment benefit liabilities [Note 15] Accrued benefit asset (liability) PENSION PL ANS 250 (1,153) (903) OTHER POST- EMPLOYMENT BENEFITS – (454) (454) 2015 TOTAL 250 (1,607) (1,357) PENSION PL ANS 275 (1,204) (929) OTHER POST- EMPLOYMENT BENEFITS – (457) (457) 96 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 24 Pension Plans and Other Post-Employment Benefits (continued) Under International Financial Reporting Interpretations Committee (IFRIC) 14, through future contribution reductions or refunds. In the event the 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 sheet. The following provides a breakdown pension asset has economic benefit to the Corporation and its subsidiaries of the 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 PENSION AND OTHER POST-EMPLOYMENT BENEFIT EXPENSE 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 2015 23 4 56 83 2014 44 2 (23) 23 2015 2014 PENSION PL ANS OTHER POST- EMPLOYMENT BENEFITS PENSION PL ANS OTHER POST- EMPLOYMENT BENEFITS 167 36 15 7 54 279 (154) (86) 56 (184) 95 3 18 2 – – 23 (10) – – (10) 13 133 12 3 6 42 196 1,049 (438) (23) 588 784 3 20 – – – 23 13 – – 13 36 In 2015, the Corporation and its subsidiaries incurred $1 million of actuarial gains ($31 million of actuarial losses in 2014) 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. ASSET ALLOCATION BY MAJOR CATEGORY WEIGHTED BY PLAN ASSETS DECEMBER 31 PERCENTAGE [%] Equity securities Debt securities All other assets DEFINED BENEFIT PENSION PL ANS 2014 52 38 10 100 2015 52 36 12 100 No plan assets are directly invested in the Corporation’s or subsidiaries’ at December 31, 2014) are included in the balance sheets. Plan assets do not securities. Lifeco’s plan assets include investments in segregated and other include any property occupied or other assets used by Lifeco. IGM’s plan assets funds managed by subsidiaries of Lifeco of $4,764 million at December 31, 2015 are invested in IGM’s mutual funds. A portion of Power Financial’s plan assets ($4,478 million at December 31, 2014) of which $4,701 million ($4,445 million are invested in segregated funds managed by a subsidiary of Lifeco. POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 97 NOTE 24 Pension Plans and Other Post-Employment Benefits (continued) DETAILS OF DEFINED BENEFIT OBLIGATION 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 PERCENTAGE [%] Actives Deferred vesteds Retirees Total Weighted average duration of defined benefit obligation [in years] CASH FLOW INFORMATION The expected employer contributions for the year 2016 are as follows: Funded (wholly or partly) defined benefit plans Unfunded defined benefit plans Defined contribution plans Total ACTUARIAL ASSUMPTIONS AND SENSITIVITIES Actuarial assumptions PERCENTAGE [%] 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. 98 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 2015 OTHER POST- EMPLOYMENT BENEFITS 454 – 454 PENSION PL ANS 6,530 742 7,272 2014 OTHER POST- EMPLOYMENT BENEFITS 457 – 457 PENSION PL ANS 6,121 745 6,866 2015 2014 PENSION PL ANS OTHER POST- EMPLOYMENT BENEFITS PENSION PL ANS OTHER POST- EMPLOYMENT BENEFITS 47 16 37 100 18.7 27 – 73 100 12.5 47 16 37 100 19.1 28 – 72 100 13.0 PENSION PL ANS OTHER POST-EMPLOYMENT BENEFITS 126 22 60 208 – 21 – 21 DEFINED BENEFIT PENSION PL ANS OTHER POST-EMPLOYMENT BENEFITS 2015 2014 2015 2014 3.1 – 4.1 3.1 – 4.3 4.7 – 5.1 3.1 – 4.1 3.9 – 4.1 3.9 – 4.3 4.7 – 5.0 3.9 – 4.1 3.5 3.3 3.8 3.3 4.7 3.3 3.5 3.3 3.9 – 4.1 – 5.3 4.5 4.8 – 3.9 – 5.3 4.5 2029 2029 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. 2015 2014 PENSION PL ANS OTHER POST- EMPLOYMENT BENEFITS PENSION PL ANS OTHER POST- EMPLOYMENT BENEFITS 22.8 25.1 24.7 26.8 22.2 23.9 24.7 26.2 22.7 25.1 24.7 26.8 22.1 23.8 24.6 26.0 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, 2015 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 (1,122) 344 612 (51) 44 1,459 (302) (583) 63 (37) 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. POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 99 NOTE 25 Derivative Financial Instruments In the normal course of managing exposure to fluctuations in interest and 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, 2015 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 swaps NET INVESTMENT HEDGES Foreign exchange contracts Forward contracts 1,362 49 2 79 2,776 190 – 80 1,592 103 – – 5,730 342 2 159 1,492 3,046 1,695 6,233 948 426 1,374 68 13 606 131 818 – 2,138 2,138 – 6,740 6,740 948 9,304 10,252 – – – – – – – – – – 68 13 606 131 818 225 49 – – 274 4 143 147 2 – 4 – 6 135 49 – – 184 (28) (1,885) (1,913) 2 – 1 – 3 3,684 5,184 8,435 17,303 427 (1,726) – – 10 10 – 1,500 28 1,528 31 – – 31 31 1,500 38 1,569 12 – 1 13 12 (524) (4) (516) – 3,694 553 7,265 – 553 8,466 19,425 80 520 80 (2,162) 100 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 25 Derivative Financial Instruments (continued) 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 swaps NET INVESTMENT HEDGES [1] Foreign exchange contracts Forward contracts 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 – 2,285 2,285 – 5,492 5,492 – – – – – – – – – – 751 8,131 8,882 156 10 317 107 590 411 50 – – 461 – 169 169 2 – 1 – 3 350 50 – – 400 (14) (751) (765) (3) – (2) – (5) 3,811 5,167 6,959 15,937 633 (370) – – 11 11 – – 3,822 – 1,500 23 1,523 36 – 1 37 36 1,500 35 1,571 491 – 491 14 – 3 17 41 18 7,199 72 90 7,068 18,089 2 693 14 (219) 1 (204) 41 1 (532) [1] During the year, Lifeco reclassified the contracts now presented in net investment hedges from foreign exchange contracts – forward contracts to conform to the current year’s presentation. The amount subject to maximum credit risk is limited to the current fair value of the instruments which are in a gain position. The maximum credit INTEREST RATE CONTRACTS Interest rate swaps, futures and options are used as part of a portfolio of risk represents the total cost of all derivative contracts with positive values assets to manage interest rate risk associated with investment activities and does not reflect actual or expected losses. The total fair value represents and insurance and investment contract liabilities and to reduce the impact the total amount that the Corporation and its subsidiaries would receive of fluctuating interest rates on the mortgage banking operations and (or pay) to terminate all agreements at year-end. However, this would not intermediary operations. Interest rate swap agreements require the periodic result in a gain or loss to the Corporation and its subsidiaries as the derivative exchange of payments without the exchange of the notional principal amount instruments which correlate to certain assets and liabilities provide offsetting on which payments are based. gains or losses. Call options grant the Corporation and its subsidiaries the right to enter into As at December 31, 2015, Lifeco received assets of $107 million ($52 million in a swap with predetermined fixed-rate payments over a predetermined time 2014) as collateral for derivative contracts from counterparties and pledged period on the exercise date. Call options are used to manage the variability assets of $608 million ($273 million in 2014) as collateral for derivative contracts in future interest payments due to a change in credited interest rates and the to counterparties. related potential change in cash flows due to surrenders. Call options are also used to hedge minimum rate guarantees. POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 101 NOTE 25 Derivative Financial Instruments (continued) FOREIGN EXCHANGE CONTRACTS Cross-currency swaps are used in combination with other investments to manage foreign currency risk associated with investment activities, and ENFORCEABLE MASTER NETTING AGREEMENTS OR SIMILAR AGREEMENTS The Corporation and its subsidiaries enter into the International Swaps and insurance and investment contract liabilities. Under these swaps, principal Derivative Association’s master agreements for transacting over-the-counter amounts and fixed or floating interest payments may be exchanged in derivatives. The Corporation and its subsidiaries receive and pledge collateral different currencies. The Corporation and its subsidiaries may also enter according to the related International Swaps and Derivative Association’s into certain foreign exchange forward contracts to hedge certain product Credit Support Annexes. The International Swaps and Derivative Association’s liabilities, cash and cash equivalents and cash flows. master agreements do not meet the criteria for offsetting on the balance OTHER DERIVATIVE CONTRACTS Equity index swaps, futures and options are used to hedge certain product liabilities. Equity index swaps are also used as substitutes for cash instruments and are used to periodically hedge the market risk associated with certain fee income. Equity put options are used to manage the potential credit risk impact of significant declines in certain equity markets. 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 without the exchange of the notional principal amounts on which the payments are based. Certain of these instruments are not designated as hedges. Changes in fair value are recorded in operating and administrative expenses in the statements of earnings for those instruments not designated as hedges. sheets because they create a right of set-off that is enforceable only in the event of default, insolvency, or bankruptcy. For exchange-traded derivatives subject to derivative clearing agreements with exchanges and clearing houses, there is no provision for set-off at default. Initial margin is excluded from the table below as it would become part of a pooled settlement process. Lifeco’s reverse repurchase agreements are also subject to right of set-off in the event of default. These transactions and agreements include master netting arrangements which provide for the netting of payment obligations between Lifeco and its counterparties in the event of default. The following disclosure shows the potential effect on the 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, 2015 FINANCIAL INSTRUMENTS (ASSETS) Derivative financial instruments Reverse repurchase agreements [3] Total financial instruments (assets) FINANCIAL INSTRUMENTS (LIABILITIES) Derivative financial instruments Total financial instruments (liabilities) DECEMBER 31, 2014 FINANCIAL INSTRUMENTS (ASSETS) Derivative financial instruments Reverse repurchase agreements [3] Total financial instruments (assets) FINANCIAL INSTRUMENTS (LIABILITIES) Derivative financial 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 520 43 563 2,682 2,682 (358) – (358) (358) (358) (104) (43) (147) (586) (586) 58 – 58 1,738 1,738 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 693 44 737 1,225 1,225 (331) – (331) (331) (331) (51) (44) (95) (260) (260) 311 – 311 634 634 [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 $107 million ($52 million at December 31, 2014), received on reverse repurchase agreements was $44 million ($45 million at December 31, 2014), and pledged on derivative liabilities was $671 million ($299 million at December 31, 2014). [3] Assets related to reverse repurchase agreements are included in bonds in the balance sheets. 102 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 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. Items excluded are: cash and cash equivalents, described in the summary of significant accounting policies and below. Fair dividends, interest and accounts receivable, loans to policyholders, certain values are management’s estimates and are generally calculated using market other financial assets, accounts payable, dividends and interest payable and conditions at a specific point in time and may not reflect future fair values. certain other financial liabilities. The calculations are subjective in nature, involve uncertainties and matters of significant judgment. The table distinguishes between those financial instruments recorded at fair value and those recorded at amortized cost. DECEMBER 31, 2015 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 other debt instruments Capital trust debentures Deposits and certificates Total financial liabilities CARRYING VALUE LEVEL 1 LEVEL 2 LEVEL 3 TOTAL FAIR VALUE 86,460 12,014 384 6,692 63 5,237 520 599 111,969 16,905 29,029 534 46,468 158,437 2,180 2,682 4 4,866 7,092 6,927 161 310 14,490 19,356 – – – 6,615 62 – 4 381 7,062 – – – – 86,450 12,013 384 10 – – 516 204 10 1 – 67 1 5,237 – 14 86,460 12,014 384 6,692 63 5,237 520 599 99,577 5,330 111,969 18,145 108 18,253 23,474 7,238 30,712 – 41,619 534 7,880 534 49,499 7,062 141,196 13,210 161,468 – 3 4 7 – 467 – – 467 474 2,153 2,632 – 4,785 – 7,497 215 312 8,024 12,809 27 47 – 74 7,272 – – – 7,272 7,346 2,180 2,682 4 4,866 7,272 7,964 215 312 15,763 20,629 [1] Fair value of certain shares available for sale cannot be reliably measured, therefore these investments are recorded at cost. POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 103 NOTE 26 Fair Value of Financial Instruments (continued) 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 other 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 recorded at cost. There were no significant transfers between Level 1 and Level 2 in 2015 and 2014. 104 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 26 Fair Value of Financial Instruments (continued) The Corporation’s financial assets and financial liabilities recorded at fair value a matrix which is based on credit quality and average life, government and and those for which fair value is disclosed have been categorized based upon agency securities, restricted stock, some private bonds and equities, most the following fair value hierarchy: ▪ Level 1 inputs utilize observable, unadjusted quoted prices 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. investment-grade and high-yield corporate bonds, most asset-backed securities, most over-the-counter derivatives, mortgage loans, deposits and certificates, and most debentures and other debt instruments. The fair value of derivative financial instruments and deposits and certificates is determined using valuation models, discounted cash flow methodologies, or similar techniques using primarily observable market inputs. The fair value of debentures and other debt instruments is determined using indicative broker quotes. Investment contracts that are measured at fair value through profit or loss are mostly included in the Level 2 category. ▪ Level 2 inputs utilize other-than-quoted prices included in Level 1 that ▪ Level 3 inputs utilize one or more significant inputs that are not based on are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other-than-quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. The fair values for some Level 2 securities were obtained from a pricing service. The pricing service inputs include, but are not limited to, benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, offers and reference data. Level 2 assets and liabilities include those priced using observable market inputs and include situations where there is little, if any, market activity for the asset or liability. The values of the majority of Level 3 securities were obtained from single-broker quotes, internal pricing models, external appraisers or by discounting projected cash flows. Financial assets and liabilities utilizing Level 3 inputs include certain bonds, certain asset-backed securities, some private equities, some mortgage loans, investments in mutual and segregated funds where there are redemption restrictions, certain over-the-counter derivatives, investment properties, obligations to securitization entities, and certain other 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, 2015. DECEMBER 31, 2015 Balance, beginning of year Total gains (losses) In net earnings In other comprehensive income [1] Purchases Sales Settlements Other Transfers into Level 3 Transfers out of Level 3 Balance, end of year BONDS SHARES FAIR VALUE THROUGH PROFIT OR LOSS AVAILABLE FOR SALE FAIR VALUE THROUGH PROFIT OR LOSS AVAILABLE FOR SALE INVESTMENT PROPERTIES DERIVATIVES, NET OTHER ASSETS (LIABILITIES) 86 5 – – – (47) – – (34) 10 1 – – – – – – – – 1 19 7 – 50 (4) – – – (5) 67 1 – – – – – – – – 1 4,613 249 379 278 (282) – – – – (26) (34) – – – 13 – – – – – 3 5 – – – 6 – INVESTMENT CONTRACT LIABILITIES TOTAL (28) 4,666 – – – – – 1 – – 227 382 333 (286) (34) 1 6 (39) 5,237 (47) 14 (27) 5,256 [1] Amount of other comprehensive income for investment properties represents the unrealized gains on foreign exchange. Transfers into Level 3 are due primarily to other financial assets previously recorded at cost and were remeasured at fair value using recent market transactions. 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. POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 105 NOTE 26 Fair Value of Financial Instruments (continued) The following table sets out information about significant unobservable inputs used at period end in measuring financial assets and financial liabilities categorized as Level 3 in the fair value hierarchy. T YPE OF ASSET VALUATION APPROACH SIGNIFICANT UNOBSERVABLE INPUT INPUT VALUE 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 3.2% – 10.0% Reversionary rate Range of 4.8% – 8.3% Vacancy rate Weighted average of 3.9% 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. NOTE 27 Other Comprehensive Income YEAR ENDED DECEMBER 31, 2015 Balance, beginning of year Other comprehensive income (loss) Other Balance, end of year YEAR ENDED DECEMBER 31, 2014 Balance, beginning of year Other comprehensive income (loss) Balance, end of year ITEMS THAT MAY BE RECL ASSIFIED SUBSEQUENTLY TO NET EARNINGS ITEMS THAT WILL NOT BE RECL ASSIFIED TO NET EARNINGS INVESTMENT REVALUATION AND CASH FLOW HEDGES FOREIGN CURRENCY TRANSL ATION SHARE OF JOINTLY CONTROLLED CORPORATIONS AND ASSOCIATES AC TUARIAL GAIN (LOSSES) ON DEFINED BENEFIT PENSION PL ANS SHARE OF JOINTLY CONTROLLED CORPORATIONS AND ASSOCIATES 12 (184) – 666 1,370 – (172) 2,036 241 37 – 278 (479) 105 – (374) (50) 3 20 (27) 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) TOTAL 390 1,331 20 1,741 TOTAL 337 53 390 106 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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 2015 2014 2,449 (130) 2,319 (4) 2,315 713.0 0.7 713.7 3.25 3.24 2,268 (132) 2,136 (3) 2,133 711.3 0.7 712.0 3.00 3.00 For 2015, 3,457,961 stock options (2,713,742 in 2014) have been excluded from the computation of diluted earnings per share as they were anti-dilutive. NOTE 29 Related Parties PRINCIPAL SUBSIDIARIES, JOINT VENTURE AND ASSOCIATE The financial statements of Power Financial include the operations of the following subsidiaries, joint venture and associate: CORPORATIONS INCORPORATED IN PRIMARY BUSINESS OPERATION Great-West Lifeco Inc. The Great-West Life Assurance Company London Life Insurance Company The Canada Life Assurance Company Irish Life Group Limited 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 Wealthsimple Financial Corp. [2] Canada Canada Canada Netherlands Switzerland Canada Financial services Financial services Financial services Financial services Holding company Holding company Financial services % EQUIT Y INTEREST 2015 2014 67.4 100 100 100 100 100 95.7 60.4 100 100 50 55.5 33.2 67.2 100 100 100 100 100 95.2 58.8 100 100 50 55.5 – [1] Lifeco holds 100% of the voting shares and 95.7% of the total outstanding shares. [2] On February 4, 2016 the Corporation made an additional investment in Wealthsimple Financial Corp. and now holds a 60.4% equity interest. POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 107 NOTE 29 Related Parties (continued) TRANSACTIONS WITH RELATED PARTIES In the normal course of business, Power Financial and its subsidiaries On January 6, 2015, the Corporation increased its tax loss consolidation transactions with IGM. A wholly owned subsidiary of Power Financial issued enter into various transactions; subsidiaries provide insurance benefits, $330 million of 4.51% preferred shares to Power Financial. Power Financial then sub-advisory services, distribution of insurance products and/or other sold these preferred shares to IGM for $330 million of IGM’s 4.50% secured administrative services to other subsidiaries of the group and to the debentures. The Corporation has legally enforceable rights to settle these Corporation. In all cases, these transactions are in the normal course of financial instruments on a net basis and the Corporation intends to exercise operations and have been recorded at fair value. Balances and transactions these rights. 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. In 2015, IGM sold residential mortgage loans to Great-West Life, London Life and segregated funds maintained by London Life for $206 million ($184 million in 2014). KEY MANAGEMENT COMPENSATION 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 Lifeco provides asset management and administrative services for employee and its subsidiaries. benefit plans relating to pension and other post-employment benefits for employees of Power Financial, and Lifeco 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 NOTE 30 Contingent Liabilities 2015 18 6 14 38 2014 17 9 11 37 The Corporation and its subsidiaries are from time to time subject to legal A subsidiary of Lifeco, Putnam Advisory Company, LLC, is a defendant in an actions, including arbitrations and class actions, arising in the normal course action in relation to its role as collateral manager of a collateralized debt of business. It is inherently difficult to predict the outcome of any of these obligation brought by an institution involved in the collateralized debt proceedings with certainty, and it is possible that an adverse resolution obligation. On April 28, 2014, the matter was dismissed. On July 2, 2014, the could have a material adverse effect on the consolidated financial position of complainant filed an appeal of the dismissal and on April 15, 2015 the United the Corporation. However, based on information presently known, it is not States Court of Appeals for the Second Circuit issued its decision overturning expected that any of the existing legal actions, either individually or in the the dismissal of the action and remanding the matter for further proceedings, aggregate, will have a material adverse effect on the consolidated financial which are ongoing. The resolution of this matter will not have a material position of the Corporation. Actual results could differ from the best estimates adverse effect on the consolidated financial position of Lifeco. of the Corporation’s and its subsidiaries’ management. LIFECO A subsidiary of Lifeco, Canada Life, has declared four partial windups in 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 provision has been adjusted to $21 million as at December 31, 2015. Subsidiaries of Lifeco in the United States are defendants in proposed class actions relating to the administration of their staff retirement plans, or to the costs and features of certain of their retirement or fund products. These actions are at their early stages. Management of Lifeco believes the claims are without merit and will be aggressively defending these actions. Based on the information presently known these actions will not have a material adverse effect on the consolidated financial position of Lifeco. 108 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 31 Commitments and Guarantees GUARANTEES In the normal course of operations, the Corporation and its subsidiaries LETTERS OF CREDIT Letters of credit are written commitments provided by a bank. The total execute agreements that provide for indemnifications to third parties in amount of letter of credit facilities at Lifeco is US$2.9 billion, of which transactions such as business dispositions, business acquisitions, loans and US$2.7 billion were issued as of December 31, 2015. securitization transactions. The Corporation and its subsidiaries have also agreed to indemnify their directors and certain of their officers. The nature of these agreements precludes the possibility of making a reasonable estimate The Reinsurance operation also periodically uses letters of credit as collateral under certain reinsurance contracts for on-balance sheet policy liabilities. of the maximum potential amount the Corporation and its subsidiaries could be required to pay third parties as the agreements often do not specify INVESTMENT COMMITMENTS With respect to Lifeco, commitments of investment transactions made in the a maximum amount and the amounts are dependent on the outcome of normal course of operations in accordance with policies and guidelines and future contingent events, the nature and likelihood of which cannot be that are to be disbursed upon fulfilment of certain contract conditions were determined. Historically, the Corporation has not made any payments under $203 million as at December 31, 2015. At December 31, 2015, the full amount of such indemnification agreements. No amounts have been accrued related $203 million will mature within 1 year. to these agreements. PLEDGING OF ASSETS FOR REINSURANCE AGREEMENTS As at December 31, 2015, the amount of Lifeco’s assets, which have a security interest by way of pledging, is $645 million ($598 million at December 31, 2014) with respect to certain reinsurance agreements. COMMITMENTS 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 [1] 144 126 108 2016 2017 2018 2019 69 2020 53 2021 AND THEREAFTER 116 TOTAL 616 [1] Subsequent to year-end, one of Lifeco’s subsidiaries signed an office lease for 15 years commencing in 2018, for an additional commitment of $271 million over the period of the lease. NOTE 32 Segmented Information The Corporation’s reportable operating segments are Lifeco, IGM Financial ▪ Pargesa is held through Parjointco. Pargesa is a holding company with and Pargesa. These repor table segments reflect Power Financial’s diversified interests in Europe-based companies active in various sectors: management structure and internal financial reporting. The following minerals-based specialty solutions for industry; cement, aggregates and provides a brief description of the three reportable operating segments: concrete; oil, gas and alternative energies; wines and spirits; testing, ▪ Lifeco is a financial services holding company with subsidiaries offering life insurance, health insurance, retirement and investment management inspection and certification; and electricity, natural gas, and energy and environmental services. services and engaged in the asset management and reinsurance businesses The Corporate column is comprised of corporate activities of Power Financial primarily in Canada, the United States and Europe. and also includes consolidation elimination entries. ▪ IGM Financial is a financial services company operating in Canada primarily The Corporation evaluates the performance based on the operating segment’s within the advice segment of the financial services market. IGM earns contribution to net earnings. Revenues and assets are attributed to geographic revenues from a range of sources, but primarily from management areas based on the point of origin of revenues and the location of assets. The fees, which are charged to its mutual funds for investment advisory and contribution to net earnings of each segment includes the share of net earnings management services. IGM also earns revenues from fees charged to its resulting from the investments that Lifeco and IGM have in each other. mutual funds for administrative services. POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 109 NOTE 32 Segmented Information (continued) CONTRIBUTION TO NET EARNINGS FOR THE YEAR ENDED DECEMBER 31, 2015 LIFECO IGM PARGESA CORPORATE TOTAL REVENUES Premium income, net Investment income, net Fee income Total revenues EXPENSES Total paid or credited to policyholders Commissions Operating and administrative expenses Financing charges Total expenses Earnings before investments in jointly controlled corporations and associates, and income taxes Share of earnings (losses) 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 TOTAL ASSETS AND LIABILITIES 24,501 4,240 5,058 33,799 22,842 2,218 4,986 303 – 195 2,833 3,028 – 1,062 883 92 30,349 2,037 3,450 21 3,471 460 3,011 1,150 – 1,861 3,011 991 – 991 210 781 321 – 460 781 – – – – – – – – – – 205 205 – 205 – – 205 205 – 24,501 (116) (199) (315) 4,319 7,692 36,512 – 22,842 (147) 14 18 3,133 5,883 413 (115) 32,271 (200) 4,241 (2) (202) 9 (211) (134) 130 (207) (211) 224 4,465 679 3,786 1,337 130 2,319 3,786 DECEMBER 31, 2015 LIFECO IGM PARGESA CORPORATE TOTAL Invested assets (including cash and cash equivalents) 160,903 8,426 Investments in jointly controlled corporations and associates Other assets Goodwill and intangible assets Investments on account of segregated fund policyholders Total assets [1] Total liabilities 277 30,211 10,409 198,194 399,994 – 894 4,784 – – 2,610 – – – 871 170,200 18 33 – – 2,905 31,138 15,193 198,194 14,104 2,610 922 417,630 374,675 9,983 – 570 385,228 [1] Total assets of Lifeco and IGM operating segments include the allocation of goodwill and certain consolidation adjustments. TOTAL ASSETS AND TOTAL REVENUES BY GEOGRAPHIC LOCATION DECEMBER 31, 2015 CANADA UNITED STATES EUROPE TOTAL Invested assets (including cash and cash equivalents) Investments in jointly controlled corporations and associates Other assets Goodwill and intangible assets Investments on account of segregated fund policyholders Total assets Total revenues 76,300 43,809 50,091 170,200 18 3,713 10,313 70,269 – 4,535 2,465 2,887 22,890 2,415 2,905 31,138 15,193 35,966 91,959 198,194 160,613 86,775 170,242 417,630 17,631 7,380 11,501 36,512 110 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 32 Segmented Information (continued) CONTRIBUTION TO NET EARNINGS FOR THE YEAR ENDED DECEMBER 31, 2014 LIFECO IGM PARGESA CORPORATE TOTAL REVENUES Premium income, net Investment income, net Fee income Total revenues EXPENSES Total paid or credited to policyholders Commissions Operating and administrative expenses Financing charges Total expenses Earnings before investments in jointly controlled corporations and associates, and income taxes Share of earnings (losses) 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 TOTAL ASSETS AND LIABILITIES 21,222 13,513 4,422 39,157 29,160 2,084 4,244 304 – 165 2,762 2,927 – 993 877 92 35,792 1,962 3,365 24 3,389 628 2,761 1,052 – 1,709 2,761 965 – 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 2,901 5,162 413 (118) 37,636 (191) 4,139 – (191) 3 (194) (121) 132 (205) (194) 211 4,350 834 3,516 1,248 132 2,136 3,516 DECEMBER 31, 2014 LIFECO IGM PARGESA CORPORATE TOTAL Invested assets (including cash and cash equivalents) 145,720 8,325 Investments in jointly controlled corporations and associates Other assets Goodwill and intangible assets Investments on account of segregated fund policyholders Total assets [1] Total liabilities 237 25,907 9,940 174,966 356,770 – 770 4,706 – – 2,440 – – – 786 154,831 – 46 – – 2,677 26,723 14,646 174,966 13,801 2,440 832 373,843 334,812 9,576 – 553 344,941 [1] Total assets of Lifeco and IGM operating segments include the allocation of goodwill and certain consolidation adjustments. TOTAL ASSETS AND TOTAL REVENUES BY GEOGRAPHIC LOCATION DECEMBER 31, 2014 CANADA UNITED STATES EUROPE TOTAL Invested assets (including cash and cash equivalents) Investments in jointly controlled corporations and associates Other assets Goodwill and intangible assets Investments on account of segregated fund policyholders Total assets Total revenues 73,206 36,198 45,427 154,831 – 4,084 10,226 68,372 – 3,613 2,061 2,677 19,026 2,359 2,677 26,723 14,646 31,030 75,564 174,966 155,888 72,902 145,053 373,843 20,043 7,551 14,181 41,775 POWER FINANCIAL CORPOR ATION 2015 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, 2015 and December 31, 2014, 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. MANAGEMENT’S RESPONSIBILITY FOR THE CONSOLIDATED FINANCIAL STATEMENTS Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. AUDITOR’S RESPONSIBILITY Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the 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. OPINION In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Power Financial Corporation as at December 31, 2015 and December 31, 2014, 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 23, 2016 Montréal, Québec 1 CPA auditor, CA, public accountancy permit No. A104630 112 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT Power Financial Corporation Five-Year Financial Summary DECEMBER 31 [IN MILLIONS OF CANADIAN DOLL ARS, EXCEPT PER SHARE AMOUNTS] (UNAUDITED) 2015 2014 2013 2012 2011 [1] CONSOLIDATED BALANCE SHEETS Cash and cash equivalents Total assets Shareholders’ equity CONSOLIDATED STATEMENTS OF EARNINGS REVENUES Premium income, net Investment income, net Fee income Total revenues EXPENSES Total paid or credited to policyholders Commissions Operating and administrative expenses Financing charges Total expenses Earnings before investments in jointly controlled corporations and associates, and income taxes 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 Net earnings attributable to common shareholders from discontinued operations Net earnings attributable to common shareholders Dividends declared on common shares Book value per common share MARKET PRICE (COMMON SHARES) High Low Year-end 4,188 417,630 19,550 3,989 373,843 17,019 4,344 341,682 15,993 3,313 268,428 13,451 3,385 252,678 13,521 24,501 4,319 7,692 36,512 22,842 3,133 5,883 413 32,271 21,222 13,563 6,990 41,775 29,160 2,901 5,162 413 37,636 20,236 2,661 5,933 28,830 17,811 2,590 4,474 400 25,275 19,257 8,375 5,302 32,934 22,875 2,487 3,806 409 29,577 17,293 9,764 5,343 32,400 23,043 2,312 3,006 409 28,770 4,241 4,139 3,555 3,357 3,630 224 4,465 679 3,786 – 3,786 1,337 130 2,319 3,786 3.14 – 3.25 1.49 23.79 38.78 30.28 31.81 211 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 36.18 134 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 36.00 130 3,487 559 2,928 – 2,928 1,193 117 1,618 2,928 2.37 – 2.29 1.40 15.79 30.15 24.06 27.24 (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 [1] The 2011 figures have not been adjusted to reflect current year reclassifications and new and revised IFRS adopted on January 1, 2013. Quarterly Financial Information [IN MILLIONS OF CANADIAN DOLL ARS, EXCEPT PER SHARE AMOUNTS] (UNAUDITED) 2015 First quarter Second quarter Third quarter Fourth quarter 2014 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 13,369 4,901 9,281 8,961 10,584 10,716 9,134 11,341 956 963 975 892 799 911 965 841 573 616 602 528 467 568 595 506 0.80 0.87 0.84 0.74 0.66 0.80 0.83 0.71 POWER FINANCIAL CORPOR ATION 2015 ANNUAL REPORT 0.80 0.86 0.84 0.74 0.66 0.80 0.83 0.71 113 Board of Directors MARC A. BIBEAU [1] President and Chief Executive Officer, Beauward Shopping Centres Ltd. ANDRÉ DESMARAIS, O.C., O.Q. [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. [4] Executive Co-Chairman of the Corporation and Chairman and Co-Chief Executive Officer, Power Corporation of Canada GÉRALD FRÈRE [2, 3] Managing Director, Frère-Bourgeois S.A. ANTHONY R. GRAHAM, LL.D. [4] Vice-Chairman, Wittington Investments, Limited V. PETER HARDER, LL.D. [2, 3] * Senior Policy Adviser, Dentons Canada LLP J. DAVID A. JACKSON, LL.B. Senior Counsel, Blake, Cassels & Graydon LLP R. JEFFREY ORR President and Chief Executive Officer of the Corporation LOUISE ROY, O.C., O.Q. Invited Fellow and Chair of the Board, Centre interuniversitaire de recherche en analyse des organisations RAYMOND ROYER, O.C., O.Q., FCPA, FCA [1, 2, 3, 4] Company Director T. TIMOTHY RYAN, JR. [1] Company Director EMŐKE J.E. SZATHMÁRY, C.M., O.M., PH.D., FRSC [1] President Emeritus, University of Manitoba Directors Emeritus JAMES W. BURNS, O.C., O.M. THE HONOURABLE P. MICHAEL PITFIELD, P.C., Q.C. [1] MEMBER OF THE AUDIT COMMIT TEE [2] MEMBER OF THE COMPENSATION COMMIT TEE [3] MEMBER OF THE REL ATED PART Y AND CONDUC T RE VIE W COMMIT TEE [4] MEMBER OF THE GOVERNANCE AND NOMINATING COMMIT TEE * NOT STANDING FOR RE-ELEC TION 114 POWER FINANCIAL CORPOR ATION 2015 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, FCPA, 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 CORPOR ATION 2015 ANNUAL REPORT 115 Corporate Information POWER FINANCIAL CORPORATION 751 Victoria Square Montréal, Québec, Canada H2Y 2J3 514-286-7430 1-800-890-7440 161 Bay Street, Suite 5000 Toronto, Ontario, Canada M5J 2S1 www.powerfinancial.com This document is also available on the Corporation’s website and on SEDAR at www.sedar.com. Transfer Agent and Registrar Stock Listings Computershare Investor Services Inc. Offices in: Montréal, Québec; Toronto, Ontario Shares of Power Financial Corporation are listed on the www.investorcentre.com Toronto Stock Exchange: COMMON SHARES: PWF FIRST PREFERRED SHARES: Series A: PWF.PR.A Series L: PWF.PR.L Series D: PWF.PR.E Series E: PWF.PR.F Series O: PWF.PR.O Series P: PWF.PR.P Series F: PWF.PR.G Series Q: PWF.PR.Q Series H: PWF.PR.H Series R: PWF.PR.R Series I: PWF.PR.I Series K: PWF.PR.K Series S: PWF.PR.S Series T: PWF.PR.T Shareholder Services Shareholders with questions relating to the payment of dividends, change of address and share certificates should contact the Transfer Agent: Computershare Investor Services Inc. Shareholder Services 100 University Avenue, 8th Floor Toronto, Ontario, Canada M5J 2Y1 Telephone: 1-800-564-6253 (toll-free in Canada and the U.S.) or 514-982-7555 www.computershare.com 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 CORPOR ATION 2015 ANNUAL REPORT DE SIG N: A R D O ISE.COM 2 0 1 5 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