Power Financial Corp
Annual Report 2016

Plain-text annual report

2 0 1 6 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 2016 Annual Report This Annual Report is intended to provide shareholders and other interested persons with selected information concerning Power Financial Corporation. For further information concerning the Corporation, shareholders and other interested persons should consult the Corporation’s disclosure documents, such as its most recent Annual Information Form and Management’s Discussion and Analysis. Copies of the Corporation’s continuous disclosure documents can be obtained from its 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, 2016, unless otherwise noted. NON-IFRS FINANCIAL MEASURES AND PRESENTATION Net earnings attributable to common shareholders are comprised of: • adjusted net earnings (previously described as operating earnings) attributable to common shareholders; and • other items, 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 by a subsidiary or a jointly controlled corporation. 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. Adjusted net 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 part of ongoing activities are excluded from this non-IFRS measure. Adjusted net earnings attributable to common shareholders and adjusted net 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); adidas AG (adidas); China Asset Management Co., Ltd. (China AMC); Euronext Brussels (EBR); Euronext Paris (EPA); 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); 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); PanAgora Asset Management, Inc. (PanAgora Asset Management or PanAgora); Pargesa Holding SA (Pargesa); Parjointco N.V. (Parjointco); Portag3 Ventures Limited Partnership (Portag3 Ventures or Portag3); Power Corporation of Canada (Power Corporation); Putnam Investments, LLC (Putnam Investments or Putnam); SGS SA (SGS); Swiss Stock Exchange (SIX); The Canada Life Assurance Company (Canada Life); The Great-West Life Assurance Company (Great-West Life); Total SA (Total); Umicore, NV/SA (Umicore); Wealthsimple Financial Corp. (Wealthsimple); XETRA Stock Exchange (XETR).  Table of Contents GROUP ORGANIZATION CHART 2 DIRECTORS’ REPORT TO SHAREHOLDERS 4 2016 AT A GLANCE 8 GREAT-WEST LIFECO 14 IGM FINANCIAL 16 PARGESA GROUP 18 RESPONSIBLE MANAGEMENT 20 REVIEW OF FINANCIAL PERFORMANCE 22 CONSOLIDATED FINANCIAL STATEMENTS 46 NOTES TO THE CONSOLIDATED  FINANCIAL STATEMENTS 51 FIVE-YEAR FINANCIAL SUMMARY 111 BOARD OF DIRECTORS 112 OFFICERS 113 CORPORATE INFORMATION 114 This is Power Financial $1.9 BILLION of net earnings attributable to common shareholders 12.7% return on equity [1] THROUGH GREAT-WEST LIFECO AND IGM FINANCIAL $792 BILLION of assets under management $1.4 TRILLION of assets under administration 30 MILLION+ customer relationships 26,800 employees and 13,900 financial advisors THROUGH THE PARGESA GROUP Significant shareholdings in [ 1] Return on equity is calculated using adjusted net earnings. seven leading European-based multinationals Financial Highlights FOR THE YEARS ENDED DECEMBER 31 [IN MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS] Revenues Net earnings – attributable to common shareholders Net earnings – per common share Adjusted net earnings [1] – attributable to common shareholders Adjusted net earnings [1] – per common share Dividends declared – per common share Consolidated assets Consolidated assets and assets under management Shareholders’ equity [2, 3] Total equity [3, 4] Book value per common share [3] Common shares outstanding [in millions] 2016 2015 49,122 36,512 1,919 2.69 2,105 2.95 1.57 418,586 792,353 19,481 32,216 23.69 713.3 2,319 3.25 2,241 3.14 1.49 417,630 779,944 19,473 32,280 23.69 713.2 [ 1] Adjusted net earnings is a non-IFRS financial measure (previously described as operating earnings). 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] Comparative figures have been retrospectively adjusted. Refer to Note 16 of the 2016 Consolidated Financial Statements. [ 4] Includes non-controlling interests in the equity of subsidiaries. POWER FINANCIAL CORPOR ATION 2016 ANNUAL REPORT 1 POWER FINANCIAL CORPORATION GREAT-WEST LIFECO 67.9%  65%  EQUITY VOTING   4.0% 2016 net earnings attributable to common shareholders $2,641 MILLION 2016 return on shareholders’ equity 13.8% Consolidated assets under administration $1.2 TRILLION GREAT-WEST FINANCIAL 100% GREAT-WEST LIFE  100% PUTNAM INVESTMENTS LONDON LIFE 100% 96.2% EQUITY 1 00% VOTING PANAGORA ASSET MANAGEMENT 80% VOTING CANADA LIFE 100% IRISH LIFE 100% Group Organization Chart 2 POWER FINANCIAL CORPOR ATION 2016 ANNUAL REPORT PUT 3.8%  IGM FINANCIAL 61.5% 2016 net earnings available to common shareholders 2016 adjusted net earnings available to common shareholders [1] $771 MILLION $737 MILLION 2016 return on shareholders’ equity [2] Total assets under management 16.3% $142 BILLION INVESTORS GROUP 100% MACKENZIE INVESTMENTS 100% INVESTMENT PLANNING COUNSEL 96.9% PARGESA 27.8% [5] 2016 net loss -SF32 MILLION 2016 adjusted net earnings [6] SF321 MILLION Net asset value SF8.9 BILLION GROUPE BRUXELLES LAMBERT 50% EQUITY 51.9% VOTING PORTAG3 VENTURES 25% [3] WEALTHSIMPLE 46.5% [4] Percentages represent participating equity interest and voting interest (unless otherwise indicated) at December 31, 2016. [1] Described as operating earnings by IGM Financial. [2] Return on shareholders’ equity is calculated using adjusted net earnings. [3] Power Financial directly held 25% of Portag3 and both Great-West Lifeco and IGM Financial held 37.5%. [4] IGM Financial also held a 22.7% interest in Wealthsimple. [5] 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. Adjusted net earnings is a non-IFRS financial measure. [6] Described as economic operating income by Pargesa. POWER FINANCIAL CORPOR ATION 2016 ANNUAL REPORT 3 PUT Directors’ Report to Shareholders Power Financial reported solid earnings in 2016 in the face of a number of external challenges. Weak equity markets during the first half of the year and currency headwinds impacted results. Across the group, our companies are investing heavily to transform their business models to better serve the needs of their customers. The financial services industry is going through a period At IGM Financial, investment, change and momentum are of rapid change, driven by heightened client expectations, evident across the company. In 2016, Jeff Carney was the rapid pace of technological development and growing appointed President and CEO of IGM Financial and regulatory expectations. In this environment, investing in Investors Group and Barry McInerney was named the development of our people is essential, and remains President and CEO of Mackenzie. Investors Group a key focus across the group. Our companies are announced significant changes to its pricing structure and investing in change, secure in the belief that by continuing its advisor recruiting strategy, while Mackenzie continued to put the interests of our clients at the centre of our to bring innovation and product excellence to the decision making, we will build upon our leading franchises Canadian market through a much-enhanced distribution and add to the 30 million individuals whose needs organization. Strong sales momentum was experienced at we already serve. Great-West Lifeco is investing strategically to drive future growth and productivity while maintaining a strong risk and expense discipline to deliver long-term value to its customers and shareholders. The company’s net earnings attributable to common shareholders were down four per cent in 2016 compared to 2015. While net both companies in the latter part of 2016 and into the new year's RRSP season. IGM also invested in various leading fintech companies and, early in 2017, announced a significant investment in China in addition to Power Corporation's own additional investment. Earnings were affected by lower equity levels in early 2016 and ongoing investments in technology and transformation. earnings in the Canadian and European segments As in the previous four years, 2016 was characterized by finished the year higher than in 2015, currency portfolio changes at Pargesa. A total of €1.6 billion was movement – particularly the weakening of the British invested, primarily in existing shareholdings, and there pound – had a negative impact on earnings, coupled were disposals of €2.5 billion. GBL continued in 2016 to with lower earnings in the U.S. segment. increase its stake in adidas and, at December 31, 2016, Great-West Lifeco’s operations in Canada were reorganized around individual and group customers to provide even greater client focus. In the United States, work is ongoing in streamlining back office processes to support Empower Retirement's growth, cost savings, and enhancements to customer experience. Investment in digital opportunities will remain a focal point to grow the company’s market-leading U.K. group risk business. held 7.5 per cent of adidas’ capital, representing a market value of €2.4 billion. GBL also continued during the year to gradually reduce its stake in Total. This disposal had a significant impact on Total’s contribution to Pargesa’s earnings. However, the proceeds from the sale will be used over time to make investments that will gradually contribute to earnings. POWER FINANCIAL CORPOR ATION 2016 ANNUAL REPORT 5 Rapid Change in Financial Services Many of the initiatives taken in 2016, and those that will continue to unfold during the course of 2017, were in direct response to several waves of change that are impacting the financial services industry around the globe. The first wave of change is on the customer front. and Personal Capital Corporation. While the investments Customers are demanding greater transparency Power Financial and its subsidiaries have made in fintech regarding what they are paying and the value they are to date have been relatively small in the context of our receiving. They also want to have access to information, overall businesses and asset mix, they are significant in be able to transact or seek advice at the time and by the that they give us visibility and an early position in this means that best suit their needs. Digital delivery is a quickly developing market. critical component of the service model which will permanently change the way we do business and how we, and the financial advisors we work with, interact with our customers. The third wave of change is on the regulatory front. Following the financial crisis, regulators focused primarily on prudential factors – imposing stress tests, for example, to determine if a financial institution is and will remain The second change we are witnessing is the emergence solvent. Regulatory focus has now increasingly shifted to of new business models based upon the applications of client outcomes. Such regulation is consistent with the technology. This has most notably taken the form of what client-first mindset of Power Financial’s group companies. is known as fintech, which encompasses the approach Positive client outcomes are the foundation of our and activities taken by companies such as Wealthsimple companies' future success. Seizing Business Opportunities Consistent with past practices, our group invested in Also in 2016, IGM Financial invested US$75 million in select markets and seized business opportunities in 2016. Personal Capital Corporation, a market-leading digital Power Financial, in partnership with its subsidiaries IGM Financial and Great-West Lifeco, launched Portag3 Ventures. This new fund invests in promising wealth advisor for mass-affluent investors, enabling the company to participate in the emerging digital wealth management industry in the United States. Canadian fintech companies that have the potential for In late 2016 and early 2017, Mackenzie entered into innovative change and global impact. Portag3 is agreements to acquire a total 13.9 per cent interest committed to finding and supporting creative, ambitious in China AMC, one of China’s first and largest fund entrepreneurs who will help reshape the Canadian fintech companies, for a total investment of approximately sector for the benefit of all consumers. $647 million. The ownership interest in China AMC will Power Financial and IGM Financial have also invested in Toronto-based Wealthsimple, Canada’s largest and fastest-growing technology-driven investment manager. Since its launch, Wealthsimple has attracted 30,000 clients and has $1 billion in assets under administration. diversify Mackenzie’s business outside of Canada, giving the company the opportunity to participate in a rapidly growing asset management industry in the world’s second largest economy. This investment, coupled with Power Corporation’s, will bring the Power group’s combined interest in China AMC to 27.8 per cent. Financial Results Power Financial’s net earnings attributable to common Other items represented a net charge of $186 million, shareholders were $1,919 million or $2.69 per share compared with a net contribution of $78 million in 2015. for the year ended December 31, 2016, compared with $2,319 million or $3.25 per share in 2015. Adjusted net earnings attributable to common shareholders were $2,105 million or $2.95 per share, compared with $2,241 million or $3.14 per share in 2015. Dividends declared by Power Financial totalled $1.57 per common share, compared with $1.49 per share in 2015. In March of 2017, the Board of Directors announced a 5.1 per cent increase in the quarterly dividend on the Corporation’s common shares, from $0.3925 to $0.4125 per share. 6 POWER FINANCIAL CORPOR ATION 2016 ANNUAL REPORT Results of Group Companies GREAT-WEST LIFECO Total assets under management at December 31, 2016 Great-West Lifeco’s net earnings attributable to common were $141.8 billion, compared with $133.6 billion shareholders were $2.6 billion or $2.668 per share in 2016, at December 31, 2015. compared with $2.8 billion or $2.774 per share in 2015. Great-West Lifeco reported return on equity of 13.8 per cent. Consolidated assets under administration at PARGESA Pargesa reported a net loss of SF32 million in 2016, compared with net earnings of SF638 million in 2015. December 31, 2016 were over $1.2 trillion, an increase The loss in 2016 is mainly due to an impairment charge of $36 billion from December 31, 2015. In February of 2017, Great-West Lifeco announced a 6 per cent increase in its quarterly dividend, to recorded on the LafargeHolcim investment as a result of a decline in the share price to €37.10 at June 30, 2016. At December 31, 2016, the share price of LafargeHolcim $0.3670 per common share. was €49.92. IGM FINANCIAL IGM Financial’s net earnings available to common Pargesa’s adjusted net earnings in 2016 were SF321 million, compared with SF308 million in 2015. shareholders were $771 million or $3.19 per share in 2016, At its annual general meeting, GBL is expected to compared with $772 million or $3.11 per share in 2015. propose that its dividend be increased by 2.4 per cent, Return on average common equity based on operating earnings for the year ended December 31, 2016 was 16.3 per cent. to €2.93 per share. In addition, at its upcoming annual meeting in May, the board of directors of Pargesa is expected to propose a 2016 dividend of SF2.44 per bearer share, an increase of 2.5 per cent. The Power Financial Group Our group companies provide financial security and peace of mind to millions of people through various investment, retirement and insurance solutions. Such solutions are provided to our clients through one-on-one relationships with their financial advisors and through workplace programs. Critical factors in meeting customer needs include Together with its subsidiaries, Power Financial is product and service innovation, and the delivery of value committed to creating long-term value for shareholders to the customer. Financial strength and the ability to predicated on the success of our clients, our employees honour long-term commitments are likewise important. and our business partners, while contributing positively Consistent with the long-time practices of the group, to the communities in which we operate. the principles of responsible management guide the Your Directors wish to express gratitude, on behalf actions of Power Financial and its portfolio companies. of all shareholders, for the important contribution of We have included a section later in this report that the management and employees of our Corporation outlines our commitments under the Corporation’s and its associated companies to the successful results responsible management philosophy. Additional achieved in 2016. information on our corporate social responsibility policies, programs and performance is further detailed on www.PowerFinancialCSR.com. On behalf of the Board of Directors, Signed, Signed, Signed, R. Jeffrey Orr President and Chief Executive Officer March 24, 2017 Paul Desmarais, Jr., o.c., o.q. Executive Co-Chairman of the Board André Desmarais, o.c., o.q. Executive Co-Chairman of the Board POWER FINANCIAL CORPOR ATION 2016 ANNUAL REPORT 7 2016 AT A GLANCE Whether improving customer service, being honoured for product excellence, giving back to their communities or expanding markets and portfolios, Power Financial companies distinguished themselves on many fronts during 2016. This is but a small sampling. Investing in China’s premier asset manager IGM Financial entered into agreements to acquire a total 13.9 per cent interest in China AMC, the premier asset manager in China. Together with a further investment by Power Corporation, the two companies will hold a combined 27.8 per cent interest in China AMC. Mackenzie’s global fixed income mandate, At the forefront of fintech In 2016, Power Financial, with its subsidiaries IGM distributed through China AMC, and other synergies Financial and Great-West Lifeco, launched Portag3 will enable IGM Financial to grow its retail and Ventures. This new fund invests in promising Canadian institutional business in both geographic regions. financial tech companies that have the potential for innovative change and global impact. Portag3 is committed to finding and supporting creative, ambitious entrepreneurs who will help reshape the Canadian fintech sector to benefit all consumers. Power Financial and IGM Financial have also invested in Toronto-based Wealthsimple, Canada’s largest and fastest-growing technology-driven investment manager. Since its launch, Wealthsimple has attracted 30,000 clients and has $1 billion in assets under administration. 8 POWER FINANCIAL CORPOR ATION 2016 ANNUAL REPORT Industry-leading fund performance Mackenzie Investments was recognized for industry- leading fund performance at the prestigious Fundata FundGrade A+ Awards. These awards are presented annually to Canadian investment funds that achieve consistently high FundGrade scores through an entire calendar year. Mackenzie Canadian Growth Balanced Fund, Mackenzie Canadian Growth Fund, Mackenzie Ivy European Class and Mackenzie Ivy Foreign Equity Fund won for top-performing funds in their respective categories. The new world of Irish Life Health The new Irish Life Health business leverages creative digital technology and traditional advisor relationships to give customers flexibility in meeting their health insurance needs. In addition to the convenience of online self-service for their health insurance claims, customers can access a Digital Doctor service including face-to- face video consultations, telephone and messaging services with Irish-registered physicians. Responding to a changing world Consumers have more options than ever to seek information and advice, make decisions and purchase products. In 2016, Great-West Life expanded how it digitally interacts with customers. Great-West Life's Canadian group retirement and savings plan member education program, SmartPATH, provides engaging, easy-to-understand information for all financial planning stages: Getting started, Getting serious, Getting close and in Retirement. The publicly available SmartPATH site, www.smartpathnow.com, features award-winning videos, interactive tools, games and articles that are building Canadians' financial confidence and helping them take action towards their savings goals. It has never been easier for plan members to access their Great-West Life group benefits information. Either through the GroupNet for Plan Members website, or on the go using GroupNet Text or with the GroupNet Mobile or GroupNet for Apple Watch apps, more than one million plan members connect with Great-West Life online. With secure and user-friendly access, plan members submit claims, get information about benefits, coverage balances and claims payments, search out drug coverage details and even locate the nearest health care provider through a built-in GPS mapping tool. POWER FINANCIAL CORPOR ATION 2016 ANNUAL REPORT 9 Dynamic innovation at the onset Launched in early 2016, Great-West Investments broke new ground with the establishment of a creative solution to help improve how U.S. investors save and receive advice for retirement. The new group is committed to launching solutions and enhancements across a range of product areas – managed accounts, retirement income, target-date, general account and stable value – to better serve investors with a variety of different needs. Continued trajectory of strong growth PanAgora Asset Management exhibited another year of strong growth in 2016, as the firm’s diverse set of investment solutions in alternatives, risk Committed to excellence Recent recognition given to Putnam demonstrated parity and active strategies – driven by innovative how the company consistently delivers value to its research – continues to attract a broad set of clients. Barron’s/Lipper ranked the firm No. 5 out of investors worldwide. In a key development, 54 companies in their Best Fund Families report for PanAgora and China AMC – one of China’s biggest five-year investment performance across asset fund management companies – forged a strategic classes. Putnam also received accolades for service relationship to bring risk-parity strategies to quality from DALBAR, which honoured the firm for institutional and retail investors in China. This the 27th consecutive year. Additionally, Putnam was collaborative relationship will offer these investors highlighted as the leading asset manager for digital better diversification using strategies not currently engagement by DST kasina, and was named the available to them. inaugural Social Media Leader of the Year at the annual Mutual Fund Industry Awards. 10 POWER FINANCIAL CORPOR ATION 2016 ANNUAL REPORT Retirement leader of the year Empower Retirement, the second-largest retirement services provider in the United States, was named Retirement Leader of the Year at the annual Mutual Fund Industry Awards. Through new sales, along with growing brand recognition, Empower grew at three times the industry average. It also retained its top ranking as the “best value for the money” in a survey of industry advisors. 125,000 ways to say thank you Many of Great-West Life’s efforts to build stronger communities begin with its people, who share their time, resources and expertise to improve the lives of those around them, and the company supports and encourages those efforts. For example, in 2016, in celebration of its 125th anniversary, Great-West Life made 125 donations of $1,000 each to registered charities that their employees Committed to financial literacy The Canadian Foundation for Economic Education (CFEE) presented Investors Group with the Financial Literacy Leadership Award for the company’s leadership in and commitment to improving financial literacy and education in Canada. With Investors Group’s support, CFEE’s Money and Youth program has thrived, with over 430,000 copies of its publication being provided free of charge to schools and homes across Canada. The company also supported CFEE’s Building Futures program, which works with provinces to integrate financial education into the compulsory core curriculum in grades 4-10. New digital tool for U.S. investors IGM Financial made an investment in Personal Capital, volunteer with across Canada. a market-leading digital wealth advisor for mass-affluent investors, enabling the company to participate in the emerging digital wealth management industry in the United States. Consistent with IGM Financial’s belief in the value of advice in growing investors’ wealth over time, Personal Capital provides online tools for investors looking for a different way to invest along with personal financial advice through a team of licensed advisors. POWER FINANCIAL CORPOR ATION 2016 ANNUAL REPORT 11 Celebrating diversity and inclusion An important part of IGM Financial’s commitment Expansion in North America Irish Life Investment Managers Limited (ILIM), Ireland's largest investment management firm, continues to expand its business relationships in North America. ILIM now provides active equity management services to Great-West Lifeco’s operating companies in Canada, to corporate responsibility is fostering diversity and as well as affiliates Investors Group and Mackenzie inclusiveness in the workplace. In 2016, the Investments. In the United States, ILIM manages assets for company engaged its leaders, employees and Empower Retirement and, in 2016, was appointed to advisors in furthering its diverse and inclusive manage a number of large indexation mandates on behalf culture through communication, surveys and of Great-West Financial. ILIM also continues to work with training, including the Taking the Stage® leadership Putnam to build new distribution opportunities in the Irish communication program for women. market. Putnam is now managing significant credit and By recognizing and celebrating its diversity, alternate strategies within multi-asset portfolios modelled IGM Financial seeks to better serve existing and and manufactured by ILIM for both its retail and its potential clients in the context of a growing and institutional client base. more diverse Canadian population. New investments During the course of 2016, Pargesa added two investments to its strategic portfolio through its subsidiary Groupe Bruxelles Lambert. At December 31, 2016, GBL held a 7.5 per cent interest in adidas, the European leader in sports equipment. At that same date, GBL held a 17 per cent interest in Umicore, a group specialized in materials technology and the recycling of precious metals. GBL has representation on the boards of both adidas and Umicore. 12 POWER FINANCIAL CORPOR ATION 2016 ANNUAL REPORT When you pay yourself, you make the rules. GLC Asset Management signs the PRI In February of 2016, Great-West Lifeco’s Canadian investment management subsidiary, GLC Asset Management Group Ltd. (GLC) became a signatory to the United Nations-supported Principles for Responsible Investment (PRI). GLC formally includes environmental, social, and governance (ESG) factors in the disciplined investment processes in place across its businesses. Putnam Investments and Irish Life Investment Managers are also signatories to the PRI, which aims to contribute to the development of a more sustainable global financial system. Giving back… together Great-West Financial kicked off a new community Helping customers retire seamlessly The award-winning HelloLife retirement planner supports the customer and the advisor working together to build a secure, flexible retirement income program. This unique approach allows the customer to be involved every step of the way. Bringing together the customer’s aspirations and lifestyle with involvement program called ACT – Associates. the advisor’s financial planning advice helps generate Community. Together. – which is aimed at a realistic plan that can provide predictable income encouraging associates to support causes of their for life along with opportunities for growth. choosing. The firm amplifies associates’ community impact through corporate support, including matching funds and paid volunteer hours. Activities range from local events to large-scale efforts such as the Giving Together Campaign to benefit communities across the United States. POWER FINANCIAL CORPOR ATION 2016 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, Putnam Investments and PanAgora. Great-West Lifeco and its companies have over $1.2 trillion in consolidated assets under administration. Net earnings attributable to common shareholders [in millions of dollars] Adjusted net earnings [1] attributable to common shareholders [in millions of dollars] Consolidated assets under administration [in billions of dollars] 1,806 2,278 2,546 2,762 2,641 1,946 2,052 2,546 2,762 2,641 546 758 1,063 1,213 1,248 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 [1] Described as operating earnings by Great-West Lifeco. 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 13 million people. $175 billion Total assets under administration $12.9 billion 2016 sales 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. $232 billion Total assets under administration $19.2 billion  2016 insurance and annuities sales $1,218 million 2016 net earnings 13+ million people served 27,000+ advisor relationships $1,200 million 2016 net earnings Top 3 provider of payout annuities in the U.K. No. 1 pension, investment and insurance provider in Ireland Great-West Financial provides life insurance, annuities and executive benefits products. Its Great-West Investments unit offers fund management, investment and advisory services. Its Empower Retirement arm 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. Empower also offers individual retirement accounts. Putnam Investments is a U.S.-based global asset manager, offering investment management services across a range of asset classes: fixed income, equity, global asset allocation and alternatives, including absolute return, risk parity and hedge funds. The firm’s affiliate PanAgora is a premier provider of institutional investment solutions, including alternatives, risk premia – including risk parity – and active strategies, spanning all major asset classes and risk ranges. US$476 billion Total assets under administration 8.5 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 US$152 billion Assets under management 185+ investment professionals 100+ mutual funds available Nearly 80 years of investment experience 150+ institutional mandates 157,500 advisors distribute Putnam products 2016 consolidated assets under administration $1.2 TRILLION 2016 net earnings attributable to common shareholders $2,641 MILLION 2016 return on shareholders’ equity 13.8% GREAT-WEST LIFECO GREAT-WEST LIFE 100% GREAT-WEST FINANCIAL 100% PUTNAM INVESTMENTS 96.2% LONDON LIFE 100% CANADA LIFE 100% IRISH LIFE 100% PANAGORA 80% [1] [1] Denotes voting interest. POWER FINANCIAL CORPOR ATION 2016 ANNUAL REPORT 15 IGM Financial IGM Financial Inc. is one of Canada’s premier personal financial services companies with $142 billion in total assets under management. The company serves the financial needs of Canadians through multiple businesses, each operating distinctly within the advice segment of the financial services market. The company is committed to building on its record of delivering long-term growth and value to its clients and shareholders. Net earnings available to common shareholders [in millions of dollars] Adjusted net earnings [1] available to common shareholders [in millions of dollars] Total assets under management [in billions of dollars] 759 762 753 772 2012 2013 2014 2015 771 2016 746 764 826 796 2012 2013 2014 2015 737 2016 121 132 142 134 2012 2013 2014 2015 142 2016 [1] Described as operating earnings by IGM Financial. Investors Group is committed to comprehensive planning delivered through long-term client and consultant relationships. The company provides advice and services to approximately one million Canadians through a network of consultants located across Canada. $81.2 billion Total assets under management $7.8 billion Mutual fund sales 2,300 consultant practices* advise on 95% of assets under management 1,553 consultants hold Certified Financial Planner (CFP) or Financial Planner (F.Pl.) designations, with another 1,193 enrolled in the programs * Consultant practices are teams led by consultants with greater than four years' experience. 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 multiple distribution channels to both retail and institutional investors. $64.0 billion Total assets under management $6.9 billion Mutual fund sales Investment products offered through 30,000 independent financial advisors 73% of Mackenzie mutual fund assets 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. $4.5 billion Assets under management in Counsel Portfolio Services $26.1 billion Assets under administration Partners with over 800 advisors across the country Total assets under management $142 BILLION 2016 adjusted net earnings [1] available to common shareholders $737 MILLION 2016 return on shareholders’ equity [2] 16.3% IGM FINANCIAL INVESTORS GROUP 100% MACKENZIE INVESTMENTS 100% INVESTMENT PLANNING COUNSEL 96.9% [1] Described as operating earnings by IGM Financial. [2] Return on shareholders’ equity is calculated using adjusted net earnings. POWER FINANCIAL CORPOR ATION 2016 ANNUAL REPORT 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 holds 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. 2016 adjusted net earnings [1] SF321 MILLION Net asset value SF8.9 BILLION PARGESA 50.0% [2] GROUPE BRUXELLES LAMBERT IMERYS 53.9% LAFARGE HOLCIM 9.4% SGS 16.2% ADIDAS 7.5% PERNOD RICARD 7.5% UMICORE 17.0% TOTAL 0.7% [1] Described as economic operating income by Pargesa. [2] Representing 51.9% of the voting rights. retouche photo pour le cielImerys is the world leader in speciality minerals with almost 260 sites in 54 countries. Value of investment €3,088 million Capital/voting rights 53.9% / 69.7% Key 2016 financial data Market capitalization Turnover Current operating income (EBIT) 5,734 4,165 582 LafargeHolcim is the world leader in construction materials: cement, aggregates and concrete. Value of investment €2,857 million Capital/voting rights 9.4% / 9.4% Key 2016 financial data [SF million] Market capitalization Turnover Gross operating income (EBITDA) 32,561 26,904 5,242 SGS is the world leader in inspection, verification, testing and certification. Value of investment €2,445 million Capital/voting rights 16.2% / 16.2% Key 2016 financial data [SF million] Market capitalization Turnover Adjusted operating income (EBIT) 16,208 5,985 919 adidas is the European leader in sports equipment. Value of investment €2,356 million Capital/voting rights 7.5% / 7.5% Key 2016 financial data Market capitalization Turnover Operating income (EBIT) 31,414 19,291 1,491 Pernod Ricard is the world’s co-leader in wines and spirits, holding a leading position on all continents. Value of investment €2,048 million Capital/voting rights 7.5% / 6.8% Key 2016 financial data Market capitalization Turnover Current operating income [1] June 30, 2016 year-end [1] [1] 26,569 8,682 2,277 [1] Umicore is a group specialized in materials technology and the recycling of precious metals. Value of investment €1,032 million Capital/voting rights 17.0% / 17.0% Key 2016 financial data Market capitalization Turnover (excluding metal) Recurring EBIT 6,065 2,668 351 Key 2016 financial data in millions of euros, unless otherwise indicated. Total is an integrated global oil and gas group with a presence in chemicals. Value of investment €789 million Capital/voting rights 0.7% /1.3% Key 2016 financial data Market capitalization Turnover [US$ million] Adjusted net operating income 118,376 149,743 from business segments [US$ million] 9,420 POWER FINANCIAL CORPOR ATION 2016 ANNUAL REPORT 19 Anchored by our responsible management philosophy, our commitment to creating long-term sustainable value remains as strong as ever.  A careful consideration of environmental, social and governance (ESG) factors in our business decisions is an integral part of our long-term success. It not only drives sustainable value in our operating businesses and investments, but also leads to economic and social prosperity for society at large. Responsible Management Reinforcing our Corporate Social Responsibility Commitments As a signatory to the United Nations Global Compact (UNGC), We are also committed to working closely with our suppliers we remain committed to supporting the UNGC’s ten principles to ensure good ethical practices and business integrity, while on human rights, labour, the environment and the fight against managing potential ESG risks to our business. In 2016, as part corruption. In 2016, we strengthened our reporting to an of our Third Party Code of Conduct deployment, we reached out “Advanced Level” Communication on Progress, providing to our key suppliers, consultants, advisors and other business information on our management policies and procedures and on partners. To date, the majority of them have attested their the alignment of our programs to the United Nations’ Sustainable compliance to the requirements of our Code. Development Goals. Visit our dedicated website, www.PowerFinancialCSR.com, for We maintained our support for the Principles for Responsible more information on our Corporate Social Responsibility (CSR) Investment (PRI) through the signatory status of our group commitments, programs and initiatives. companies, namely Great-West Lifeco subsidiaries GLC Asset Management Group Ltd., Putnam Investments and Irish Life Investment Managers Limited, and IGM Financial subsidiaries Investors Group and Mackenzie Investments. Responsibly Managing our Investments By integrating ESG factors in our investment analysis, we ensure We conduct ongoing engagements with a broad cross-section we are investing in quality companies with attractive long-term of other stakeholders, including employees, suppliers, local prospects that are managed in a responsible manner. We continue communities and responsible investment organizations. Over to meet regularly with our major operating subsidiaries to align the past year, our CSR efforts continued to be recognized by our commitments and share knowledge on our CSR initiatives. our stakeholders. 20 POWER FINANCIAL CORPOR ATION 2016 ANNUAL REPORT Recognized for Our Commitment to Sustainability In 2016, Power Financial and its group companies were recognized by a number of organizations for their long-standing commitment to sustainability. Power Financial, Power On the environmental front, Great-West Lifeco's subsidiary Corporation and IGM Financial Great-West Lifeco earned a GWL Realty Advisors Inc. gained listing status on the position on the CDP’s Climate maintained its Green Star FTSE4Good Global Index – one A List, placing it in the top 10 ranking status on the Global of the most important indices per cent of companies globally, Real Estate Sustainability that measures the performance the only Canadian financial Benchmark (GRESB). IGM of companies demonstrating services company to do so. Financial also maintained its strong ESG practices. This is the CDP’s highest listing status on the ranking, indicating a global Sustainalytics’ Jantzi Social leadership position in Index and was named one of greenhouse gas emissions the 2016 Best 50 Corporate disclosure and management. Citizens in Canada by Corporate Knights. Contributing to Economic and Social Progress As an investor, employer and contributor to the communities where we operate, we recognize the unique position we are in to promote sustainable economic progress while making a meaningful difference in society. PROMOTING PERSONAL EMPLOYEE DEVELOPMENT AND WELL-BEING Our employees are the foundation of our success. We want them to feel proud of the work they do, the company they work for, and the difference they make. This is why we take every opportunity to programs, and investment products, thus helping them prepare for retirement and other life-changing events. Our group companies also actively support a suite of financial literacy initiatives for community organizations, underserved groups, post-secondary students and individuals of all ages. invest in our people so that they can learn new skills and gain new Both Great-West Lifeco and IGM Financial continue to provide experiences to support their personal ambitions and drive the responsible investment offerings, helping clients ensure their business forward. Our companies are actively engaging their employees on investments promote environmental sustainability, social responsibility and sound corporate governance. leadership and talent development, health and well-being and ADDRESSING CLIMATE CHANGE performance recognition programs. In 2016 and 2017, Great-West Life was again selected as one of Canada’s Top 100 Employers, one of Manitoba’s Top Employers and one of Canada’s Top Employers for Young People. We remain committed to doing our part to tackle climate change with a strategy focused on helping to finance the transition to a low-carbon economy and reducing the direct environmental footprint of our operations. In 2016, Great-West Lifeco’s In 2016, Power Financial and its group companies employed Canadian bond group continued to grow its investments in 26,800 individuals and contributed $3.6 billion in employee green energy projects, including investments in solar, wind salaries and benefits. These funds flow through the economy, and hydro energy projects. impacting the hundreds of communities in which our employees live and work. MEETING CUSTOMER NEEDS FOR FINANCIAL SECURITY, WELL-BEING AND RESPONSIBLE INVESTMENTS Despite our limited environmental impact as a holding company, together with our major operating subsidiaries, we implemented innovative environmental initiatives in our buildings, many of which now meet both BOMA BESt® designations and Leadership in Energy and Environmental Design (LEED) certifications. Our group companies contribute to fostering the financial health In 2016, Power Financial, our parent company Power Corporation, and well-being of the communities they serve by developing as well as our subsidiaries Great-West Lifeco and IGM Financial, innovative products and services that are positively influencing once again participated in the annual CDP Climate Change financial and health outcomes in society. Our more than 13,900 program, supporting the organization’s endeavours to increase financial consultants and advisors focus on each customer’s transparency and disclosure on climate change. unique needs for life and health insurance, retirement savings POWER FINANCIAL CORPOR ATION 2016 ANNUAL REPORT 21 Review of Financial Performance ALL TABUL AR AMOUNTS ARE IN MILLIONS OF CANADIAN DOLL ARS, UNLESS OTHERWISE NOTED. MARCH 24, 2017 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 Annual Report. In addition, the following abbreviations are used in the Review of Financial Performance and in the Financial Statements and Notes thereto: Audited Consolidated Financial Statements of Power Financial and Notes thereto for the year ended December  31,  2016 (the  2016 Consolidated Financial Statements or the Financial Statements); International Financial Reporting Standards (IFRS). 22 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTReview of Financial Performance Overview Power Financial, a subsidiar y of Power Corporation, is a diversified Pargesa is a holding company, which, at December 31, 2016, held a 50% interest management and holding company with substantial operations in the in GBL, which represents 51.9% of the voting rights. GBL, a Belgian holding financial services sector in Canada, the United States and Europe, through company, is listed on the Brussels Stock Exchange (EBR: GBLB). its controlling interests in Lifeco and IGM. Power Financial also holds jointly with the Frère Group of Belgium a controlling interest in Pargesa, a holding company which, through its subsidiary GBL, focuses on a limited number of significant holdings, as well as incubator and financial pillar investments. Lifeco (TSX: GWO) and IGM (TSX: IGM) are public companies listed on the Toronto Stock Exchange. Pargesa is a public company listed on the Swiss Stock Exchange (SIX: PARG). LIFECO Lifeco is an international financial services holding company with interests At December 31, 2016, GBL’s portfolio was mainly comprised of investments in: Imer ys – mineral-based specialty solutions for industr y (EPA: NK); LafargeHolcim – cement, aggregates and concrete (SIX: HOLN and EPA: LHN); SGS – testing, inspection and certification (SIX: SGSN); adidas – design and distribution of sportswear (XETR: ADS); Pernod Ricard – wines and spirits (EPA: RI); Umicore – materials technology and recycling (EBR: UMI); and Total – oil, gas and alternative energies (EPA: FP). In addition to these holdings, representing 88% of its portfolio based on market value, GBL invests in: in life insurance, health insurance, retirement and investment services, asset ▪ “Incubator” investments, made up of a limited selection of smaller listed and management and reinsurance businesses. unlisted holdings that have the potential to become strategic assets over At December 31, 2016, Power Financial and IGM held 67.9% and 4.0%, respectively, of Lifeco’s common shares, representing approximately 65% of the voting rights time. GBL aims to become a core shareholder and, for mid-sized companies, to possibly hold a majority stake; and attached to all outstanding Lifeco voting shares. The Insurance Companies Act ▪ The “financial pillar”, comprising major stakes in private equity funds, limits ownership in life insurance companies to 65%. debt funds and theme-based funds. IGM FINANCIAL IGM is a financial services company which serves the financial needs of Canadians through its principal subsidiaries, each operating distinctly primarily within the advice segment of the financial services market. At December 31, 2016, Power Financial and Great-West Life, a subsidiary of Lifeco, held 61.5% and 3.8%, respectively, of IGM’s common shares. Power Financial’s equity interest in IGM increased by 1.1%, from 60.4% at December 31, 2015 to 61.5% at December 31, 2016, as a result of IGM’s repurchases and subsequent cancellation of its common shares. In 2016, GBL sold 43.5 million shares of Total, representing a 1.8% in Total interest and 42.7 million shares of Engie, representing a 1.8% interest in Engie. GBL’s net gain resulting from these sales was €721 million. At December 31, 2016, Pargesa’s net asset value was SF8,884 million, compared with SF7,970 million at December 31, 2015. PORTAG3 In October 2016, Power Financial, together with Lifeco and IGM, announced the formation of a new investment fund, Portag3  Ventures Limited Partnership, dedicated primarily to backing early-stage innovative financial On December 29,  2016 and January 5, 2017, Mackenzie Investments, a services companies. subsidiary of IGM, entered into agreements to acquire, in two separate transactions, a 13.9  % interest in China Asset Management Co.,  Ltd., a fund management company in China, for an aggregate consideration of approximately $647 million (RMB¥3.3 billion). In accordance with the terms of these agreements, Mackenzie Investments made a deposit of $193 million (RMB¥1.0 billion). On January 5, 2017, Power Financial’s parent company, Power Corporation, also entered into an agreement to acquire an additional 3.9 % interest in China AMC for $179 million (RMB¥936 million). Upon closing, In the fourth quarter of 2016, Portag3 invested in Diagram, a launchpad for technology-based ventures in insurance, financial services and healthcare. In 2016, Portag3 also invested in a number of select portfolio investments. At December 31, 2016, the fair value of the Corporation’s direct investment in Portag3 was $10 million. WEALTHSIMPLE In 2016, Power Financial invested a further $16 million in Wealthsimple, Power Corporation and Mackenzie Investments will hold a combined 27.8 % a  technology-driven investment manager, bringing its investment interest in China AMC. The transactions are expected to close in the first half to $33  million at year end. In the fourth quarter of 2016, IGM made an of 2017 and are subject to customary closing conditions, including Chinese initial investment of $20 million in Wealthsimple. At December 31, 2016, regulatory approvals. PARGESA AND GBL Power Financial Europe B.V., a wholly owned subsidiary of Power Financial, and the Frère Group each hold a 50% interest in Parjointco. At December 31, 2016, Parjointco held a 55.5% interest in Pargesa, representing 75.4% of the voting rights. Power Financial’s and IGM’s equity interests in Wealthsimple were 46.5% and 22.7%, respectively. At December 31, 2016, Wealthsimple’s assets under administration were $795 million. In the first quarter of 2017, Power Financial and IGM made advances of $20 million and $15 million, respectively, to Wealthsimple. Basis of Presentation The 2016 Consolidated Financial Statements of the Corporation have been statements present the financial results of Power Financial (parent) and prepared in accordance with IFRS and are presented in Canadian dollars. Lifeco and IGM (operating subsidiaries) after the elimination of intercompany Consolidated financial statements present, as a single economic entity, balances and transactions. the assets, liabilities, revenues, expenses and cash flows of the parent Lifeco and IGM are controlled by Power Financial and their financial company and its operating subsidiaries. The consolidated financial statements are consolidated with those of Power Financial. 23 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTReview of Financial Performance Power Financial’s investment in Pargesa is held through Parjointco. Parjointco is a holding company jointly controlled by Power Financial and the Frère 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: ▪ The investment is initially recognized at cost and adjusted thereafter ▪ Power Financial’s net earnings or loss includes its share of Pargesa’s net for changes in Power Financial’s share of Pargesa’s net assets earnings or loss; and (shareholders’ equity); ▪ Power Financial’s other comprehensive income includes its share of Pargesa’s other comprehensive income. The following table summarizes the accounting presentation for the Corporation’s holdings: CONTROL ACCOUNTING METHOD 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 ▪ 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 ▪ Impairment testing is done at the individual investment level ▪ A subsequent recovery of value does not result in a reversal ▪ A significant or prolonged decline in the value of the investment results in an impairment charge ▪ Earnings are reduced by ▪ A share price decrease impairment charges, if any subsequent to an impairment charge leads to a further impairment At December 31, 2016, the Corporation’s holdings were as follows: HOLDINGS Lifeco [1] IGM [2] Pargesa [3] Wealthsimple [4] % ECONOMIC INTEREST NATURE OF INVESTMENT ACCOUNTING METHOD 67.9 61.5 27.8 46.5 Controlling interest Controlling interest Joint control Joint control Consolidation Consolidation Equity method Equity method [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] IGM also holds a 22.7% interest in Wealthsimple. At December 31, 2016, Pargesa’s holdings were as follows: HOLDINGS GBL Imerys LafargeHolcim SGS adidas Pernod Ricard Umicore Total % ECONOMIC INTEREST NATURE OF INVESTMENT ACCOUNTING METHOD 50.0 53.9 9.4 16.2 7.5 7.5 17.0 0.7 Controlling interest Controlling interest Portfolio investment 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 Available for sale This summary of accounting presentation should be read in conjunction with the following notes to the Corporation’s 2016 Consolidated Financial Statements: ▪ Basis of presentation and summary of significant accounting policies (Note 2); ▪ Investments (Note 5); ▪ Investments in jointly controlled corporations and associates (Note 7); ▪ Goodwill and intangible assets (Note 10); and ▪ Non-controlling interests (Note 19). 24 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTReview of Financial Performance NON-IFRS FINANCIAL MEASURES AND PRESENTATION Net earnings attributable to common shareholders are comprised of: ▪ adjusted net earnings attributable to common shareholders; and ▪ other items, 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 by a subsidiary or a jointly controlled corporation. Other items are listed and described in a separate section below in this review of financial performance. 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. Adjusted net 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 part of ongoing activities are excluded from this non-IFRS measure. Adjusted net earnings attributable to common shareholders and adjusted net 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 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. Results of Power Financial Corporation EARNINGS SUMMARY – CONDENSED SUPPLEMENTARY NON- CONSOLIDATED STATEMENTS OF EARNINGS The following table is a reconciliation of non-IFRS financial measures: adjusted net earnings, other items, adjusted net earnings per share and other items 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 to the net earnings attributable to common shareholders of Power Financial are accounted for using the equity method. T WELVE MONTHS ENDED DECEMBER 31 Adjusted net earnings [1] Lifeco IGM Pargesa Corporate operations Dividends on perpetual preferred shares Adjusted net earnings [2] Other items [3] IGM Pargesa Net earnings [2] Earnings per share – basic [2] Adjusted net earnings Other items Net earnings 2016 2015 1,790 452 119 2,361 (132) (124) 2,105 21 (207) (186) 1,919 2.95 (0.26) 2.69 1,862 474 112 2,448 (77) (130) 2,241 (15) 93 78 2,319 3.14 0.11 3.25 [1] Previously described as “Operating earnings”. For a reconciliation of each component’s non-IFRS adjusted net earnings to their net earnings, refer to the “Contribution to adjusted net earnings” section below. [2] Attributable to common shareholders. [3] See “Other items” below. NET EARNINGS (attributable to common shareholders) ADJUSTED NET EARNINGS (attributable to common shareholders) Net earnings attributable to common shareholders for the twelve-month Adjusted net earnings attributable to common shareholders for the twelve- period ended December  31,  2016 were $1,919  million or $2.69  per share, month period ended December 31, 2016 were $2,105 million or $2.95 per share, compared with $2,319 million or $3.25 per share in the corresponding period compared with $2,241 million or $3.14 per share in the corresponding period in 2015, a decrease of 17.2% on a per share basis. in 2015, a decrease of 6.1% on a per share basis. A discussion of the results of the Corporation is provided in the sections “Contribution to adjusted net earnings”, “Corporate operations of Power Financial”, and “Other items” below. 25 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTReview of Financial Performance CONTRIBUTION TO ADJUSTED NET EARNINGS — LIFECO, IGM AND PARGESA Power Financial’s share of adjusted net earnings from Lifeco, IGM and Pargesa decreased by 3.6% for the twelve-month period ended December 31, 2016, compared with the same period in 2015, from $2,448 million to $2,361 million. Lifeco Lifeco’s contribution to Power Financial’s adjusted net earnings for the twelve-month period ended December 31, 2016 was $1,790 million, compared with $1,862 million for the corresponding period in 2015. ▪ Lifeco’s net earnings attributable to Lifeco common shareholders were $2,641 million or $2.668 per share for the twelve-month period ended December 31, 2016, compared with $2,762 million or $2.774 per share in the corresponding period in 2015, a decrease of 3.8% on a per share basis. While net earnings in Canada and Europe operations finished the year up from 2015, earnings were negatively impacted by currency movement, particularly the weakening of the British pound, and lower earnings in the U.S. segment. ▪ Summary of Lifeco’s net earnings by segment: T WELVE MONTHS ENDED DECEMBER 31 2016 2015 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 Net earnings [1] [1] Attributable to Lifeco common shareholders. Lifeco’s contribution to Power Financial: T WELVE MONTHS ENDED DECEMBER 31 Average direct ownership [%] Contribution to Power Financial’s adjusted net earnings and net earnings 345 436 400 37 1,218 333 (52) (32) 249 927 277 (4) 1,200 (26) 2,641 2016 67.6 1,790 307 479 432 (23) 1,195 384 32 (7) 409 886 313 (25) 1,174 (16) 2,762 2015 67.3 1,862 C A N A DA unit. Excluding these restructuring costs, net earnings decreased Net earnings for the twelve-month period ended December 31, 2016 were US$115 million (C$140 million). The decrease was primarily due to lower $1,218 million, compared with $1,195 million for the corresponding period contributions from investment experience and lower net fee income in Lifeco’s in 2015. The increase was primarily due to higher contributions from Asset Management business unit. These items were partially offset by higher investment experience and lower income taxes, partially offset by lower contributions from contract liability basis changes and lower income taxes, contributions from insurance contract liability basis changes and less driven by a management election to claim foreign tax credits. favourable morbidity experience. U N ITED S TATE S EU RO P E Net earnings for the twelve-month period ended December 31, 2016 were Net earnings for the twelve-month period ended December  31,  2016 $1,200 million, compared with $1,174 million for the corresponding period in were US$188  million (C$249  million), compared with US$318  million 2015. The increase was primarily due to higher contributions from insurance (C$409 million) for the corresponding period in 2015. Included in net contract liability basis changes and investment experience, partially offset by earnings in the fourth quarter of  2016 were restructuring costs of less favourable morbidity experience and the impact of currency movement. US$15 million (C$20 million) relating to the Asset Management business 26 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTReview of Financial Performance IGM Financial IGM’s contribution to Power Financial’s adjusted net earnings was $452 million for the twelve-month period ended December 31, 2016, compared with $474 million for the corresponding period in 2015. ▪ IGM’s adjusted net earnings available to IGM common shareholders were $737 million or $3.05 per share for the twelve-month period ended December 31, 2016, compared with $796 million or $3.21 per share in the corresponding period in 2015, a decrease of 5.0% on a per share basis due to a decrease in contributions from each of IGM’s segments. ▪ Adjusted net earnings before interest and taxes of IGM’s segments and adjusted net earnings (non-IFRS measures described by IGM as “Earnings before interest and taxes” and “Operating earnings”, respectively), and net earnings available to IGM common shareholders were as follows: T WELVE MONTHS ENDED DECEMBER 31 Investors Group Mackenzie Corporate and other Adjusted net earnings (before interest, income taxes, preferred share dividends and other) Interest expense, income taxes, preferred share dividends and other Adjusted net earnings [1] Other items Net earnings [1] [1] Available to IGM common shareholders. IGM’s contribution to Power Financial: T WELVE MONTHS ENDED DECEMBER 31 Average direct ownership [%] Contribution to Power Financial’s: Adjusted net earnings Other items 2016 736 171 132 1,039 (302) 737 34 771 2016 61.3 452 21 473 2015 761 216 140 1,117 (321) 796 (24) 772 2015 59.6 474 (15) 459 I N V E S TO RS G RO U P M AC K ENZI E Adjusted net earnings decreased in the twelve-month period ended Adjusted net earnings decreased in the twelve-month period ended December 31, 2016, compared to the same period in 2015, due to: December 31, 2016, compared to the same period in 2015, due to: ▪ An increase in non-commission expenses, resulting largely from ▪ A decrease in management fee revenues, primarily resulting from Consultant network support and other business development efforts, the decrease in average assets under management of 8.3% when and an increase in commission expenses; compared with the corresponding period in 2015, offset, in part, ▪ Partially offset by an increase in fee revenue primarily reflecting the increase in average daily mutual fund assets of 1.5% and the increase by an increase in the average management fee rate and an increase in non-commission expenses; in fee revenue from insurance products. ▪ Partially offset by a decrease in commission expenses, primarily due to the decrease in average mutual fund assets for the period and the lower amount of deferred sales commissions paid in recent years. Total assets under management were as follows: DECEMBER 31 [IN BILLIONS OF DOLL ARS] Investors Group Mackenzie Corporate and other [1] Total 2016 81.2 64.0 (3.4) 141.8 2015 74.9 61.7 (3.0) 133.6 [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. 27 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTReview of Financial Performance Total average daily mutual fund assets under management were as follows: [IN BILLIONS OF DOLL ARS] Investors Group Mackenzie Corporate and other [1] Total Q4 79.7 50.5 4.5 Q3 78.1 49.6 4.5 Q2 75.8 47.8 4.3 2016 Q1 73.5 46.7 4.2 Q4 75.3 48.5 4.0 Q3 75.4 49.2 4.0 Q2 76.8 50.6 4.0 2015 Q1 75.5 50.5 3.9 134.7 132.2 127.9 124.4 127.8 128.6 131.4 129.9 [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. Pargesa Pargesa’s contribution to Power Financial’s adjusted net earnings was $119 million for the twelve-month period ended December 31, 2016, compared with $112 million in the corresponding period in 2015. The components of Pargesa’s adjusted net earnings (described by Pargesa as “operating earnings”) and net earnings were: 2016 2015 T WELVE MONTHS ENDED DECEMBER 31 [IN MILLIONS OF SWISS FRANCS] Contribution from principal holdings Share of earnings of: Imerys Lafarge [1] Dividends from: LafargeHolcim [1] SGS Total Engie Pernod Ricard Umicore adidas Contribution from private equity activities and other investment funds Net financing charges Other operating income from holding company activities General expenses and taxes Adjusted net earnings Other items Net earnings (loss) [1] Lafarge contributed to Pargesa’s earnings until June 30, 2015. LafargeHolcim started contributing to Pargesa’s earnings in the second quarter of 2016. 2016 27.8 119 (207) (88) Pargesa’s contribution to Power Financial: T WELVE MONTHS ENDED DECEMBER 31 [IN MILLIONS OF CANADIAN DOLL ARS] Average direct ownership [%] Contribution to Power Financial’s: Adjusted net earnings Other items 28 112 − 45 41 28 26 21 14 11 298 38 8 6 (29) 321 (353) (32) 102 13 − 37 85 26 20 8 2 293 14 34 − (33) 308 330 638 2015 27.8 112 93 205 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTReview of Financial Performance The average exchange rates for the twelve-month periods ended December 31, 2016 and 2015 were as follows: Euro/SF SF/CAD 2016 1.09 1.35 2015 1.07 1.33 CHANGE % 1.9 1.5 A significant portion of Pargesa’s earnings is composed of dividends from The change in Pargesa’s adjusted net earnings for the twelve-month period its investments: ended December 31, 2016 was primarily due to: ▪ LafargeHolcim (first dividend declared in the second quarter of 2016); ▪ The LafargeHolcim merger, which became effective on July 10, 2015. Starting ▪ SGS (declared in the first quarter); ▪ Total (declared in the second, third and fourth quarters); ▪ Engie (declared in the second and third quarters); on that date, the investment in LafargeHolcim is accounted for as available for sale. In the second quarter of 2016, Pargesa’s share of a dividend from LafargeHolcim was SF45 million. In the twelve-month period of 2015, Pargesa recorded a share of earnings from Lafarge of SF13 million. ▪ Pernod Ricard (declared in the second and fourth quarters); ▪ A decrease in dividends from Total resulting from disposals of Total. ▪ Umicore (declared in the second and third quarters); and ▪ adidas (declared in the second quarter). ▪ Non-cash gains of SF31 million included in net financing charges due to the mark to market of derivative financial instruments related to convertible and exchangeable debentures issued by GBL, compared with non-cash gains of SF56 million in the corresponding period of 2015. ▪ An increase of SF24 million in the contribution from private equity activities and other investment funds. CORPORATE OPERATIONS Corporate operations include income (loss) from investments, operating expenses, financing charges, depreciation and income taxes. T WELVE MONTHS ENDED DECEMBER 31 Income (loss) from investments Portag3 and Wealthsimple Interest on cash and cash equivalents, foreign exchange gains (losses) and other Operating and other expenses Operating expenses Financing charges Depreciation Income taxes [1] Corporate operations 2016 (21) 3 (18) (77) (18) (2) (17) (114) (132) [1] Consists mainly of withholding taxes payable on the repatriation of cash held by Power Financial Europe B.V. to Power Financial. 2015 (3) 24 21 (70) (17) (2) (9) (98) (77) 29 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTReview of Financial Performance OTHER ITEMS The following table presents the Corporation’s Other items: T WELVE MONTHS ENDED DECEMBER 31 IGM Reduction of income tax estimates Restructuring charges Pargesa Total – Gains on partial disposal LafargeHolcim – Impairment charges Lafarge – Reversal of impairment charges Lafarge – Impairment and restructuring charges Imerys – Impairment and restructuring charges Engie – Impairment charges and loss on partial disposal Other (charge) income 2016 21 − 175 (360) − − − (15) (7) (186) 2015 − (15) 57 − 88 (23) (26) − (3) 78 Other items in 2016 were mainly comprised of the Corporation’s share of: Other items in 2015 were mainly comprised of the Corporation’s share of: IGM Financial FO U RTH Q UA RTER IGM Financial FO U RTH Q UA RTER ▪ Reduction of income tax estimates of $21 million: consisting of a reduction ▪ Restructuring charges of $15 million: reflecting severance and payments to in income tax estimates related to certain tax filings. third parties related to exiting certain investment management activities and third-party back office relationships associated with Mackenzie and Pargesa FI RS T Q UA RTER ▪ Total – Gain on partial disposal of $101 million: GBL disposed of a 1.1% equity interest in Total. ▪ LafargeHolcim – Impairment charge of $308 million: a non-cash charge of €1,443 million at GBL due to the significant decrease of the share price of LafargeHolcim. Investors Group. Pargesa FI RS T Q UA RTER ▪ Total – Gain on partial disposal of $9 million: GBL disposed of a 0.1% equity interest in Total. S ECO N D Q UA RTER ▪ Engie – Impairment charge of $9 million: a non-cash charge at GBL. ▪ Lafarge – Reversal of impairment charges of $80 million: representing the S ECO N D Q UA RTER ▪ LafargeHolcim – Impairment charge of $52 million: a non-cash charge of €239 million at GBL as a result of a further decline in the share price of LafargeHolcim, from €41.28 at March 31, 2016 to €37.10 at June 30, 2016. partial reversal of previous impairment charges recorded by GBL on its investment in Lafarge, in connection with the merger with Holcim. ▪ L afarge – Impairment and restructuring charges of $2 3  million: representing other items recorded by Lafarge, comprised of impairment charges and charges recorded in connection with the merger with Holcim. FO U RTH Q UA RTER ▪ Total – Gain on partial disposal of $74 million: GBL disposed of an additional TH I R D Q UA RTER 0.7% equity interest in Total. ▪ Lafarge – Reversal of impairment charges of $8 million: as described above ▪ Engie – Impairment charge and loss on partial disposal of $6 million: net for the second quarter. impact recorded by GBL of a non-cash charge and a loss on partial disposal FO U RTH Q UA RTER of a 1.8% equity interest in Engie. ▪ Total – Gain on partial disposal of $48 million: GBL disposed of an additional 0.4% equity interest in Total. ▪ Imerys – Impairment and restructuring charges of $26 million: a charge representing other 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). 30 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTReview of Financial Performance 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 at December 31, 2016. ASSETS Cash and cash equivalents Investments Investment in Lifeco Investment in 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 [3, 4] Total equity Total liabilities and equity POWER FINANCIAL CONSOLIDATED BAL ANCE SHEETS LIFECO IGM AND OTHER [1] CONSOLIDATION ADJUSTMENTS DECEMBER 31, 2016 DECEMBER 31, 2015 [2] 3,259 159,276 − 361 − 259 10,781 5,627 9,997 3,972 5,977 200,403 399,912 157,949 − 5,980 10,572 611 8,208 889 − − − − − 1,263 1,994 2,660 − (316) 184 (14,425) (3,227) − 33 − − (90) − 637 − 4,396 4,188 167,744 166,012 − − 2,811 292 10,781 5,627 11,292 5,966 9,274 200,403 − − 2,610 295 15,512 5,131 10,495 5,983 9,210 198,194 417,630 15,625 (17,204) 418,586 − 7,721 1,325 1,832 − − (42) (142) 157,949 160,745 7,721 7,513 7,092 6,927 12,784 12,392 200,403 374,904 − 10,878 − 200,403 (184) 386,370 198,194 385,350 POWER FINANCIAL 842 76 13,536 2,866 2,811 − − − 122 − − − 20,253 − − 250 522 − 772 2,580 16,901 − 19,481 20,253 2,514 19,488 3,006 25,008 399,912 150 4,597 − 4,747 15,625 (2,664) (24,085) 9,729 (17,020) 2,580 16,901 12,735 32,216 2,580 16,893 12,807 32,280 (17,204) 418,586 417,630 [1] Consolidation adjustments and other include eliminations and reclassifications. [2] Comparative figures have been retrospectively adjusted as described in Note 16 to the Corporation’s 2016 Consolidated Financial Statements. [3] Non-controlling interests for Lifeco includes the Participating Account surplus in subsidiaries. [4] Non-controlling interests for consolidation adjustments represents non-controlling interests in the equity of Lifeco and IGM. Total assets of the Corporation increased to $418.6 billion at December 31, 2016, ▪ Insurance and investment contract liabilities decreased by $2.8 billion, compared with $417.6 billion at December 31, 2015, mainly due to the impact of primarily due to the strengthening of the Canadian dollar against the positive market movement and new business growth, mostly offset by the British pound, euro and U.S. dollar, partially offset by the impact of new impact of currency movement. business and fair value adjustments. Liabilities increased to $386.4 billion at December 31, 2016, compared with ▪ Insurance and investment contract liabilities on account of segregated $385.4 billion at December 31, 2015, mainly due to the following, as disclosed fund policyholders increased by $2.2 billion, primarily due to the combined by Lifeco: ▪ Debentures and other debt instruments increased by $0.6 billion, to $7,513 million, primarily due to the issuance of a €500 million 10-year senior bond by Lifeco. impact of market value gains and investment income of $13.0 billion, mostly offset by the impact of currency movement of $10.6 billion, and net withdrawals of $0.5 billion. 31 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTReview of Financial Performance 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, enhance the information provided in this review of financial performance and assist the reader by identifying changes in Power Financial’s non-consolidated balance sheets, which include its investments in Lifeco and IGM accounted for using the equity method. DECEMBER 31 ASSETS Cash and cash equivalents [2] Investment in Lifeco Investment in IGM Investment in Parjointco Investments (including investments in Portag3 and Wealthsimple) Other assets Total assets LIABILITIES Debentures Other liabilities Total liabilities EQUITY Perpetual preferred shares Common shareholders’ equity Total equity Total liabilities and equity 2016 2015 [1] 842 13,536 2,866 2,811 76 122 20,253 250 522 772 2,580 16,901 19,481 20,253 870 13,746 2,808 2,610 55 123 20,212 250 489 739 2,580 16,893 19,473 20,212 [1] Comparative figures have been retrospectively adjusted as described in Note 16 to the Corporation’s 2016 Consolidated Financial Statements. [2] In these non-consolidated balance sheets, cash equivalents include $341 million ($478 million at December 31, 2015) of fixed income securities with maturities of more than three months. In accordance with IFRS, these are classified in investments in the 2016 Consolidated Financial Statements. Cash and cash equivalents Cash and cash equivalents held by Power Financial amounted to $842 million Dividends declared in the fourth quarter by IGM and received by the at December 31, 2016, compared with $870 million at the end of December 2015. Corporation on January 31, 2017 are included in other assets and amounted The fourth quarter dividends declared by the Corporation and paid on to $83 million (see “Non-consolidated Statements of Cash Flows” below February 1, 2017 are included in other liabilities and amounted to $311 million. for details). Investments in Lifeco, IGM and Parjointco The carrying value of Power Financial’s investments in Lifeco, IGM and Parjointco, accounted for using the equity method, increased to $19,213 million at December 31, 2016, compared with $19,164 million at December 31, 2015: Carrying value, at the beginning of the year Share of adjusted net earnings Share of other items Share of other comprehensive income (loss) Dividends Other, mainly related to effects of changes in ownership Carrying value, at December 31, 2016 EQUITY LIFECO IGM PARJOINTCO TOTAL 13,746 1,790 − (990) (926) (84) 2,808 2,610 452 21 (35) (333) (47) 119 (207) 379 (75) (15) 19,164 2,361 (186) (646) (1,334) (146) 13,536 2,866 2,811 19,213 Preferred shares Preferred shares of the Corporation consist of 10 series of Non-Cumulative On February 1, 2016, 2,234,515 of the Corporation’s outstanding 11,200,000 Non- Fixed Rate First Preferred Shares, two series of Non-Cumulative 5-Year Rate Cumulative 5-Year Rate Reset First Preferred Shares, Series P were converted, Reset First Preferred Shares, and two series of Non-Cumulative Floating on a one-for-one basis, into Non-Cumulative Floating Rate First Preferred Rate First Preferred Shares, with an aggregate stated capital of $2,580 million Shares, Series Q. at December 31, 2016 (same as at December 31, 2015). All series are perpetual preferred shares and are redeemable in whole or in part solely at the The terms and conditions of the outstanding First Preferred Shares are described in Note 17 to the Corporation’s 2016 Consolidated Financial Statements. Corporation’s option from specified dates. 32 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTReview of Financial Performance Common shareholders’ equity Common shareholders’ equity was $16,901 million at December 31, 2016, compared with $16,893 million at December 31, 2015: T WELVE MONTHS ENDED DECEMBER 31 Common shareholders’ equity, at the beginning of the year Changes in retained earnings Net earnings before dividends on perpetual preferred shares Dividends declared Effects of changes in ownership in subsidiaries and other Changes in reserves Other comprehensive income (loss) Foreign currency translation adjustments Investment revaluation and cash flow hedges Actuarial gains (losses) on defined benefit plans Share of Pargesa’s and other associates Share-based compensation Issuance of common shares (30,980 shares in 2016 and 1,515,000 shares in 2015) under the Corporation’s Employee Stock Option Plan [1] Common shareholders’ equity at December 31 2016 16,893 2,043 (1,244) (156) 643 (1,004) 93 (127) 387 15 (636) 1 16,901 2015 14,362 2,449 (1,193) (137) 1,119 1,370 (184) 105 60 − 1,351 61 16,893 [1] Issued for $49 million in 2015 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 $23.69 at December 31, 2016, same as at December 31, 2015. Outstanding number of common shares As of the date hereof, there were 7 13,288,699  common shares of the The Corporation filed a short-form base shelf prospectus dated December 7, Corporation outstanding, compared with 713,238,680 at December 31, 2015. As 2016, pursuant to which, for a period of 25 months thereafter, the Corporation of the date hereof, options were outstanding to purchase up to an aggregate may issue up to an aggregate of $3 billion of First Preferred Shares, common of 10,390,609 common shares of the Corporation under the Corporation’s shares, subscription receipts and unsecured debt securities, or any Employee Stock Option Plan. combination thereof. This filing provides the Corporation with the flexibility to access debt and equity markets on a timely basis. Cash Flows CONSOLIDATED STATEMENTS OF CASH FLOWS (condensed) The condensed cash flows of Lifeco and IGM, and Power Financial’s non-consolidated cash flows, 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, 2016. T WELVE MONTHS ENDED DECEMBER 31 Cash flows from: Operating activities Financing activities Investing activities Effect of changes in exchange rates on cash and cash equivalents Increase (decrease) in cash and cash equivalents Cash and cash equivalents, at the beginning of the year Cash and cash equivalents, at December 31 POWER FINANCIAL CONSOLIDATED CASH FLOWS LIFECO IGM CONSOLIDATION ADJUSTMENTS AND OTHER 2016 2015 6,254 (1,045) (4,565) (198) 446 2,813 3,259 737 (75) (1,034) − (372) 983 611 (1,336) 1,335 163 − 162 (478) (316) 6,900 (1,015) (5,479) (198) 208 4,188 4,396 5,783 (2,039) (3,844) 299 199 3,989 4,188 POWER FINANCIAL 1,245 (1,230) (43) − (28) 870 842 Consolidated cash and cash equivalents increased by $208 million in the twelve-month period ended December 31, 2016, compared with an increase of $199 million in the corresponding period of 2015. 33 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTReview of Financial Performance Operating activities produced a net inflow of $6,900 million in the twelve- Cash flows from investing activities resulted in a net outflow of $5,479 million month period ended December  31, 2016, compared with a net inflow in the twelve-month period ended December 31, 2016, compared with a net of $5,783 million in the corresponding period of 2015. outflow of $3,844 million in the corresponding period of 2015. Cash flows from financing activities, which include dividends paid on the The Corporation decreased its level of fixed income securities with maturities common and preferred shares of the Corporation and dividends paid by of more than three months, resulting in a net inflow of $137 million in the subsidiaries to non-controlling interests, represented a net outflow of twelve-month period ended December 31, 2016, compared with a net inflow $1,015 million in the twelve-month period ended December 31, 2016, compared of $33 million in the corresponding period of 2015. with a net outflow of $2,039 million in the corresponding period of 2015. 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 (loss) from cash and cash equivalents, less operating expenses, financing charges, income taxes, and preferred and common share dividends. The following non-consolidated statement of cash flows 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 Loss from investments in Portag3 and Wealthsimple Other FINANCING ACTIVITIES Dividends paid on preferred shares Dividends paid on common shares Issuance of common shares INVESTING ACTIVITIES Investments in Portag3 and Wealthsimple Purchase of other investments and 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 2016 2015 2,043 (841) 21 22 1,245 (125) (1,106) 1 (1,230) (27) (16) (43) (28) 870 842 2,449 (1,251) 3 28 1,229 (130) (1,046) 49 (1,127) (17) (1) (18) 84 786 870 On a non-consolidated basis, cash and cash equivalents decreased by ▪ Pargesa declares and pays an annual dividend in the second quarter ending $28 million in the twelve-month period ended December 31, 2016, compared June 30. The dividend paid by Pargesa to Parjointco in 2016 amounted to with an increase of $84 million in the corresponding period in 2015. SF2.38 per bearer share, compared with SF2.27 in 2015. The Corporation Operating activities produced a net inflow of $1,245 million in the twelve- month period ended December 31, 2016, compared with a net inflow of $1,229 million in the corresponding period in 2015. ▪ Dividends declared by Lifeco on its common shares during the twelve- month period ended December 31, 2016 were $1.3840 per share, compared with $1.3040 in the corresponding period of 2015. In the twelve-month received dividends of $75 million (SF56 million) from Parjointco in 2016, compared with $69 million (SF53 million) in the corresponding period of 2015. The Corporation’s financing activities during the twelve-month period ended December 31, 2016 were a net outflow of $1,230 million, compared with a net outflow of $1,127 million in the corresponding period in 2015, and included: period ended December 31, 2016, the Corporation recorded dividends from ▪ Dividends paid on preferred and common shares by the Corporation of Lifeco of $926 million, compared with $873 million in the corresponding $1,231 million, compared with $1,176 million in the corresponding period period of December 31, 2015. On February 9, 2017, Lifeco announced a 6% of 2015. In the twelve-month period ended December 31, 2016, dividends increase in the quarterly dividend on its common shares, from $0.3460 to declared on the Corporation’s common shares were $1.57  per share, $0.3670 per share, payable March 31, 2017. compared with $1.49 per share in the corresponding period of 2015. ▪ Dividends declared by IGM on its common shares during the twelve- ▪ Issuance of common shares of the Corporation for $1 million pursuant to month period ended December 31, 2016 were $2.25 per share, the same the Corporation’s Employee Stock Option Plan, compared with an issuance as in the corresponding period of 2015. In the twelve-month period for an amount of $49 million in the corresponding period of 2015. ended December 31, 2016, the Corporation received dividends from IGM of $333 million, the same as in the corresponding period of 2015. The Corporation’s investing activities during the twelve-month period ended December 31, 2016 represented a net outflow of $43 million, compared with a net outflow of $18 million in the corresponding period of 2015. 34 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTReview of Financial Performance Capital Management As a holding company, Power Financial’s objectives in managing its capital capital plans. The Board of Directors of the Corporation reviews and approves 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 capital markets. The Corporation manages its capital taking into consideration the risk characteristics and liquidity of its holdings. In order to maintain or adjust its capital structure, the Corporation may adjust the amount of dividends paid to shareholders, return capital to shareholders or issue capital. capital transactions such as the issuance, redemption and repurchase of common shares, perpetual preferred shares and debentures. The boards of directors of the Corporation’s subsidiaries, as well as those of Pargesa and GBL, are responsible for their respective company’s capital management. The Corporation has 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 The Board of Directors of the Corporation is responsible for capital a relatively low level of debt. management. Management of the Corporation is responsible for establishing capital management procedures and for implementing and monitoring its 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 accounted for 81% of consolidated capitalization at December 31, 2016. DECEMBER 31 2016 2015 DEBENTURES AND OTHER DEBT INSTRUMENTS Power Financial Lifeco IGM Consolidation adjustments PREFERRED SHARES Power Financial Lifeco IGM EQUITY Common shareholders’ equity Non-controlling interests [1] 250 5,980 1,325 (42) 7,513 2,580 2,514 150 5,244 16,901 10,071 26,972 39,729 250 5,395 1,325 (43) 6,927 2,580 2,514 150 5,244 16,893 10,143 27,036 39,207 [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. In January 2017, IGM issued $400 million of 10-year 3.44% debentures and $200 million of 30-year 4.56% debentures. The net proceeds will be used RATINGS The current rating by Standard & Poor’s (S&P) of the Corporation’s debentures by IGM to assist its subsidiary, Mackenzie Investments, in financing a is “A+” with a stable outlook. Dominion Bond Rating Service’s (DBRS) current substantial portion of the acquisitions of a 13.9% interest in China AMC, rating on the Corporation’s debentures is “A (High)” with a stable rating trend. a fund management company in China, and for general corporate purposes. Credit ratings are intended to provide investors with an independent measure On February 8, 2017, Irish Life Assurance, a subsidiary of Lifeco, redeemed its of the credit quality of the securities of a corporation and are indicators 5.25% €200 million subordinated debenture notes at their principal amount of the likelihood of payment and the capacity of a corporation to meet its together with accrued interest. The Corporation is not subject to externally imposed regulatory capital requirements; however, Lifeco and certain of its main subsidiaries and IGM’s subsidiaries are subject to regulatory capital requirements. 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 of a specific security for a particular investor. The ratings also may not reflect the potential impact of all risks on the value of securities and are subject to revision or withdrawal at any time by the rating organization. 35 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTReview of Financial Performance The “A+” rating assigned to the Corporation’s debentures by S&P is the fifth The “A (High)” rating assigned to the Corporation’s debentures by DBRS is the highest of the 22 ratings used for long-term debt. A long-term debenture fifth highest of the 26 ratings used for long-term debt. A long-term debenture rated “A+” is somewhat more susceptible to the adverse effects of changes rated “A (High)” implies that the capacity for the repayment is substantial, in circumstances and economic conditions than obligations in higher-rated but of lesser credit quality than AA, and may be vulnerable to future events, categories; however, the obligor’s capacity to meet its financial commitment although qualifying negative factors are considered manageable. on the obligation is still strong. Risk Management Power Financial is a holding company that holds substantial interests in the have often been unrelated to the operating performance, underlying asset financial services sector through its controlling interest in each of Lifeco values or prospects of such companies. These factors may cause decreases and IGM. As a result, the Corporation bears the risks associated with being in asset values that are deemed to be significant or prolonged, which may a significant shareholder of these operating companies. The respective result in impairment charges. In periods of increased levels of volatility and boards of directors of Lifeco, IGM, Pargesa and GBL are responsible for the risk related market turmoil, Power Financial subsidiaries’ operations could be oversight function at their respective companies. The risk committee of the adversely impacted and the trading price of Power Financial’s securities may board of directors of Lifeco is responsible for its risk oversight, and the board be adversely affected. of directors of IGM provides oversight and carries out its risk management 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. These risks relate to credit, liquidity and market risk as described in Pargesa’s consolidated financial statements for the year ended December 31, 2016. The Corporation believes that a prudent approach to risk is achieved through a governance model that focuses on the active oversight of its investments. The Board of Directors of the Corporation has overall responsibility for operational risks associated with financial instruments and for monitoring management’s implementation and maintenance of policies and controls to manage risks associated with the Corporation’s business as a holding company. LAWS, RULES AND REGULATIONS There are many laws, governmental rules and regulations, and stock exchange rules that apply to the Corporation. Changes in these laws, rules and regulations, or their interpretation by governmental agencies or the courts, could have a significant effect on the business and the financial condition of the Corporation. The Corporation, in addition to complying with these laws, rules and regulations, must also monitor them closely so that changes therein are taken into account in the management of its activities. CYBERSECURITY The Corporation is exposed to risks relating to cybersecurity, in particular cyber threats, which include cyber-attacks such as, but not limited to, hacking, computer viruses, unauthorized access to confidential, proprietary or sensitive information or other breaches of network or Information Technology The Board of Directors provides oversight and carries out its risk management (“IT”) security, which are constantly evolving. The Corporation continues to mandate primarily through the following committees: ▪ The Audit Committee addresses risks related to financial reporting and cybersecurity. ▪ The Compensation Committee considers risks associated with the Corporation’s compensation policies and practices. ▪ The Governance and Nominating Committee oversees the Corporation’s approach to appropriately address potential risks related to governance matters. ▪ The Related Party and Conduct Review Committee considers the risks related to transactions with related parties of the Corporation. There are certain risks inherent in an investment in the securities of the Corporation and in the activities of the Corporation, including the following monitor and enhance its defences and procedures to prevent, detect, respond to and manage cybersecurity threats. Consequently, the Corporation’s IT defences are continuously monitored and adapted to both prevent and detect cyber-attacks, and then recover and remediate. Unavailability or breaches could result in a negative impact on the Corporation’s financial results or result in reputational damage. 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 liquidity risk, credit risk and market risk. ▪ Liquidity risk is the risk that the Corporation will not be able to meet all risks and others discussed elsewhere in this review of financial performance, cash outflow obligations as they come due. which investors should carefully consider before investing in securities of the ▪ Credit risk is the potential for financial loss to the Corporation if a Corporation. The following is a review of certain risks that could impact the counterparty in a transaction fails to meet its obligations. 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. ▪ 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 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 equity price risk. ▪ Currency risk relates to the Corporation operating in different currencies and converting non-Canadian earnings at different points in time at different foreign exchange levels when adverse changes in foreign adversely affect Power Financial and its subsidiaries, including fluctuations currency exchange rates occur. in foreign exchange, inflation and interest rates, as well as monetary policies, ▪ Interest rate risk is the risk that the fair value of future cash flows of a business investment and the health of capital markets in Canada, the United financial instrument will fluctuate because of changes in the market States and Europe. In recent years, financial markets have experienced interest rates. significant price and volume fluctuations that have affected the market prices of equity securities held by the Corporation and its subsidiaries and that ▪ Equity price risk is the uncertainty associated with the valuation of assets arising from changes in equity markets. 36 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTReview of Financial Performance Liquidity Risk As a holding company, Power Financial’s ability to meet its obligations, Fixed income securities, which are included in investments and in cash and cash equivalents, consist primarily of bonds, bankers’ acceptances and including payment of interest, other operating expenses and dividends, highly liquid temporary deposits with Canadian chartered banks and banks and to complete current or desirable future enhancement opportunities or in jurisdictions where Power Financial operates as well as bonds and short- acquisitions generally depends upon dividends from its principal subsidiaries term securities of, or guaranteed by, the Canadian or U.S. governments. (Lifeco and IGM) and Pargesa, and its ability to raise additional capital. Power Financial regularly reviews the credit ratings of its counterparties. Dividends to shareholders of Power Financial will be dependent on the The maximum exposure to credit risk on these financial instruments is their operating performance, profitability, financial position and creditworthiness carrying value. 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 Derivatives continue to be used on a basis consistent with the risk management guidelines of Power Financial and are monitored by the Corporation for effectiveness as economic hedges even if specific hedge accounting requirements are not met. Power Financial regularly reviews the credit ratings of derivative financial instrument counterparties. Derivative contracts are over-the-counter with counterparties that are highly rated that solvency and capital ratios be maintained. The payment of interest and financial institutions. dividends by IGM’s principal subsidiaries is subject to corporate laws and regulations which require that solvency standards be maintained. In addition, certain subsidiaries of IGM must also comply with capital and liquidity requirements established by regulatory authorities. Power Financial’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, 2015. Power Financial regularly reviews its liquidity requirements and seeks to maintain a sufficient level of liquidity to meet its operating expenses, Market Risk Power Financial’s financial instruments are comprised of cash and cash financing charges and payment of preferred share dividends for a reasonable equivalents, fixed income securities, derivatives and debentures. period of time. The ability of Power Financial to arrange additional financing in the future will depend in part upon prevailing market conditions as well as C U R R EN C Y R I S K 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, dividend paying capability and financial condition, and further enhancement opportunities or acquisitions. 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, 2016, approximately 90% of Power Financial’s cash and cash equivalents and fixed income securities were denominated in Power Financial’s management of liquidity risk has not changed materially Canadian dollars. since December 31, 2015. 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. 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. EQ U IT Y P R I C E R I S K Power Financial’s financial instruments do not have significant exposure to equity price risk. Power Financial’s management of financial instruments risk has not changed materially since December 31, 2015. Lifeco’s and IGM’s management of financial instruments risk has also not changed materially since December 31, 2015. For a further discussion of Power Financial’s, Lifeco’s and IGM’s financial instruments risk management, refer to Note 21 to the Corporation’s 2016 Consolidated Financial Statements. Financial Instruments and Other Instruments FAIR VALUE MEASUREMENT Fair value represents the amount that would be exchanged in an arm’s-length ▪ Level 1  inputs utilize observable, unadjusted quoted prices in active transaction between willing parties and is best evidenced by a quoted market markets for identical assets or liabilities that the Corporation has the price, if one exists. Fair values represent management’s estimates and are ability to access. 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. The Corporation’s assets and liabilities recorded at fair value and those for which fair value is disclosed have been categorized based upon the following ▪ 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, market activity for the asset or liability. fair value hierarchy: 37 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTReview of Financial Performance In certain cases, the inputs used to measure fair value may fall into The following table presents the carrying amounts and fair value of the different levels of the fair value hierarchy. In such cases, the level in the fair Corporation and its subsidiaries’ assets and liabilities recorded or disclosed at value hierarchy within which the fair value measurement falls has been fair value. The table distinguishes between assets and liabilities recorded on a determined based on the lowest level input that is significant to the fair recurring basis and those for which fair value is disclosed. The table excludes value measurement. The Corporation and its subsidiaries’ assessment of fair value information for financial assets and financial liabilities not measured the significance of a particular input to the fair value measurement requires at fair value if the carrying amount is a reasonable approximation of the fair judgment and considers factors specific to the asset or liability. value. Items excluded are: cash and cash equivalents, dividends, interest AT DECEMBER 31 ASSETS 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 Funds held by ceding insurers Derivative instruments Other assets Assets disclosed at fair value Bonds Loans and receivables Mortgage loans Loans and receivables Shares Available for sale [1] Total assets recorded or disclosed at fair value LIABILITIES Liabilities recorded at fair value Investment contract liabilities Derivative instruments Other liabilities Liabilities disclosed at fair value Obligations to securitization entities Debentures and other debt instruments Capital trust debentures Deposits and certificates Total liabilities recorded or disclosed at fair value and accounts receivable, loans to policyholders, certain other financial assets, accounts payable, dividends and interest payable and certain other financial liabilities. CARRYING VALUE 2016 FAIR VALUE CARRYING VALUE 2015 FAIR VALUE 88,283 11,819 88,283 11,819 86,460 12,014 86,460 12,014 339 339 384 384 7,673 182 4,340 8,605 572 516 7,673 182 4,340 8,605 572 516 6,692 63 5,237 13,652 520 599 6,692 63 5,237 13,652 520 599 122,329 122,329 125,621 125,621 16,970 18,484 16,905 18,253 29,295 30,418 29,029 30,712 376 376 534 534 46,641 49,278 46,468 49,499 168,970 171,607 172,089 175,120 2,009 2,050 10 4,069 7,721 7,513 161 471 15,866 19,935 2,009 2,050 10 4,069 7,873 8,313 212 472 16,870 20,939 2,253 2,682 4 2,253 2,682 4 4,939 4,939 7,092 6,927 161 310 14,490 19,429 7,272 7,964 215 312 15,763 20,702 [1] Fair value of certain shares available for sale cannot be reliably measured, therefore these investments are recorded at cost. See Note  26 to the Corporation’s  2016 Consolidated Financial Statements for additional disclosure of the Corporation’s fair value measurement at December 31, 2016. 38 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTReview of Financial Performance DERIVATIVE FINANCIAL INSTRUMENTS In the course of their activities, the Corporation and its subsidiaries use operating policies, guidelines and procedures relating to the use of derivative derivative financial instruments. When using such derivatives, they only act financial instruments, which in particular focus on: as limited end-users and not as market makers in such derivatives. ▪ prohibiting the use of derivative instruments for speculative purposes; The use of derivatives is monitored and reviewed on a regular basis by senior management of the Corporation and by senior management of its subsidiaries. The Corporation and its subsidiaries have each established ▪ documenting transactions and ensuring their consistency with risk management policies; ▪ 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, 2016. The following table provides a summary of the Corporation and its subsidiaries’ derivatives portfolio: DECEMBER 31 Power Financial Lifeco IGM 2016 2015 NOTIONAL 14 17,229 4,094 21,337 MA XIMUM CREDIT RISK TOTAL FAIR VALUE 1 528 43 572 1 (1,484) 5 (1,478) NOTIONAL 11 16,712 2,702 19,425 MA XIMUM CREDIT RISK TOTAL FAIR VALUE 1 461 58 520 1 (2,163) − (2,162) In 2016, there was an increase of $1.9 billion in the notional amount outstanding and an increase in the maximum credit risk (this represents the market value of instruments in a gain position), primarily as a result of regular hedging activities, partially offset by the impact of currency movement for foreign- denominated derivatives as the Canadian dollar strengthened against the British pound, euro and U.S. dollar. See Note 25 to the Corporation’s 2016 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 its reinsurance business, Lifeco provides letters may enter into certain agreements, the nature of which precludes the of credit to other parties or beneficiaries. A beneficiary will typically hold possibility of making a reasonable estimate of the maximum potential a letter of credit as collateral in order to secure statutory credit for insurance amount the Corporation or subsidiary could be required to pay third parties, and investment contract liabilities ceded to or amounts due from Lifeco. as some of these agreements do not specify a maximum amount and Lifeco may be required to seek collateral alternatives if it is unable to renew the amounts are dependent on the outcome of future contingent events, existing letters of credit on maturity. See Note 31 to the Corporation’s 2016 the 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. 39 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTReview of Financial Performance Commitments and Contractual Obligations PAYMENTS DUE BY PERIOD Debentures and other debt instruments [1] Obligations to securitization entities Capital trust debentures Deposits and certificates Operating leases [2] Purchase obligations [3] Pension contributions [4] Contractual commitments [5] Total Power Financial [6] Lifeco IGM [7] Total LESS THAN 1 YEAR 1–5 YEARS MORE THAN 5 YEARS 712 1,340 − 462 147 108 324 1,084 4,177 7 2,292 1,878 4,177 1,225 6,311 − 7 383 172 − 88 5,609 70 150 2 317 3 − − 8,186 6,151 6 1,252 6,928 8,186 251 5,028 872 6,151 TOTAL 7,546 7,721 150 471 847 283 324 1,172 18,514 264 8,572 9,678 18,514 [1] Please refer to Note 14 to the Corporation’s 2016 Consolidated Financial Statements for further information. [2] Includes office space and equipment used in the normal course of business. Lease payments are charged to operations over the period of use. [3] Purchase obligations are commitments of Lifeco to acquire goods and services, 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. [7] Subsequent to year-end, IGM issued $400 million of 10-year 3.44% debentures and $200 million of 30-year 4.56% debentures. Income Taxes (Non-Consolidated Basis) The Corporation had, at December 31, 2016, non-capital losses of $99 million available to reduce future taxable income (including capital gains). These losses expire from 2028 to 2036. In addition, the Corporation has capital losses of $84 million that can be used indefinitely. Capital losses can only be used 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 administrative services, (ii) distributing insurance products and (iii) the sale of 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 and are reviewed by the appropriate those transactions that it deems appropriate and that are done at market related party and conduct review committee. terms and conditions. In 2013, the Board of Directors of the Corporation approved a tax loss In the normal course of business, Great-West Life and Putnam enter into consolidation program with IGM. This program allows Power Financial to various transactions with related companies which include providing group generate sufficient taxable income to use its non-capital losses which would insurance benefits and sub-advisory services to other companies within the otherwise expire, while IGM receives tax deductions which are used to reduce Power Financial group of companies. Such transactions are at market terms its taxable income. and conditions. These transactions are reviewed by the appropriate related party and conduct review committee. As of December 31, 2016, under this program, the Corporation owned $2 billion of 4.50% secured debentures of IGM. These debentures represent the Lifeco provides asset management and administrative services for employee consideration obtained from the sale to IGM of $2 billion of 4.51% preferred benefit plans relating to pension and other post-employment benefits shares issued to Power Financial from a wholly owned subsidiary. The for employees of Power Financial, and Lifeco and its subsidiaries. These Corporation has legally enforceable rights to settle these financial instruments transactions are at market terms and conditions and are reviewed by the on a net basis and the Corporation intends to exercise these rights. appropriate related party and conduct review committee. See Note 29 to the Corporation’s 2016 Consolidated Financial Statements for more information. 40 POWER FINANCIAL CORPORATION 2016 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 – are FAIR VALUE MEASUREMENT The carrying values of financial assets necessarily reflect the prevailing market required to make significant judgments, estimates and assumptions that liquidity and the liquidity premiums embedded in the market pricing methods affect the reported amounts of assets, liabilities, net earnings, comprehensive that the Corporation and its subsidiaries rely upon. income and related disclosures. Key sources of estimation uncertainty and areas where significant judgments are made by the management of the Corporation and the managements of its subsidiaries include: the entities to be consolidated, insurance and investment contract liabilities, fair value measurements, investment impairment, goodwill and intangible assets, income taxes and employee future benefits. These are described in the Notes to the Corporation’s 2016 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 subsidiaries or other structured entities 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 their power to affect variable returns. INSURANCE AND INVESTMENT CONTRACT LIABILITIES Insurance contract liabilities represent the amounts required, in addition 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. Bonds at fair value through profit or loss and available for sale 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. to future premiums and investment income, to provide for future benefit The Corporation and its subsidiaries estimate the fair value of bonds not payments, policyholder dividends, commission and policy administrative traded in active markets by referring to actively traded securities with similar expenses for all insurance and annuity policies in force with Lifeco. The attributes, dealer quotations, matrix pricing methodology, discounted cash Appointed Actuaries of Lifeco’s subsidiaries are responsible for determining flow analyses and/or internal valuation models. This methodology considers the amount of the liabilities in order to make appropriate provisions for Lifeco’s factors such as the issuer’s industry, the security’s rating, term, coupon rate obligations to policyholders. The Appointed Actuaries determine the liabilities and position in the capital structure of the issuer, as well as yield curves, credit for insurance and investment contracts using generally accepted actuarial curves, prepayment rates and other relevant factors. For bonds that are not practices, according to the standards established by the Canadian Institute traded in active markets, valuations are adjusted to reflect illiquidity, and such of Actuaries. The valuation uses the Canadian Asset Liability Method (CALM). adjustments are generally based on available market evidence. In the absence This method involves the projection of future events in order to determine of such evidence, management’s best estimate is used. 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 assurance that insurance contract liabilities cover a range of possible outcomes. Margins are reviewed periodically for continued appropriateness. Investment contract liabilities are measured at fair value 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 2016 Consolidated Financial Statements. Shares at fair value through profit or loss and available for sale Fair values for publicly traded shares are generally determined by the last bid price for the security from the exchange where it is principally traded. Fair values for shares for which there is no active market are typically based upon alternative valuation techniques such as discounted cash flow analysis, review of price movement relative to the market and utilization of information provided by the underlying investment manager. 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 profit or loss and available-for-sale portfolios. Mortgage loans and bonds classified as loans and receivables 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 for similar instruments. Valuation inputs typically include benchmark yields and risk-adjusted spreads based on current lending activities and market activity. 41 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTReview of Financial Performance Investment properties Fair values for investment properties are determined using independent qualified appraisal services and include adjustments by Lifeco management PENSION PLANS AND OTHER POST-EMPLOYMENT BENEFITS The Corporation and its subsidiaries maintain funded defined benefit for material changes in proper ty cash flows, capital expenditures pension plans for certain employees and advisors, unfunded supplementary or general market conditions in the interim period between appraisals. employee retirement plans (SERP) for certain employees, and unfunded post- The determination of the fair value of investment properties requires the use employment health, dental and life insurance benefits to eligible employees, of estimates including future cash flows (such as future leasing assumptions, advisors and their dependants. The Corporation’s subsidiaries also maintain rental rates, capital and operating expenditures) and discount, reversionary defined contribution pension plans for eligible employees and advisors. 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 reporting period to determine whether there is any objective evidence that 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 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. The defined benefit pension plans provide pensions based on length of service and final average earnings. Expenses for defined benefit plans are actuarially determined using the projected unit credit method prorated on service based upon management of the Corporation and of 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. ▪ The Corporation and its subsidiaries determine the net interest component of the pension expense for the period by applying the discount rate used to measure the accrued benefit liability at the beginning of the annual period to the net accrued benefit liability. The discount rate used to value liabilities is determined by reference to market yields on high-quality corporate bonds. ▪ If the plan benefits are changed, or a plan is curtailed, any past service costs or curtailment gains or losses are recognized immediately in net earnings. For impaired mortgage loans and bonds classified as loans and receivables, provisions are established or impairments recorded to adjust the carrying ▪ Net interest costs, current service costs, past service costs and curtailment gains or losses are included in operating and administrative expenses. value to the net realizable amount. Wherever possible the fair value of ▪ Remeasurements arising from defined benefit plans represent actuarial collateral underlying the loans or observable market price is used to establish gains and losses, and the actual return on plan assets, less interest calculated net realizable value. For impaired available-for-sale bonds, the accumulated at the discount rate and changes in the asset ceiling. Remeasurements are loss recorded in other comprehensive income is reclassified to net investment recognized immediately through other comprehensive income and are not income. Impairments on available-for-sale debt instruments are reversed if reclassified to net earnings. 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 to net investment income. ▪ The accrued benefit asset (liability) represents the plan surplus (deficit). ▪ Payments to the defined contribution plans are expensed as incurred. Impairment losses on available-for-sale shares are recorded to net investment INCOME TAXES income if the loss is significant or prolonged. Subsequent losses are also recorded directly in net investment income. GOODWILL AND INDEFINITE LIFE INTANGIBLES IMPAIRMENT TESTING Goodwill and indefinite life intangible assets are tested for impairment 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 annually or more frequently if events indicate that impairment may have balance sheet date. Current tax assets and current tax liabilities are offset if occurred. Indefinite life intangible assets that were previously impaired are a legally enforceable right exists to offset the recognized amounts and the reviewed at each reporting date for evidence of reversal. entity intends either to settle on a net basis or to realize the assets and settle Goodwill and indefinite life intangible assets have been allocated to cash the liabilities simultaneously. generating units or to groups of cash generating units (CGU), representing A provision for tax uncertainties which meets the probable threshold for the lowest level that the assets are monitored for internal reporting purposes. recognition is measured based on the probability-weighted average approach. 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 amount exceeds its recoverable amount. The recoverable amount is the higher of the asset’s fair value less cost of disposal or value in use, which is calculated using the present value of estimated future cash flows expected to be generated. 42 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTReview of Financial Performance Deferred income tax Deferred income tax is the tax expected to be payable or recoverable on Deferred tax assets and liabilities are measured at the tax rates expected to apply in the year when the asset is realized or the liability is settled, based on differences arising between the carrying amounts of assets and liabilities tax rates and tax laws that have been enacted or substantively enacted at the in the financial statements and the corresponding tax basis used in the balance sheet date. Deferred tax assets and deferred tax liabilities are offset computation of taxable income and on unused tax attributes, and is if a legally enforceable right exists to net current tax assets against current accounted for using the balance sheet liability method. Deferred tax liabilities tax liabilities and the deferred taxes relate to the same taxable entity and the are generally recognized for all taxable temporary differences and deferred same taxation authority. 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. 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 Recognition of a deferred tax asset is based on the fact that it is probable tax asset to be utilized. Unrecognized deferred tax assets are reassessed that the entity will have taxable profits and/or tax planning opportunities at each balance sheet date and are recognized to the extent that it has available to allow the deferred income tax asset to be utilized. Changes in become probable that future taxable profits will allow the deferred tax asset circumstances in future periods may adversely impact the assessment of to be recovered. the recoverability. The uncertainty of the recoverability is taken into account in establishing the deferred income tax assets. The Corporation and its subsidiaries’ financial planning process provides a significant basis for the measurement of deferred income tax assets. Deferred tax liabilities are recognized for taxable temporary differences 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. There were no changes to the Corporation’s accounting policies for the year ended December 31, 2016. Changes in Accounting Policies Future Accounting Changes The Corporation and its subsidiaries continuously monitor the potential changes proposed by the International Accounting Standards Board (IASB) and analyze the effect that changes in the standards may have on their consolidated financial statements when they become effective. IFRS 17 – INSURANCE CONTRACTS (Exposure Draft) In June 2013, the IASB issued a revised IFRS 4, Insurance Contracts exposure IFRS 4 – INSURANCE CONTRACTS In September 2016, the IASB issued an amendment to the existing IFRS 4. draft proposing changes to the accounting standard for insurance contracts. The amendment “Applying IFRS 9, Financial Instruments with IFRS 4, Insurance The intent of the revised standard is to eliminate inconsistencies by providing Contracts” provides qualifying insurance companies with two options to a single principle-based framework to account for all types of insurance address the potential volatility associated with implementing IFRS 9 before contracts, including reinsurance. The new standard will also provide the new proposed insurance contract standard is effective. The two options requirements for presentation and disclosure items to enhance comparability are as follows: between entities. IFRS 17 will replace IFRS 4 in its entirety and is expected to be issued in the first half of 2017 with a proposed effective date of January 1, 2021. ▪ Deferral Approach: provides the option to defer implementation of IFRS 9 until the year 2021 or the effective date of the new insurance contract During 2016, at the request of the IASB, Lifeco participated in additional standard, whichever is earlier; or field testing of the exposure draft to address potential interpretation and operational challenges. The proposed standard differs significantly from Lifeco’s current accounting and actuarial practices under the Canadian Asset Liability Method (CALM). 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. ▪ Overlay Approach: provides the option to recognize the volatility that could arise when IFRS 9 is applied within other comprehensive income, rather than profit or loss. The Corporation and Lifeco qualify for the amendment and will be applying the deferral approach to adopt both IFRS 9 and the new insurance contract standard simultaneously on January 1, 2021. 43 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTReview of Financial Performance 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 IFRS 15 – REVENUE FROM CONTRACTS WITH CUSTOMERS The IASB issued IFRS 15, Revenue from Contracts with Customers, which provides financial instruments. The standard was completed in three separate phases: a single model for entities to use in accounting for revenue arising from ▪ 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. As the Corporation will apply the deferral approach as noted above, the standard will be effective for the Corporation on January 1, 2021. 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. The Corporation and its subsidiaries do not anticipate the adoption of this standard will have a significant impact; however, it is not possible as yet to provide a reliable estimate of the impact on the Corporation’s financial statements. IFRS 16 – LEASES 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. Disclosure Controls and Procedures Based on their evaluations as at December 31, 2016, the Chief Executive Officer and Chief Financial Officer have concluded that the Corporation’s disclosure controls and procedures were effective as at December 31, 2016. 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, 2016, in accordance with IFRS. The Corporation’s management is responsible 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, 2016. 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, 2016 which have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting. 44 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTReview of Financial Performance Selected Annual Information FOR THE YEARS ENDED DECEMBER 31 Total revenues Adjusted net 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 [2] Book value per common share [2] Number of common shares outstanding [millions] Dividends per share [declared] Common shares First preferred shares Series A [3] Series D Series E Series F Series H Series I Series K Series L Series O Series P [4] Series Q [4] Series R Series S Series T [5] 2016 49,122 2,105 2.95 1,919 2.69 2.68 418,586 23,229 7,513 19,481 23.69 713.3 1.5700 0.4725 1.3750 1.3125 1.4750 1.4375 1.5000 1.2375 1.2750 1.4500 0.5765 0.5252 1.3750 1.2000 1.0500 2015 36,512 2,241 3.14 2,319 3.25 3.24 417,630 22,400 6,927 19,473 23.69 713.2 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 16,942 20.19 711.7 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 [1] Adjusted net earnings and adjusted net 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] 2015 and 2014 figures have been retrospectively adjusted as described in Note 16 to the Corporation’s 2016 Consolidated Financial Statements. [3] 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. [4] 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. [5] Issued in December 2013. The first dividend payment was made on April 30, 2014 in the amount of $0.4027 per share. 45 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORT2016 2015 [NOTE 16] 4,396 4,188 117,072 29,634 8,231 4,340 8,467 167,744 10,781 5,627 3,103 1,128 572 7,685 1,907 5,966 9,274 200,403 418,586 115,379 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 9,210 198,194 417,630 155,940 158,492 2,009 7,721 7,513 2,050 8,636 2,098 200,403 386,370 2,580 805 14,849 1,247 19,481 12,735 32,216 418,586 2,253 7,092 6,927 2,682 7,686 2,024 198,194 385,350 2,580 804 14,206 1,883 19,473 12,807 32,280 417,630 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] Obligations 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 Signed, R. Jeffrey Orr Director POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTConsolidated Financial Statements Consolidated Statements of Earnings FOR THE YEARS ENDED DECEMBER 31 [IN MILLIONS OF CANADIAN DOLL ARS, EXCEPT PER SHARE AMOUNTS] 2016 2015 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 Net investment income 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 (losses) 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 35,050 (3,925) 31,125 6,297 3,906 10,203 7,794 49,122 28,315 (2,103) 26,212 1,502 6,961 34,675 3,590 6,380 412 45,057 4,065 (98) 3,967 581 3,386 1,343 124 1,919 3,386 2.69 2.68 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 POWER FINANCIAL CORPOR ATION 2016 ANNUAL REPORT 47 Consolidated Financial Statements Consolidated Statements of Comprehensive Income FOR THE YEARS ENDED DECEMBER 31 [IN MILLIONS OF CANADIAN DOLL ARS] Net earnings Other comprehensive income (loss) Items that may be reclassified subsequently to net earnings Net unrealized gains (losses) on available-for-sale assets Unrealized gains (losses) Income tax (expense) benefit Realized (gains) losses transferred to net earnings Income tax expense (benefit) Net unrealized gains (losses) on cash flow hedges Unrealized gains (losses) Income tax (expense) benefit Realized (gains) losses transferred to net earnings Income tax expense (benefit) Net unrealized foreign exchange gains (losses) on translation of foreign operations Unrealized gains (losses) on translation Unrealized gains (losses) on euro debt designated as hedge of net investments in foreign operations Income tax (expense) benefit Share of other comprehensive income of jointly controlled corporations and associates Total – items that may be reclassified Items that will not be reclassified subsequently to net earnings Actuarial gains (losses) on defined benefit plans [Note 24] Income tax (expense) benefit Share of other comprehensive income of jointly controlled corporations and associates Total – items that will not be reclassified Other comprehensive income (loss) Comprehensive income ATTRIBUTABLE TO Non-controlling interests Perpetual preferred shareholders Common shareholders 2016 3,386 117 (11) (81) 12 37 107 (40) 2 (1) 68 (1,471) 42 (6) (1,435) 367 (963) (237) 60 1 (176) (1,139) 2,247 855 124 1,268 2,247 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 48 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTConsolidated Financial Statements Consolidated Statements of Changes in Equity FOR THE YEAR ENDED DECEMBER 31, 2016 [IN MILLIONS OF CANADIAN DOLL ARS] PERPETUAL PREFERRED SHARES COMMON SHARES RETAINED EARNINGS SHARE-BASED COMPENSATION OTHER COMPREHENSIVE INCOME [NOTE 27] NON- CONTROLLING INTERESTS TOTAL TOTAL EQUIT Y STATED CAPITAL RESERVES Balance, beginning of year 2,580 804 14,206 142 1,741 1,883 12,807 32,280 Net earnings Other comprehensive income (loss) Comprehensive income (loss) Dividends to shareholders Perpetual preferred shares Common shares Dividends to non-controlling interests Share-based compensation [Note 18] Stock options exercised Effects of changes in ownership of subsidiaries, capital and other – – – – – – – – – – – – – – – – 1 – 2,043 – 2,043 (124) (1,120) – – – (156) Balance, end of year 2,580 805 14,849 – – – – – – 59 (44) – 157 – (651) (651) – – – – – – – (651) (651) – – – 59 (44) 1,343 (488) 855 – – (708) 22 44 3,386 (1,139) 2,247 (124) (1,120) (708) 81 1 – (285) (441) 1,090 1,247 12,735 32,216 FOR THE YEAR ENDED DECEMBER 31, 2015 [IN MILLIONS OF CANADIAN DOLL ARS] Balance, beginning of year As previously reported Adjustment [Note 16] Restated balance Net earnings Other comprehensive income Comprehensive income Dividends to shareholders Perpetual preferred shares Common shares Dividends to non-controlling interests Share-based compensation [Note 18] Stock options exercised Effects of changes in ownership of subsidiaries, capital and other PERPETUAL PREFERRED SHARES 2,580 – 2,580 – – – – – – – – – Balance, end of year 2,580 STATED CAPITAL RESERVES COMMON SHARES RETAINED EARNINGS SHARE-BASED COMPENSATION OTHER COMPREHENSIVE INCOME [NOTE 27] NON- CONTROLLING INTERESTS TOTAL TOTAL EQUIT Y 743 – 743 – – – – – – – 61 – 804 13,164 (77) 13,087 2,449 – 2,449 (130) (1,063) – – – (137) 14,206 142 – 142 – – – – – – 48 (48) – 142 390 – 390 – 1,331 1,331 – – – – – 532 – 532 – 1,331 1,331 – – – 48 (48) 11,883 28,902 (45) (122) 11,838 28,780 1,337 616 1,953 – – (711) 19 36 3,786 1,947 5,733 (130) (1,063) (711) 67 49 20 1,741 20 (328) (445) 1,883 12,807 32,280 49 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTConsolidated Financial Statements Consolidated Statements of Cash Flows FOR THE YEARS ENDED DECEMBER 31 [IN MILLIONS OF CANADIAN DOLL ARS] OPERATING ACTIVITIES Earnings before income taxes Income tax paid, net of refunds received Adjusting items Change in insurance and investment contract liabilities Change in funds held by ceding insurers Change in funds held under reinsurance contracts Change in reinsurance assets Change in fair value through profit or loss Other FINANCING ACTIVITIES Dividends paid By subsidiaries to non-controlling interests Perpetual preferred shares Common shares Issue of common shares by the Corporation [Note 17] Issue of common shares by subsidiaries Repurchase of common shares by subsidiaries Issue of euro-denominated debt [Note 14] Changes in other debt instruments Change in obligations to securitization entities INVESTMENT ACTIVITIES Bond sales and maturities Mortgage loan repayments Sale of shares Investment property sales Change in loans to policyholders Business acquisitions, net of cash and cash equivalents acquired Investment in bonds Investment in mortgage loans Investment in shares Deposit for investment in China AMC [Note 9] Investment in investment properties and other Effect of changes in exchange rates on cash and cash equivalents Increase 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 2016 3,967 (442) 7,128 505 18 (567) (3,906) 197 6,900 (710) (125) (1,106) (1,941) 1 34 (423) 706 (23) 631 2015 4,465 (543) (1,088) 821 28 367 2,013 (280) 5,783 (715) (130) (1,046) (1,891) 49 113 (509) – (137) 336 (1,015) (2,039) 30,406 2,616 2,797 427 48 (33) (34,506) (3,847) (2,969) (193) (225) (5,479) (198) 208 4,188 4,396 5,817 521 29,591 2,926 2,274 206 8 (4) (32,491) (3,394) (2,551) – (409) (3,844) 299 199 3,989 4,188 5,881 533 50 POWER FINANCIAL CORPOR ATION 2016 ANNUAL REPORT Notes to the Consolidated Financial Statements ALL TABULAR AMOUNTS ARE IN MILLIONS OF CANADIAN DOLLARS, UNLESS OTHERWISE NOTED. Note 1 Corporate Information Power Financial Corporation (Power Financial or the Corporation) is a publicly The Consolidated Financial Statements (f inancial statements) of listed company (TSX: PWF) incorporated and domiciled in Canada whose Power Financial as at and for the year ended December 31, 2016 were approved registered address is 751 Victoria Square, Montréal, Québec, Canada, H2Y 2J3. by its Board of Directors on March 24, 2017. The Corporation is controlled by 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. Power Corporation of Canada. Note 2 Basis of Presentation and Summary of Significant Accounting Policies The financial statements of Power Financial as at December 31, 2016 have been The Corporation holds a 50% (50% at December 31, 2015) interest in Parjointco, prepared in accordance with International Financial Reporting Standards. a jointly controlled corporation that is considered to be a joint venture. BASIS OF PRESENTATION The financial statements include the accounts of Power Financial and all its subsidiaries on a consolidated basis after elimination of intercompany Parjointco holds a 55.5% (55.5% at December 31, 2015) equity interest in Pargesa. Accordingly, the Corporation accounts for its investment in Parjointco using the equity method. 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 USE OF SIGNIFICANT JUDGMENTS, ESTIMATES AND ASSUMPTIONS In the preparation of the financial statements, management of the those returns through its use of power over the entity. Subsidiaries of the Corporation and management of its subsidiaries are required to make Corporation are consolidated from the date of acquisition, being the date on significant judgments, estimates and assumptions that affect the reported which the Corporation obtains control, and continue to be consolidated until amounts of assets, liabilities, net earnings, comprehensive income and the date that such control ceases. The Corporation will reassess whether or related disclosures. Key sources of estimation uncertainty and areas where not it controls an entity if facts and circumstances indicate there are changes significant judgments have been made are listed below and are discussed to one or more of the elements of control listed above. throughout the notes in these financial statements, including: The operating subsidiaries of the Corporation are: ▪ Management consolidates all subsidiaries and entities in which it has ▪ Lifeco, a public company in which the Corporation and IGM Financial hold 67.9% and 4.0% of the common shares, respectively (67.4% and 4.0%, respectively at December 31, 2015). Lifeco’s major operating subsidiary companies are Great-West Life, Great-West Life & Annuity, London Life, Canada Life, Irish Life and Putnam. ▪ IGM Financial, a public company in which the Corporation and Great-West Life hold 61.5% and 3.8% of the common shares, respectively (60.4% and 3.8%, respectively at December 31, 2015). IGM’s major operating subsidiary companies are Investors Group and Mackenzie. These financial statements of Power Financial include the results of Lifeco and IGM Financial 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 Lifeco and IGM Financial, all as at and for the year ended December 31, 2016. The notes to Power Financial’s financial statements are derived from the notes to the determined that the Corporation has control. Control is evaluated according to the ability of the Corporation to direct the relevant activities of the subsidiaries or other structured entities in order to derive variable returns. Management of the Corporation and 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 their power to affect variable returns. ▪ The actuarial assumptions made by management of Lifeco, such as interest rates, inflation, policyholder behaviour, mortality and morbidity of policyholders, used in the valuation of insurance and certain investment contract liabilities in accordance with the Canadian Asset Liability Method (CALM), require significant judgment and estimation (Note 12). ▪ Management of Lifeco uses judgment to evaluate the classification of insurance and reinsurance contracts to determine whether these arrangements should be accounted for as insurance, investment or service contracts. financial statements of Lifeco and IGM Financial. ▪ In the determination of the fair value of financial instruments, management Jointly controlled corporations are entities in which unanimous consent is required for decisions relating to relevant activities. Associates are entities in which the Corporation exercises significant influence over the entity’s operating of the Corporation and of its subsidiaries exercise judgment in the determination of fair value inputs, particularly those items categorized within Level 3 of the fair value hierarchy (Note 26). and financial policies, without having control or joint control. Investments in ▪ Management of the Corporation and of its subsidiaries evaluate the jointly controlled corporations and associates are accounted for using the synergies and future benefits for initial recognition and measurement equity method. Under the equity method, the share of net earnings (losses), of goodwill and intangible assets, as well as testing for impairment. The other comprehensive income (loss) and the changes in equity of the jointly determination of the recoverable amount of the cash generating units (to controlled corporations and associates are recognized in the consolidated which goodwill and intangible assets are assigned) relies upon valuation statements of earnings, consolidated statements of comprehensive income methodologies that require the use of estimates (Note 10). and consolidated statements of changes in equity, respectively. POWER FINANCIAL CORPOR ATION 2016 ANNUAL REPORT 51 Notes to the Consolidated Financial Statements Note 2 Basis of Presentation and Summary of Significant Accounting Policies (continued) ▪ Cash generating units for which goodwill and indefinite life intangible assets have been determined by management of the Corporation and of Lifeco Premiums for all types of insurance contracts and contracts with limited its subsidiaries as the lowest level at which the assets are monitored for mortality or morbidity risk are generally recognized as revenue when due internal reporting purposes. Management of the Corporation and of its and collection is reasonably assured. subsidiaries use judgment in determining the lowest level of monitoring (Note 10). Investment property income includes rents earned from tenants under lease agreements and property tax and operating cost recoveries. Rental income ▪ The actuarial assumptions used in determining the expense and defined leases with contractual rent increases and rent-free periods are recognized on benefit obligation for the Corporation and its subsidiaries’ pension plans a straight-line basis over the term of the lease. Investment property income is and other post-employment benefits require significant judgment and included in net investment income in the statement of earnings. 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 used in determining the expense for the current year (Note 24). Fee income primarily includes fees earned from the management of segregated fund assets, proprietary mutual fund assets, fees earned on administrative services only for Group health contracts, commissions and fees earned from management services. Fee income is recognized when the service ▪ The Corporation and its subsidiaries operate within various tax jurisdictions is performed, the amount is collectible and can be reasonably estimated. 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 the carrying amounts of its tax assets and liabilities (Note 16). ▪ Management of the Corporation and of its subsidiaries assess the Lifeco has sub-advisor arrangements where Lifeco retains the primary obligation with the client. As a result, fee income earned is reported on a gross basis, with the corresponding sub-advisor expense recorded in operating and administrative expenses. recoverability of the deferred income tax asset carrying values based on future years’ taxable income projections and believe the carrying values IGM Financial Management fees are based on the net asset value of the investment fund or of the deferred income tax assets as of December 31, 2016 are recoverable other assets under management and are recognized on an accrual basis as the (Note 16). ▪ Legal and other provisions are recognized resulting from a past event which, in the judgment of management of the Corporation and of its subsidiaries, has resulted in a probable outflow of economic resources which would be passed onto a third party to settle the obligation. Management of the Corporation and of its subsidiaries use judgment to evaluate the possible outcomes and risks to determine the best estimate of the provision at the balance sheet date (Note 30). service is performed. Administration fees are also recognized on an accrual basis as the service is performed. Distribution fees derived from investment fund and securities transactions are recognized on a trade-date basis. Distribution fees derived from insurance and other financial services transactions are recognized on an accrual basis. These management, administration and distribution fees are included in fee income in the statements of earnings. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash, current operating accounts, ▪ Management of Lifeco uses independent qualified appraisal services overnight bank and term deposits and fixed income securities with an original to determine the fair value of investment properties, which include term to maturity of three months or less. 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 (Note 5). ▪ The determination by IGM’s management as to whether securitized 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 Lifeco management’s judgment that these investing activities are long term in nature. ▪ Management of Lifeco uses judgments to determine whether Lifeco retains the primary obligation with a client in sub-advisor arrangements. Where Lifeco retains the risks and benefits, revenues and expenses are recorded on a gross basis. ▪ The provision for future credit losses within Lifeco’s insurance contract liabilities is based on investment credit ratings. Lifeco’s practice is to use third-party independent credit ratings where available. Lifeco management’s judgment is required when setting credit ratings for instruments that do not have a third-party rating. INVESTMENTS Investments include bonds, mortgage loans, shares, investment properties, and loans to policyholders of Lifeco. Investments are classified as either fair value through profit or loss, available for sale, held to maturity, loans and receivables, or as non-financial instruments based on management’s intention relating to the purpose and nature of the instruments or the characteristics of the investments. The Corporation and its subsidiaries currently have not classified any investments as held to maturity. Investments in bonds (including fixed income securities), mortgage loans and shares normally actively traded on a public market or where fair value can be reliably measured 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. REVENUE RECOGNITION Interest income is accounted for on an accrual basis using the effective interest 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 method for bonds and mortgage loans. Dividend income is recognized earning investment income. 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). 52 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTNotes to the Consolidated Financial Statements Note 2 Basis of Presentation and Summary of Significant Accounting Policies (continued) Fair value through profit or loss investments are recorded at fair value on the S H A R E S AT FAI R VA LU E TH RO U G H P RO FIT Consolidated Balance Sheets (balance sheets) with realized and unrealized O R LOS S A N D AVAI L A B LE FO R SA LE gains and losses reported in the statements of earnings. Available-for-sale Fair values for publicly traded shares are generally determined by the last bid investments are recorded at fair value on the balance sheets with unrealized price for the security from the exchange where it is principally traded. Fair gains and losses recorded in other comprehensive income. Realized gains and values for shares for which there is no active market are typically based upon losses are reclassified from other comprehensive income and recorded to net alternative valuation techniques such as discounted cash flow analysis, review investment income in the statements of earnings when the available-for-sale of price movements relative to the market and utilization of information 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. provided by the underlying investment manager. 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 profit or loss and available-for-sale portfolios. Investment properties are real estate held to earn rental income or for M O RTGAG E LOA N S A N D B O N DS C L A S S I FI ED capital appreciation. Investment properties are initially measured at cost A S LOA N S A N D R EC EIVA B LE S and subsequently carried at fair value on the balance sheets. Changes in fair The fair values disclosed for bonds and mortgage loans, classified as loans value are recorded as net investment income in the statements of earnings. and receivables, are determined by discounting expected future cash flows Properties held to earn rental income or for capital appreciation that have using current market rates for similar instruments. Valuation inputs typically an insignificant portion that is owner occupied or where there is no intent to include benchmark yields and risk-adjusted spreads based on current lending occupy on a long-term basis are classified as investment properties. Properties activities and market activity. that do not meet these criteria are classified as owner-occupied properties. Loans to policyholders of Lifeco are classified as loans and receivables and measured at amortized cost. Loans to policyholders are shown at their unpaid principal balance and are fully secured by the cash surrender values of the policies. The carrying value of loans to policyholders approximates fair value. Fair value measurement 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 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 these liabilities, except when the bond has been deemed impaired. I N V E S TM ENT P RO P ERTI E S 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 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. Impairment Investments are reviewed regularly on an individual basis at the end of each reporting period to determine whether there is any objective evidence that The following is a description of the methodologies used to determine the investment is impaired. The Corporation and its subsidiaries consider 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 various factors in the impairment evaluation process, including, but not limited to, the financial condition of the issuer, specific adverse conditions affecting an industry or region, decline in fair value not related to interest rates, bankruptcy or defaults, and delinquency in payments of interest Fair values for bonds recorded at fair value through profit or loss or available or principal. 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 methodologies, discounted cash flow analyses and/or internal valuation models. These methodologies consider 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. 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 to net investment income. Impairment losses on available-for-sale shares are recorded to net investment income if the loss is significant or prolonged. Subsequent losses are also In the absence of such evidence, management’s best estimate is  used. recorded directly in net investment income. 53 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTNotes to the Consolidated Financial Statements Note 2 Basis of Presentation and Summary of Significant Accounting Policies (continued) Securities lending Lifeco engages in securities lending through its securities custodians as assets on these contracts do not have fixed maturity dates, their release generally being dependent on the run-off of the corresponding insurance lending agents. Loaned securities are not derecognized, and continue to be contract liabilities. reported within investments, as Lifeco retains substantial risks and rewards and economic benefits related to the loaned securities. 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. 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 On the liability side, funds held under reinsurance contracts consist mainly of amounts retained by Lifeco from ceded business written on a funds-withheld basis. Lifeco withholds assets related to ceded insurance contract liabilities in order to reduce credit risk. 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. 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 OTHER ASSETS Other assets include premiums in course of collection, accounts receivable, liable to its policyholders for the portion reinsured. Consequently, allowances prepaid expenses, deferred acquisition costs and miscellaneous other assets are made for reinsurance contracts which are deemed uncollectible. which are measured at amortized cost. Deferred acquisition costs relating to 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 investment contracts are recognized as assets if the costs are incremental and incurred due to the contract being issued. Deferred acquisition costs are amortized on a straight-line basis over the term of the policy, not exceeding settlements, as well as the reinsurance assets associated with insurance 20 years. 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. Any gains or losses on buying reinsurance are recognized in the statement of earnings immediately at the date of purchase in accordance with the CALM. 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. 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 risk is measured at the fair value of the underlying asset portfolio with the change in fair value recorded in net investment income. See Note 6 for funds held by ceding insurers that are managed by Lifeco. Other funds held by ceding insurers are general obligations of the cedant and serve as collateral for insurance contract liabilities assumed from cedants. Funds-withheld BUSINESS COMBINATIONS, GOODWILL AND INTANGIBLE ASSETS Business combinations are accounted for using the acquisition method. Goodwill represents the excess of purchase consideration over the fair value of net assets acquired. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Intangible assets comprise finite life and indefinite life intangible assets. Finite life intangible assets include the value of technology and software, certain customer contracts and deferred selling commissions. Finite life intangible assets are reviewed at least annually to determine if there are indicators of impairment and assessed as to whether the amortization period and method are appropriate. Intangible assets with finite lives are amortized on a straight- line basis over their estimated useful lives on the following basis: i) technology and software (3 to 10 years); and ii) customer contract-related (9 to 30 years). Commissions paid by IGM on the sale of certain investment funds are deferred and amortized over their estimated useful lives, not exceeding a period of 7 years. Commissions paid on the sale of deposits are deferred and amortized over their estimated useful lives, not exceeding a period of 5 years. When a client redeems units or shares in investment funds that are subject to a deferred sales charge, a redemption fee is paid by the client and is recorded as revenue by IGM. Any unamortized deferred selling commission asset recognized on the initial sale of these investment fund units or shares is recorded as a disposal. IGM regularly reviews the carrying value of deferred selling commissions with respect to any events or circumstances that indicate impairment. Among the tests performed by IGM to assess recoverability is the comparison of the future economic benefits derived from the deferred selling commission asset in relation to its carrying value. 54 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTNotes to the Consolidated Financial Statements Note 2 Basis of Presentation and Summary of Significant Accounting Policies (continued) Indefinite life intangible assets include brands, trademarks and trade Investment contracts are contracts that carry financial risk, which is the names, certain customer contracts, mutual fund management contracts risk of a possible future change in one or more of the following: interest rate, and the shareholders’ portion of acquired future participating account commodity price, foreign exchange rate, or credit rating. Refer to Note 21 for profit. Amounts are classified as indefinite life intangible assets based on a discussion on risk management. an analysis of all the relevant factors, and when there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows. The identification of indefinite life intangible assets is made by reference to relevant factors such as product life cycles, potential obsolescence, industry stability and competitive position. Following initial recognition, indefinite life intangible assets are measured at cost less accumulated impairment losses. 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 Impairment testing Goodwill and indefinite life intangible assets are tested for impairment determining the amount of the liabilities in order to make appropriate provisions for Lifeco’s obligations to policyholders. The Appointed Actuaries annually or more frequently if events indicate that impairment may have determine the liabilities for insurance and investment contracts using occurred. Indefinite life intangible assets that were previously impaired are generally accepted actuarial practices, according to the standards established reviewed at each reporting date for evidence of reversal. by the Canadian Institute of Actuaries. The valuation uses the CALM. This 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. method involves the projection of future events in order to determine the amount of assets that must be set aside currently to provide for all future obligations and involves a significant amount of judgment. Goodwill and indefinite life intangible assets are tested for impairment by In the computation of insurance contract liabilities, valuation assumptions comparing the carrying value of the CGU to the recoverable amount of the CGU have been made regarding rates of mortality and morbidity, investment to which the goodwill and indefinite life intangible assets have been allocated. returns, levels of operating expenses, rates of policy termination and rates of An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of the asset’s fair value less cost of disposal or value in use, which is calculated using the present value of estimated future cash flows expected to be generated. 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 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 for future deterioration in the best estimate assumptions and provide reasonable assurance that insurance contract liabilities cover a range of possible outcomes. Margins are reviewed periodically for continued appropriateness. Investment contract liabilities are measured at fair value determined using discounted cash flows utilizing the yield curves of financial instruments with presented separately in the balance sheets. The assets and liabilities are similar cash flow characteristics. set equal to the fair value of the underlying asset portfolio. Investment income and changes in fair value of the segregated fund assets are offset by corresponding changes in the segregated fund liabilities. INSURANCE AND INVESTMENT CONTRACT LIABILITIES 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. Contract classification When significant insurance risk exists, Lifeco’s products are classified 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 at contract inception as insurance contracts, in accordance with IFRS 4, fee revenue for financial assets that are derecognized are reported in net Insurance Contracts (IFRS 4). Significant insurance risk exists when Lifeco investment income in the statements of earnings. agrees to compensate policyholders or beneficiaries of the contract for specified uncertain future events that adversely affect the policyholder and If all or substantially all risks and rewards are retained, the financial assets are not derecognized and the transactions are accounted for as secured whose amount and timing is unknown. Refer to Note 12 for a discussion of financing transactions. insurance risk. In the absence of significant insurance risk, the contract is classified as an investment contract or service contract. Investment contracts with discretionary participating features are accounted for in accordance with IFRS 4 and investment contracts without discretionary participating features are accounted for in accordance with IAS 39, Financial Instruments: Recognition and Measurement. Lifeco has not classified any contracts as investment OTHER FINANCIAL LIABILITIES Debentures and other debt instruments, and capital trust debentures are initially recorded on the balance sheets at fair value and subsequently carried at amortized cost using the effective interest rate method with amortization expense recorded in financing charges in the statements of earnings. These liabilities are derecognized when the obligation is cancelled or redeemed. contracts with discretionary participating features. Accounts payable, dividends and interest payable, and deferred income Investment contracts may be reclassified as insurance contracts after inception if insurance risk becomes significant. A contract that is classified as an insurance contract at contract inception remains as such until all rights and obligations under the contract are extinguished or expire. reserves are measured at amortized cost. Deferred income reserves related to investment contracts are amortized on a straight-line basis to recognize the initial policy fees over the policy term, not exceeding 20 years. 55 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTNotes to the Consolidated Financial Statements Note 2 Basis of Presentation and Summary of Significant Accounting Policies (continued) PENSION PLANS AND OTHER POST-EMPLOYMENT BENEFITS The Corporation and its subsidiaries maintain funded defined benefit 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 pension plans for certain employees and advisors, unfunded supplementary in the financial statements and the corresponding tax basis used in the employee retirement plans (SERP) for certain employees, and unfunded post- computation of taxable income and on unused tax attributes, and is employment health, dental and life insurance benefits to eligible employees, accounted for using the balance sheet liability method. Deferred tax liabilities advisors and their dependants. The Corporation’s subsidiaries also maintain are generally recognized for all taxable temporary differences and deferred defined contribution pension plans for eligible employees and advisors. tax assets are recognized to the extent that it is probable that future taxable The defined benefit pension plans provide pensions based on length of service and final average earnings. Expenses for defined benefit plans are profits will be available against which deductible temporary differences and unused tax attributes can be utilized. actuarially determined using the projected unit credit method prorated on Recognition of deferred tax assets is based on the fact that it is probable service, based upon management of the Corporation and of its subsidiaries’ that the entity will have taxable profits and/or tax planning opportunities assumptions about discount rates, compensation increases, retirement ages available to allow the deferred income tax asset to be utilized. Changes in of employees, mortality and expected health care costs. Any changes in these circumstances in future periods may adversely impact the assessment of assumptions will impact the carrying amount of defined benefit obligations. the recoverability. The uncertainty of the recoverability is taken into account The Corporation and its subsidiaries’ accrued benefit liability in respect of in establishing the deferred income tax assets. The Corporation and its defined benefit plans is calculated separately for each plan by discounting the subsidiaries’ financial planning process provides a significant basis for the amount of the benefit that employees have earned in return for their service measurement of deferred income tax assets. in current and prior periods and deducting the fair value of any plan assets. Deferred tax assets and liabilities are measured at the tax rates expected to The Corporation and its subsidiaries determine the net interest component apply in the year when the asset is realized or the liability is settled, based on of the pension expense for the period by applying the discount rate used to tax rates and tax laws that have been enacted or substantively enacted at the measure the accrued benefit liability at the beginning of the annual period balance sheet date. Deferred tax assets and deferred tax liabilities are offset, to the net accrued benefit liability. The discount rate used to value liabilities if a legally enforceable right exists to net current tax assets against current is determined by reference to market yields on high-quality corporate bonds. tax liabilities and the deferred taxes relate to the same taxable entity and the If the plan benefits are changed, or a plan is curtailed, any past service costs same taxation authority. or curtailment gains or losses are recognized immediately in net earnings. The carrying amount of deferred tax assets is reviewed at each balance sheet 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) and is included in other assets (other liabilities). Payments to the defined contribution plans are expensed as incurred. 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 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. INCOME TAXES The income tax expense for the period represents the sum of current income DERIVATIVE FINANCIAL INSTRUMENTS The Corporation and its subsidiaries use derivative products as risk management instruments to hedge or manage asset, liability and capital tax and deferred income tax. Income tax is recognized as an expense or positions, including revenues. The Corporation and its subsidiaries’ policy recovery in the statements of earnings, except to the extent that it relates guidelines prohibit the use of derivative instruments for speculative to items that are not recognized in the statements of earnings (whether in trading purposes. other comprehensive income or directly in equity), in which case the income tax is also recognized in other comprehensive income or directly in equity. 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 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. enforceable right exists to offset the recognized amounts and the entity Derivatives are valued using market transactions and other market evidence intends either to settle on a net basis, or to realize the assets and settle the whenever possible, including market-based inputs to models, broker or dealer liabilities simultaneously. A provision for tax uncertainties which meets the probable threshold for recognition is measured based on the probability-weighted average approach. quotations or alternative pricing sources with reasonable levels of price transparency. When models are used, the selection of a particular model to value a derivative depends on the contractual terms of, and specific risks inherent in, the instrument, as well as the availability of pricing information 56 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTNotes to the Consolidated Financial Statements Note 2 Basis of Presentation and Summary of Significant Accounting Policies (continued) in the market. The Corporation and its subsidiaries generally use similar models to value similar instruments. Valuation models require a variety of EMBEDDED DERIVATIVES An embedded derivative is a component of a host contract that modifies inputs, including contractual terms, market prices and rates, yield curves, the cash flows of the host contract in a manner similar to a derivative, credit curves, measures of volatility, prepayment rates and correlations of according to a specified interest rate, financial instrument price, foreign such inputs. 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. Hedge accounting is discontinued when the hedge no longer qualifies for hedge accounting. Fair value hedges Fair value hedges are used to manage the exposure to changes in fair value exchange rate, underlying index or other variable. Embedded derivatives are treated as separate contracts and are recorded at fair value if their economic characteristics and risks are not closely related to those of the host contract and the host contract is not itself recorded at fair value through the statement of earnings. Embedded derivatives that meet the definition of an insurance contract are accounted for and measured as an insurance contract. EQUITY 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 reduction from retained earnings, net of income tax. Reser ves are composed of share-based compensation and other comprehensive income. Share-based compensation reserve represents 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 of subsidiaries. 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 SHARE-BASED PAYMENTS The fair value-based method of accounting is used for the valuation of attributable to a particular risk and could affect profit or loss. For fair value compensation expense for options granted to employees of the Corporation hedges, changes in fair value of both the hedging instrument and the hedged and its subsidiaries. Compensation expense is recognized as an increase to item are recorded in net investment income and consequently any ineffective operating and administrative expenses in the statements of earnings over portion of the hedge is recorded immediately in net investment income. the vesting period of the granted options, with a corresponding increase in Cash flow hedges Cash flow hedges are used to manage the exposure to variability in cash the proceeds received, together with the amount recorded in share-based compensation reserve, are added to the stated capital of the entity issuing flows that is attributable to a particular risk associated with a recognized the corresponding shares. share-based compensation reserve. When the stock options are exercised, 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 comprehensive income are recorded in net investment income in the same period the hedged item affects net earnings. Gains and losses on cash flow hedges are immediately reclassified from other comprehensive income to net investment income if and when it is probable that a forecasted transaction is no longer expected to occur. Net investment hedges 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. 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 earnings, net of related hedges, and a liability is recognized on the balance sheets over the vesting period. The liability is remeasured at fair value at each reporting period with the change in the liability recorded in operating and administrative expenses. FOREIGN CURRENCY TRANSLATION The Corporation and its subsidiaries operate with multiple functional currencies. The Corporation’s financial statements are prepared in Canadian dollars, which is the functional and presentation currency of the Corporation. Assets and liabilities denominated in foreign currencies are translated into each entity’s functional currency at exchange rates prevailing at the balance sheet dates for monetary items and at exchange rates prevailing at the transaction date for non-monetary items. Revenues and expenses denominated in foreign currencies are translated into each entity’s functional currency at an average of daily rates. Realized and unrealized exchange gains and losses are included in net investment income. 57 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTNotes to the Consolidated Financial Statements Note 2 Basis of Presentation and Summary of Significant Accounting Policies (continued) Translation of net investment in foreign operations Foreign operations are subsidiaries, jointly controlled corporations, IFRS 4 – Insurance Contracts In September  2016, the IASB issued an amendment to IFRS  4, Insurance associates and/or business units with functional currencies other than the Contracts. The amendment “Applying IFRS 9, Financial Instruments (IFRS 9) with Canadian dollar. Assets and liabilities are translated into Canadian dollars at IFRS 4, Insurance Contracts” provides qualifying insurance companies with two the rate of exchange prevailing at the balance sheet dates and all revenues options to address the potential volatility associated with implementing and expenses are translated at an average of daily rates. Unrealized foreign IFRS 9 before the new proposed insurance contract standard is effective. The currency translation gains and losses on the Corporation’s net investment in two options are as follows: its foreign operations are presented as a component of other comprehensive income. Unrealized foreign currency translation gains and losses are recognized proportionately in net earnings when there has been a disposal of a foreign operation. POLICYHOLDER BENEFITS Policyholder benefits include benefits and claims on life insurance contracts, ▪ Deferral approach: provides the option to defer implementation of IFRS 9 until the year 2021 or the effective date of the new insurance contract standard, whichever is earlier, or ▪ Overlay approach: provides the option to recognize the volatility that could arise when IFRS 9 is applied within other comprehensive income, rather than profit or loss. maturity payments, annuity payments and surrenders. Gross benefits and The Corporation qualifies for the amendment and will be applying the deferral claims for life insurance contracts include the cost of all claims arising during approach to adopt both IFRS 9 and the new insurance contract standard the year and settlement of claims. Death claims and surrenders are recorded simultaneously on January 1, 2021. on the basis of notifications received. Maturities and annuity payments are recorded when due. LEASES Leases that do not transfer substantially all the risks and rewards of ownership are classified as operating leases. Payments made under operating leases, where the Corporation and its subsidiaries are the lessee, are charged to net earnings over the period of use. IFRS 9 – Financial Instruments The IASB issued IFRS 9 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 Where the Corporation and its subsidiaries are the lessor under an operating flow characteristics of the financial assets. lease for its investment property, the assets subject to the lease arrangement are presented within the balance sheets. Income from these leases is recognized in the statements of earnings on a straight-line basis over the lease term. Leases that transfer substantially all the risks and rewards of ownership to the lessee are classified as finance leases. Where the Corporation and its subsidiaries are the lessor 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, except that net earnings available to common shareholders and the weighted average number of common shares outstanding are adjusted to include ▪ 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. As the Corporation will apply the deferral approach as noted above, the standard will be effective for the Corporation on January 1, 2021. 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. The Corporation and its subsidiaries do not anticipate the adoption of this standard will have a significant impact, however it is not yet possible to provide a reliable estimate of the impact on the Corporation’s financial the potential dilutive effect of outstanding stock options granted by the statements. Corporation and its subsidiaries, as determined by the treasury stock method. FUTURE ACCOUNTING CHANGES The Corporation and its subsidiaries continuously monitor the potential changes proposed by the International Accounting Standards Board (IASB) and analyze the effect that changes in the standards may have on their consolidated financial statements when they become effective. IFRS 16 – Leases 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. 58 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTNotes to the Consolidated Financial Statements Note 3 Business Acquisitions LIFECO On August 1, 2016, Lifeco, through its indirect wholly owned Irish subsidiary, During the fourth quarter of 2016, Lifeco completed its comprehensive Irish Life, completed the acquisition of Aviva Health Insurance Ireland Limited evaluation of the fair value of the net assets acquired from both Aviva Health (Aviva Health), an Irish health insurance company, and assumed control of and GloHealth and the purchase price allocation. As a result, initial goodwill GloHealth Financial Services Limited (GloHealth), where Irish Life previously presented in the September 30, 2016 unaudited interim financial statements held 49%. The fair value of the 49% equity interest in GloHealth at acquisition in the amount of $126 million has been adjusted in the fourth quarter of 2016. was $32 million, which includes a fair value increase of $24 million recorded in net investment income for the period ended December 31, 2016. Lifeco now holds 100% of the equity interest of GloHealth. The amounts assigned to the assets acquired, goodwill, liabilities assumed and contingent consideration for both Aviva Health and GloHealth are as follows: Assets acquired and goodwill Cash and cash equivalents Investments Reinsurance assets Other assets Intangible assets Goodwill Liabilities assumed and contingent consideration Insurance contract liabilities Other liabilities Contingent consideration 85 123 242 292 35 95 872 360 318 37 715 The goodwill represents the excess of the purchase price over the fair value Aviva Health was rebranded as Irish Life Health; the combined operations of of the net assets acquired, representing the synergies or future economic Aviva Health and GloHealth contributed $117 million in revenues and incurred benefits arising from other assets acquired that are not individually identified net losses of $8 million, which included acquisition and restructuring expenses and separately recognized in the acquisition. The goodwill is not deductible of $13 million, from the date of acquisition to December 31, 2016. These amounts for tax purposes. are included in the statements of earnings and comprehensive income. Note 4 Cash and Cash Equivalents DECEMBER 31 Cash Cash equivalents Cash and cash equivalents 2016 1,658 2,738 4,396 2015 1,900 2,288 4,188 At December 31, 2016, cash amounting to $185 million was restricted for use by subsidiaries ($159 million at December 31, 2015). 59 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTNotes to the Consolidated Financial Statements Note 5 Investments CARRYING VALUES AND FAIR VALUES Carrying values and estimated fair values of investments are as follows: DECEMBER 31 Bonds [1] Designated as fair value through profit or loss Classified as fair value through profit or loss [1] Available for sale Loans and receivables Mortgage loans Loans and receivables Classified 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 85,697 2,586 11,819 16,970 2016 FAIR  VALUE 85,697 2,586 11,819 18,484 CARRYING  VALUE 83,645 2,815 12,014 16,905 2015 FAIR  VALUE 83,645 2,815 12,014 18,253 117,072 118,586 115,379 116,727 29,295 30,418 29,029 30,712 339 339 384 384 29,634 30,757 29,413 31,096 7,673 558 8,231 4,340 8,467 7,673 558 8,231 4,340 8,467 6,692 597 7,289 5,237 8,694 6,692 597 7,289 5,237 8,694 167,744 170,381 166,012 169,043 [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. BONDS AND MORTGAGES Carrying value of bonds and mortgages due over the current and non-current term is as follows: DECEMBER 31, 2016 Bonds Mortgage loans DECEMBER 31, 2015 Bonds Mortgage loans 1 YEAR OR LESS 1-5 YEARS OVER 5 YEARS TOTAL TERM TO MATURIT Y CARRYING VALUE 12,021 2,836 14,857 26,762 13,162 39,924 77,974 13,576 91,550 116,757 29,574 146,331 CARRYING VALUE 1 YEAR OR LESS 1-5 YEARS OVER 5 YEARS TOTAL TERM TO MATURIT Y 12,041 2,906 14,947 25,901 11,875 37,776 77,070 14,600 91,670 115,012 29,381 144,393 The table shown above excludes the carrying value of impaired bonds and mortgages, as the ultimate timing of collectability is uncertain. 60 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTNotes to the Consolidated Financial Statements Note 5 Investments (continued) 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 2016 283 10 82 375 2015 355 11 33 399 The carrying amount of impaired investments includes bonds and mortgages loans. The above carrying values for loans and receivables are net of allowances for credit losses of $44 million as at December 31, 2016 ($21 million as at December 31, 2015). 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, 2016 Regular net investment income Investment income earned Net realized gains Net allowances for credit losses on loans and receivables Other income (expenses) Changes in fair value through profit or loss 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 BONDS MORTGAGE LOANS SHARES INVESTMENT PROPERTIES OTHER TOTAL 4,236 110 (7) – 4,339 3,182 7,521 985 67 (28) (9) 1,015 (2) 267 5 – – 272 959 1,013 1,231 325 – – (84) 241 61 302 543 6,356 – – (113) 430 (294) 136 182 (35) (206) 6,297 3,906 10,203 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 Investment income earned comprises income from investments that properties income includes rental income earned on investment properties, are classified as available for sale, loans and receivables and classified or ground rent income earned on leased and sub-leased land, fee recoveries, designated as fair value through profit or loss net of impairment charges. lease cancellation income, and interest and other investment income earned Investment income from bonds and mortgage loans includes interest income on investment properties. Other income includes policyholder loan income, and premium and discount amortization. Income from shares includes foreign exchange gains and losses, income earned from derivative financial dividends and distributions from equity investment funds. Investment instruments and other miscellaneous income. 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 Foreign exchange rate changes and other Balance, end of year 2016 5,237 102 61 (427) (633) 4,340 2015 4,613 278 249 (282) 379 5,237 61 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTNotes to the Consolidated Financial Statements Note 5 Investments (continued) 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 securities custodians are used as lending agents. Collateral, which exceeds the as at December 31, 2016 and December 31, 2015. In addition, the securities fair value of the loaned securities, is deposited by the borrower with Lifeco’s lending agent indemnifies Lifeco against borrower risk, meaning that the lending agent and maintained by the lending agent until the underlying lending agent agrees contractually to replace securities not returned due to a security has been returned. The fair value of the loaned securities is monitored borrower default. As at December 31, 2016, Lifeco had loaned securities (which on a daily basis by the lending agent, who obtains or refunds additional are included in investments) with a fair value of $7,520 million ($6,593 million collateral as the fair value of the loaned securities fluctuates. There was no at December 31, 2015). Note 6 Funds Held by Ceding Insurers At December  31, 2016, Lifeco had amounts on deposit of $10,781  million In 2016, a subsidiary of Lifeco completed a portfolio transfer of approximately ($15,512 million at December 31, 2015) for funds held by ceding insurers on $1,300 million whereby investment contract liabilities and supporting bonds the balance sheets. Income and expenses arising from the agreements are and cash were acquired. The portfolio of investment contract liabilities had included in net investment income on the statements of earnings. been previously reinsured by Lifeco on a funds-withheld basis. As a result, the In 2016, Lifeco completed the transfer of approximately $1,600 million of annuity policies from The Equitable Life Assurance Company (Equitable Life) acquired during 2015. As a result, the related assets presented as funds held by ceding insurers at December 31, 2015 are recorded in investments at December 31, 2016. related assets presented in funds held by ceding insurers at December 31, 2015 are recorded in investments at December 31, 2016. The details of the funds on deposit for certain agreements where Lifeco has credit risk are as follows: CARRYING VALUES AND ESTIMATED FAIR VALUES CARRYING  VALUE 214 8,391 118 8,723 8,218 505 8,723 2016 FAIR  VALUE 214 8,391 118 8,723 8,218 505 8,723 2016 618 3,792 3,300 476 205 8,391 CARRYING  VALUE 180 2015 FAIR  VALUE 180 13,472 13,472 178 178 13,830 13,830 13,222 13,222 608 608 13,830 13,830 2015 3,697 3,405 5,186 798 386 13,472 DECEMBER 31 Cash and cash equivalents Bonds Other assets Supporting: Reinsurance liabilities Surplus 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 62 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTNotes to the Consolidated Financial Statements Note 7 Investments in Jointly Controlled Corporations and Associates Investments in jointly controlled corporations and associates are composed Investments in jointly controlled corporations and associates also include principally of the Corporation’s 50% interest in Parjointco. As at December 31, Lifeco’s 30.4% investment in Allianz Ireland, an unlisted general insurance 2016, Parjointco held a 55.5% equity interest in Pargesa (same as December 31, company operating in Ireland (same as December 31, 2015), held through its 2015), representing 75.4% of the voting rights. wholly owned subsidiary Irish Life. The carrying values of the investments in jointly controlled corporations and associates are as follows: DECEMBER 31 PARJOINTCO OTHER TOTAL PARJOINTCO OTHER 2016 2015 TOTAL Carrying value, beginning of year Investments Share of earnings (losses) Share of other comprehensive income (loss) Dividends Other Carrying value, end of year 2,610 – (88) 379 (75) (15) 2,811 295 36 (10) (11) (18) – 292 2,905 2,440 237 2,677 36 (98) 368 (93) (15) – 205 24 (69) 10 18 19 22 (4) 3 18 224 46 (73) 13 3,103 2,610 295 2,905 In 2016, Groupe Bruxelles Lambert, a subsidiary of Pargesa, recorded The net asset value of the Corporation’s indirect interest in Pargesa is impairment charges of €1,682 million on its investment in LafargeHolcim Ltd approximately $3,260 million as at December 31, 2016. The carrying value due to a significant decline in the share price. The Corporation’s share of of the investment in Pargesa is $2,811 million, or $1,981 million excluding this charge is $360 million and is included in share of earnings (losses) of the unrealized net gains of its underlying investments. Pargesa’s financial investments in jointly controlled corporations and associates. information as at and for the year ended December 31, 2016 can be obtained from its publicly available information. 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 Disposal/retirements Changes in foreign exchange rates Cost, end of year Accumulated amortization, beginning of year Amortization Disposal/retirements Changes in foreign exchange rates Accumulated amortization, end of year Carrying value, end of year OWNER- OCCUPIED PROPERTIES CAPITAL ASSETS 2016 TOTAL OWNER- OCCUPIED PROPERTIES CAPITAL ASSETS 2015 TOTAL 776 26 (2) (13) 787 (72) (12) – – (84) 703 1,240 2,016 732 1,062 1,794 137 (49) 1 163 (51) (12) 11 (2) 35 159 (13) 32 170 (15) 67 1,329 2,116 776 1,240 2,016 (838) (97) 46 (15) (904) 425 (910) (109) 46 (15) (988) 1,128 (61) (12) 1 – (72) 704 (747) (88) 8 (11) (838) 402 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 2016 717 270 141 1,128 (808) (100) 9 (11) (910) 1,106 2015 680 277 149 1,106 63 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTNotes to the Consolidated Financial Statements Note 9 Other Assets DECEMBER 31 Premiums in course of collection, accounts receivable and interest receivable Deferred acquisition costs Pension benefits [Note 24] Income taxes receivable Trading account assets Finance leases receivable Prepaid expenses Deposit for investment in China AMC [1] Other 2016 5,056 597 214 111 516 273 155 193 570 2015 4,120 704 250 79 590 293 146 – 726 [1] On December 29, 2016 and January 5, 2017, Mackenzie Investments, a subsidiary of IGM, entered into agreements to acquire, in two separate transactions, a 13.9% interest in China AMC, a fund management company in China for an aggregate consideration of approximately $647 million. In accordance with the terms of these agreements, Mackenzie Investments made a deposit of $193 million. The transactions are expected to close in the first half of 2017 and are subject to customary closing conditions, including Chinese regulatory approvals. 7,685 6,908 Total other assets of $6,390 million as at December 31, 2016 ($5,636 million as at December 31, 2015) are to be realized within 12 months. 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 [Note 3] Changes in foreign exchange rates Balance, end of year 2016 2015 COST ACCUMUL ATED IMPAIRMENT CARRYING VALUE COST ACCUMUL ATED IMPAIRMENT CARRYING VALUE 10,451 (1,241) 9,210 10,192 (1,043) 9,149 95 (67) – 36 95 (31) 3 256 – (198) 3 58 10,479 (1,205) 9,274 10,451 (1,241) 9,210 INTANGIBLE ASSETS The carrying value and changes in the carrying value of the intangible assets are as follows: Indefinite life intangible assets BRANDS, TRADEMARKS AND TRADE NAMES CUSTOMER CONTRAC T- REL ATED MUTUAL FUND MANAGEMENT CONTRAC TS 1,305 (41) 1,264 3,019 (81) 2,938 (162) (1,116) 5 32 (157) (1,084) 741 – 741 – – – SHAREHOLDERS’ PORTION OF ACQUIRED FUTURE PARTICIPATING ACCOUNT PROFIT 354 – 354 – – – 1,107 1,854 741 354 TOTAL 5,419 (122) 5,297 (1,278) 37 (1,241) 4,056 DECEMBER 31, 2016 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 64 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTNotes to the Consolidated Financial Statements Note 10 Goodwill and Intangible Assets (continued) 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 Finite life intangible assets DECEMBER 31, 2016 Cost, beginning of year Additions Disposal/redemption Changes in foreign exchange rates Other, including write-off of assets fully amortized Cost, end of year Accumulated amortization, beginning of year Amortization 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, 2015 Cost, beginning of year Additions Disposal/redemption Changes in foreign exchange rates Other, including write-off of assets fully amortized 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) 1,903 741 – – 741 – – – SHAREHOLDERS’ PORTION OF ACQUIRED FUTURE PARTICIPATING ACCOUNT PROFIT TOTAL 354 4,893 – – 3 523 354 5,419 – – – (1,079) (199) (1,278) 4,141 741 354 TECHNOLOGY AND SOFT WARE CUSTOMER CONTRAC T- REL ATED DEFERRED SELLING COMMISSIONS OTHER TOTAL 1,331 247 – (25) – 1,553 (727) (132) – 18 – (841) 712 810 42 – (21) – 831 (418) (50) – 8 – (460) 371 1,356 231 3,728 235 (68) – (149) 1,374 (629) (205) 37 – 149 (648) 726 1 (4) (12) – 216 (112) (11) 3 5 – 525 (72) (58) (149) 3,974 (1,886) (398) 40 31 149 (115) 101 (2,064) 1,910 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 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 (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 65 POWER FINANCIAL CORPORATION 2016 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 2016 2015 TOTAL 1,156 3,028 2,047 1 205 – 1,443 1,251 143 9,274 – 973 1,156 4,001 1,156 3,028 – 973 1,156 4,001 216 2,263 1,978 246 2,224 – – 1,841 – 1,003 23 1 205 1,841 1,443 2,254 166 4,056 13,330 1 210 – 1,443 1,251 143 9,210 – – 1,896 – 1,003 23 1 210 1,896 1,443 2,254 166 4,141 13,351 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 2016, Lifeco conducted its annual impairment testing of goodwill and indefinite life intangible assets based on September 30, 2016 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 are 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 are unlikely to cause the carrying values to exceed their recoverable amounts. 66 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTNotes to the Consolidated Financial Statements 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 $1,547  million at December  31,  2016 ($1,390 million at December 31, 2015). 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. 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., Ireland and Germany. Certain guaranteed minimum withdrawal benefits products offered by Lifeco offer levels of death and maturity guarantees. At December 31, 2016, the amount of guaranteed minimum withdrawal benefits products in force in Canada, the U.S., Ireland and Germany was $3,917 million ($3,488 million at December 31, 2015). For further details on Lifeco’s risk and guarantee exposure and the management of these risks, refer to the “Risk Management and Control Practices” section of Lifeco’s 2016 annual report. 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 2016 12,487 41,619 2,622 81,033 51,726 11,019 200,506 359 (2,009) 1,547 200,403 2015 11,656 42,160 2,596 80,829 50,101 10,839 198,181 382 (1,759) 1,390 198,194 67 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTNotes to the Consolidated Financial Statements Note 11 Segregated Funds and Other Structured Entities (continued) 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 (losses) due to changes in foreign exchange rates Policyholder withdrawals Business and other acquisition 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 (losses) due to changes in foreign exchange rates Total Change in insurance and investment contract liabilities on account of segregated fund policyholders Net 2016 198,194 21,358 2,379 4,275 6,311 (10,584) (21,895) 193 8 (13) 20 157 2,209 200,403 2016 2,379 4,275 6,311 (10,584) 2,381 2,381 – 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 – INVESTMENTS ON ACCOUNT OF SEGREGATED FUND POLICYHOLDERS (by fair value hierarchy level) DECEMBER 31, 2016 LEVEL 1 LEVEL 2 LEVEL 3 TOTAL Investments on account of segregated fund policyholders [1] 125,829 63,804 12,045 201,678 [1] Excludes other liabilities, net of other assets, of $1,275 million. 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. In  2016 certain foreign equity holdings valued at $18  million have been As at December 31, 2016, $6,726 million ($5,925 million at December 31, 2015) transferred from Level 2 to Level 1 ($412 million were transferred from Level of the segregated funds were invested in funds managed by related parties 1 to Level 2 at December 31, 2015), based on Lifeco’s ability to utilize observable, Investors Group and Mackenzie Investments, subsidiaries of IGM. quoted prices in active markets. Level 2 assets include those assets where fair value is not available from normal market pricing sources and where Lifeco does not have visibility through to the underlying assets. 68 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTNotes to the Consolidated Financial Statements Note 11 Segregated Funds and Other Structured Entities (continued) 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 Balance, beginning of year Total gains (losses) included in segregated fund investment income Purchases Sales Transfers into Level 3 Transfers out of Level 3 Balance, end of year 2016 11,765 (109) 584 (370) 175 – 2015 10,390 1,039 944 (607) – (1) 12,045 11,765 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 $4,323 million for the year ended December 31, 2016 Some of these funds are managed by related parties of Lifeco and Lifeco ($4,399 million in 2015). receives management fees related to these services. Management fees Included within other assets (Note 9) at December 31, 2016 is $435 million can be variable due to the performance of factors – such as markets or ($501 million at December 31, 2015) of investments by Lifeco in bonds and shares industries – in which the fund invests. Fee income derived in connection of Putnam-sponsored funds and $81 million ($89 million at December 31, 2015) with the management of investment funds generally increases or decreases of investments in shares of sponsored unit trusts in Europe. in direct relationship with changes of assets under management, which is affected by prevailing market conditions, and the inflow and outflow of client assets. Note 12 Insurance and Investment Contract Liabilities INSURANCE AND INVESTMENT CONTRACT LIABILITIES DECEMBER 31 Insurance contract liabilities Investment contract liabilities [1] GROSS LIABILIT Y REINSURANCE ASSETS 2016 NET GROSS LIABILIT Y REINSURANCE ASSETS 2015 NET 155,940 2,009 157,949 5,627 150,313 158,492 5,131 153,361 – 2,009 2,253 – 2,253 5,627 152,322 160,745 5,131 155,614 [1] Lifeco corrected the classification of $73 million of deferred tax liabilities to investment contract liabilities at December 31, 2015, to conform to the current period presentation. The reclassification had no impact on the net earnings of the Corporation (refer to Note 16). 69 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTNotes to the Consolidated Financial Statements Note 12 Insurance and Investment Contract Liabilities (continued) 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 34,019 11,790 1,385 29,125 29,081 52,549 157,949 (443) 14 – 923 309 4,824 5,627 The composition of the assets supporting liabilities and equity of Lifeco is as follows: GROSS LIABILIT Y REINSURANCE ASSETS 2016 NET 34,462 11,776 1,385 28,202 28,772 47,725 32,072 12,278 1,519 28,162 27,625 59,089 152,322 160,745 2015 NET 32,491 12,262 1,519 27,368 27,286 54,688 155,614 34,019 11,790 1,385 29,125 29,081 52,549 (419) 16 – 794 339 4,401 5,131 3,199 5,742 186 5,970 1,256 BONDS MORTGAGE LOANS SHARES [1] INVESTMENT PROPERTIES OTHER TOTAL 8,327 4,828 1,354 – 56 13 – – 71 7 – 16,311 5,597 988 17,464 23,820 31,550 14,996 6,047 451 32 3,699 4,005 3,557 952 628 116,773 21,651 – 123 1,979 – 236 – 1,499 8,665 – 154 1,732 – 226 – 1,649 7,873 2,679 14,527 59 179 200,948 216,955 16,655 25,008 4,340 248,483 399,912 118,287 22,550 8,655 4,340 248,483 402,315 BONDS MORTGAGE LOANS SHARES [1] INVESTMENT PROPERTIES OTHER TOTAL 15,332 5,887 1,087 18,848 23,023 31,982 13,048 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 32,072 12,278 1,519 28,162 27,625 59,089 3,342 19,181 65 411 199,876 213,930 16,735 25,260 5,237 249,861 399,935 116,291 23,446 7,839 5,237 249,861 402,674 DECEMBER 31, 2016 Participating liabilities Canada United States Europe Non-participating liabilities Canada United States Europe Other, including segregated funds Total equity Total carrying value Fair value DECEMBER 31, 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 [1] Includes Lifeco’s investments in jointly controlled corporations and associates. 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. 70 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTNotes to the Consolidated Financial Statements Note 12 Insurance and Investment Contract Liabilities (continued) 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: DECEMBER 31, 2016 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 45,844 (403) 46,247 112,648 5,534 107,114 153,361 35 2,009 (229) – (483) – (26) 2 – (2) 35 2,035 (231) – (481) 5,396 (326) 5,722 966 (135) (113) 824 335 – 142 (470) (113) 5,757 2,177 (701) (113) (9,998) (311) (9,687) (10,168) Balance, end of year 47,176 (429) 47,605 108,764 6,056 102,708 150,313 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 Under fair value accounting, movement in the fair value of the supporting The decrease in the United States was primarily due to updated economic assets is a major factor in the movement of insurance contract liabilities. assumptions of $27 million, updated longevity assumptions of $19 million, Changes in the fair value of assets are largely offset by corresponding changes updated life mortality assumptions of $17 million and modelling refinements in the fair value of liabilities. The change in the value of the insurance contract of $3 million. liabilities associated with the change in the value of the supporting assets is included in the normal change in the in-force business above. Net participating insurance contract liabilities decreased by $231 million in 2016 due to Lifeco’s management actions and assumption changes. The In 2016, the major contributors to the decrease in net insurance contract decrease was primarily due to updated expense and tax assumptions of liabilities were the impact of foreign exchange rate changes of $10,168 million $153 million, higher investment returns of $102 million, provisions for future primarily due to the lower British pound and Lifeco’s management actions policyholder dividends of $19 million, updated mortality assumptions of and changes in assumptions of $701 million. This was partially offset by $13 million and updated morbidity assumptions of $2 million, partially offset by increases due to the impact of new business of $5,757 million and the normal increases due to updated policyholder behaviour assumptions of $29 million changes in the in-force business of $2,177 million, which was primarily due to and modelling refinements of $29 million. the change in fair value. In 2015, the major contributors to the increase in net insurance contract Net non-participating insurance contract liabilities decreased by $470 million liabilities were the impact of foreign exchange rate changes of $12,359 million, in 2016 due to Lifeco’s management actions and assumption changes including the impact of new business of $4,277 million, and business movement from/to a $56 million decrease in Canada, a $348 million decrease in Europe and a external parties of $1,590 million, which was primarily due to the acquisition $66 million decrease in the United States. of Equitable Life’s annuity business during the first quarter of 2015, partially The decrease in Canada was primarily due to updated morbidity assumptions of $86 million, updated provision for claims of $61 million largely as a result of a decreased lag in reporting of Group health claims, updated longevity offset by decreases due to the normal changes in the in-force business of $4,417 million, which were primarily due to the change in fair value, and management actions and assumption changes of $495 million. assumptions of $20 million and modelling refinements of $8 million, partially Net non-participating insurance contract liabilities decreased by $411 million offset by increases due to updated expense and tax assumptions of $91 million, in 2015 due to Lifeco’s management actions and assumption changes including updated economic assumptions of $20 million and updated life mortality a $50 million decrease in Canada, a $331 million decrease in Europe and a assumptions of $8 million. $30 million decrease in the United States. The decrease in Europe was primarily due to updated longevity assumptions The decrease in Canada was primarily due to updated mortality assumptions of $207 million, updated economic assumptions of $165 million, modelling of $159 million, updated economic assumptions of $15 million and updated refinements of $30 million, updated morbidity assumptions of $17 million and expense and tax assumptions of $12 million, partially offset by increases due updated policyholder behaviour assumptions of $9 million, partially offset to updated policyholder behaviour assumptions of $85 million, and modelling by increases due to updated life mortality assumptions of $43 million and refinements of $49 million. updated expense and tax assumptions of $40 million. The decrease in Europe was primarily due to updated longevity assumptions The discount rate for valuing the reinsurance asset was updated in Ireland. of $292 million, updated economic assumptions of $184 million, updated This change in accounting estimate increased gross liabilities and reinsurance morbidity assumptions of $12 million and updates to other provisions of assets by $360 million and had no impact on net liabilities or net earnings. $10 million, partially offset by increases due to updated mortality assumptions 71 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTNotes to the Consolidated Financial Statements Note 12 Insurance and Investment Contract Liabilities (continued) of $64 million, updated expense and tax assumptions of $55 million, modelling Net participating insurance contract liabilities decreased by $84 million refinements of $37 million and updated policyholder behaviour assumptions in 2015 due to Lifeco’s management actions and assumption changes. The 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, partially offset by increases due to updated policyholder behaviour assumptions of $6 million. decrease was primarily due to provisions for future policyholder dividends of $4,991 million, updated expense and tax assumptions of $545 million and updated mortality assumptions of $412 million, partially offset by increases due to lower investment returns of $5,527 million, updated policyholder behaviour assumptions of $188  million, and modelling refinements of $149 million. 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 2016 2,253 (220) 93 (46) – (71) 2,009 2015 922 (89) 18 7 1,330 65 2,253 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 was 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. PREMIUM INCOME DECEMBER 31 Direct premiums Assumed reinsurance premiums Total POLICYHOLDER BENEFITS DECEMBER 31 Direct Assumed reinsurance Total 2016 23,772 11,278 35,050 2016 16,721 11,594 28,315 2015 22,120 6,009 28,129 2015 15,880 6,673 22,553 ACTUARIAL ASSUMPTIONS In the computation of insurance contract liabilities, valuation assumptions Annuitant mortality is also studied regularly and the results are used to modify established industr y experience annuitant mortality tables. have been made regarding rates of mortality/morbidity, investment returns, Mortality improvement has been projected to occur throughout future levels of operating expenses, rates of policy termination and rates of years for annuitants. 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. Mortality improvement has been projected to occur for the next 25 years. In addition, appropriate provisions have been made for future mortality deterioration on term insurance. Morbidity Lifeco uses industry-developed experience tables modified to reflect emerging Lifeco experience. Both claim incidence and termination are monitored regularly and emerging experience is factored into the current valuation. Property and casualty reinsurance Insurance contract liabilities for property and casualty reinsurance written by London Reinsurance Group Inc. (LRG), a subsidiary of London Life, are determined using accepted actuarial practices for property and casualty insurers in Canada. 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 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 net earnings. LRG analyzes the emergence of claims experience 72 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTNotes to the Consolidated Financial Statements Note 12 Insurance and Investment Contract Liabilities (continued) against expected assumptions for each reinsurance contract separately and at the end of term for renewable term policies in Canada and Reinsurance. at the portfolio level. If necessary, a more in-depth analysis is undertaken of Industry experience has guided Lifeco’s assumptions for these products as the cedant experience. Lifeco’s own experience is very limited. Investment returns The assets which correspond to the different liability categories are Utilization of elective policy options There are a wide range of elective options embedded in the policies issued segmented. For each segment, projected cash flows from the current assets by Lifeco. Examples include term renewals, conversion to whole life and liabilities are used in the CALM to determine insurance contract liabilities. insurance (term insurance), settlement annuity purchase at guaranteed Cash flows from assets are reduced to provide for asset default losses. Testing rates (deposit annuities) and guarantee resets (segregated fund maturity under several interest rate and equity scenarios (including increasing and guarantees). The assumed rates of utilization are based on Lifeco or industry decreasing rates) is done to provide for reinvestment risk (refer to Note 21). experience when it exists and, when not, on judgment considering incentives Expenses Contractual policy expenses (e.g., sales commissions) and tax expenses are reflected on a best estimate basis. Expense studies for indirect operating expenses are updated regularly to determine an appropriate estimate of to utilize the option. Generally, whenever it is clearly in the best interests of an informed policyholder to utilize an option, then it is assumed to be elected. Policyholder dividends and adjustable policy features Future policyholder dividends and other adjustable policy features are included future operating expenses for the liability type being valued. Improvements in the determination of insurance contract liabilities with the assumption in unit operating expenses are not projected. An inflation assumption is that policyholder dividends or adjustable benefits will change in the future incorporated in the estimate of future operating expenses consistent with in response to the relevant experience. The dividend and policy adjustments the interest rate scenarios projected under the CALM as inflation is assumed are determined consistent with policyholders’ reasonable expectations, such to be correlated with new money interest rates. expectations being influenced by the participating policyholder dividend Policy termination Studies to determine rates of policy termination are updated regularly to form the basis of this estimate. Industry data is also available and is useful where Lifeco has no experience with specific types of policies or its exposure is limited. Lifeco has significant exposures in respect of the T-100 and Level Cost of Insurance Universal Life products in Canada and policy renewal rates policies and/or policyholder communications, marketing material and past practice. It is Lifeco’s expectation that changes will occur in policyholder dividend scales or adjustable benefits for participating or adjustable business respectively, corresponding to changes in the best estimate assumptions, resulting in an immaterial net change in 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 on shareholders’ earnings is reflected in the changes in best estimate assumptions above. RISK MANAGEMENT Insurance risk Insurance risk is the risk that the insured event occurs and that there are Lifeco is in the business of accepting risk associated with insurance contract liabilities. Lifeco’s objective is to mitigate its exposure to risk arising from these large deviations between expected and actual actuarial assumptions, contracts through product design, product and geographical diversification, including mortality, persistency, longevity, morbidity, expense variations the implementation of its underwriting strategy guidelines, and through the and investment returns. 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. INCREASE (DECREASE) IN 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 2016 (281) (384) (242) – – 149 (491) 43 (50) 407 (438) (117) (608) 2015 (282) (314) (225) – – 109 (430) 45 (108) 433 (457) (108) (602) 73 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTNotes to the Consolidated Financial Statements 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 63,144 40,871 53,934 157,949 480 323 4,824 5,627 2016 NET 62,664 40,548 49,110 GROSS LIABILIT Y REINSURANCE ASSETS 60,234 39,903 60,608 375 355 4,401 5,131 2015 NET 59,859 39,548 56,207 155,614 152,322 160,745 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 Obligations to Securitization Entities IGM securitizes residential mortgages through the Canada Mortgage and coupons and receive investment returns on repaid mortgage principal, Housing Corporation (CMHC)-sponsored National Housing Act Mortgage- is recorded as a derivative and had a negative fair value of $23 million at Backed Securities (NHA MBS) Program and Canada Mortgage Bond (CMB) December 31, 2016 (a negative fair value of $47 million in 2015). Program and through Canadian bank-sponsored asset-backed commercial 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 for credit enhancement which are carried at cost. Credit risk is limited to IGM earns interest on the mortgages and pays interest on the obligations these cash reserves and future net interest income as the ABCP Trusts have no to securitization entities. As part of the CMB transactions, IGM enters recourse to IGM’s other assets for failure to make payments when due. Credit into a swap transaction whereby IGM pays coupons on CMBs and receives risk is further limited to the extent these mortgages are insured. investment returns on the NHA MBS and the reinvestment of repaid mortgage principal. A component of this swap, related to the obligation to pay CMB DECEMBER 31 Carrying value NHA MBS and CMB Programs Bank-sponsored ABCP Total Fair value 2016 SECURITIZED MORTGAGES OBLIGATIONS TO SECURI TIZATION ENTITIES NET SECURITIZED MORTGAGES OBLIGATIONS TO SECURITIZATION  ENTITIES 4,942 2,673 7,615 4,987 2,734 7,721 (45) (61) (106) 4,612 2,369 6,981 4,670 2,422 7,092 7,838 7,873 (35) 7,238 7,272 2015 NET (58) (53) (111) (34) 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. 74 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTNotes to the Consolidated Financial Statements Note 14 Debentures and Other Debt Instruments CARRYING  VALUE 2016 FAIR  VALUE CARRYING  VALUE 2015 FAIR  VALUE DECEMBER 31 DEBENTURES POWER FINANCIAL 6.90% debentures, due March 11, 2033, unsecured 250 328 250 328 LIFECO 5.25% subordinated debentures callable February 8, 2017 (€200 million), including associated fixed to floating swap, 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 1.75% debentures due December 7, 2026 (€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 2.538% plus the 3-month LIBOR rate (US$300 million), with an interest rate swap to pay fixed interest of 4.68%, unsecured Subordinated debentures due June 21, 2067, bearing an interest rate of 5.691% until first call par date of 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 first call par date of 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 0.670% to 0.792% (0.213% to 0.223% at December 31, 2015), unsecured Revolving credit facility with interest equal to LIBOR rate plus 0.70% or U.S. prime rate loan (US$220 million; US$245 million at December 31, 2015), unsecured Total other debt instruments 285 200 499 706 704 100 193 392 231 342 277 211 549 778 718 128 261 523 240 441 311 200 499 745 – 100 192 391 238 342 324 220 561 798 – 127 264 527 282 438 402 345 414 412 999 994 998 1,052 499 150 375 125 150 175 150 200 536 159 421 156 203 229 199 244 498 150 375 125 150 175 150 200 560 166 439 160 207 234 202 253 (42) 7,085 (55) (43) 7,885 6,460 (57) 7,497 133 295 428 133 295 428 129 338 467 129 338 467 7,513 8,313 6,927 7,964 75 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTNotes to the Consolidated Financial Statements Note 14 Debentures and Other Debt Instruments (continued) LIFECO In 2016, Great-West Life & Annuity Insurance Capital, LP II, a subsidiary Subsequent event On February 8, 2017, Irish Life Assurance, a subsidiary of Lifeco, redeemed its of Lifeco, elected to not call its US$300 million 7.153% junior subordinated 5.25% €200 million subordinated debenture notes at their principal amount debentures with a first par call date of May 16, 2016 and a final maturity date together with accrued interest. of May 16, 2046. Beginning May 16, 2016, the debentures pay a floating rate of interest set at 3-month LIBOR plus 2.538%. Great-West Financial also entered IGM FINANCIAL into an external 30-year interest rate swap transaction to 2046 whereby it will pay a fixed 4.68% rate of interest and will receive a floating 3-month LIBOR plus 2.538% rate of interest on the notional principal amount. Subsequent event On December 29, 2016 and January 5, 2017, Mackenzie Investments entered into agreements to acquire, in two separate transactions, a 13.9% interest On December 7, 2016, Lifeco issued €500 million of 10-year senior bonds in China AMC for an aggregate consideration of approximately $64 7 million. with an annual coupon rate of 1.75%. The bonds are listed on the Irish Stock On January 26, 2017, IGM issued $400 million of 10-year 3.44% debentures Exchange. The euro-denominated debt has been designated as a hedge priced to provide a yield to maturity of 3.448% and $200 million of 30-year against Lifeco’s net investment in euro-denominated foreign operations 4.56% debentures priced to provide a yield to maturity of 4.56%. The net with changes in foreign exchange on the debt instrument recorded in other proceeds will be used by IGM to assist its subsidiary, Mackenzie Investments, comprehensive income. in financing a substantial portion of these acquisitions and for general corporate purposes. The principal repayments on debentures and other debt instruments in each of the next five years and thereafter are as follows: 2017 2018 2019 2020 2021 Thereafter Note 15 Other Liabilities DECEMBER 31 Bank overdraft Accounts payable Dividends and interest payable Income taxes payable Deferred income reserve Capital trust debentures Deposits and certificates Funds held under reinsurance contracts Pension and other post-employment benefits [Note 24] Other 712 350 375 500 – 5,609 2015 479 2,072 420 545 437 161 310 356 1,607 1,299 7,686 2016 447 2,412 435 553 309 161 471 320 1,802 1,726 8,636 Total other liabilities of $6,001 million as at December 31, 2016 ($5,067 million as at December 31, 2015) are expected to be settled within 12 months. 76 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTNotes to the Consolidated Financial Statements Note 15 Other Liabilities (continued) 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 CARRYING VALUE 150 11 161 2016 FAIR VALUE 212 – 212 CARRYING VALUE 150 11 161 2015 FAIR VALUE 215 – 215 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. 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 Share of (earnings) losses of investments in jointly controlled corporations and 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 Adjustments in respect of prior years Deferred taxes Origination and reversal of temporary differences Effect of change in tax rates or imposition of new taxes Recognition of previously unrecognized tax losses, tax credits or temporary differences Other 2016 26.8 (5.0) (5.4) 0.7 (2.5) 14.6 2015 26.7 (4.9) (5.1) (1.3) (0.2) 15.2 2016 2015 521 (32) (37) 452 122 4 (7) 10 129 581 513 – (4) 509 160 7 (4) 7 170 679 77 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTNotes to the Consolidated Financial Statements Note 16 Income Taxes (continued) The following table shows current and deferred taxes relating to items not recognized in the statements of earnings: DECEMBER 31 Current taxes (recovery) Deferred taxes (recovery) DEFERRED TAXES Deferred taxes are attributable to the following items: DECEMBER 31 Loss carry forwards Investments Insurance and investment contract liabilities Intangible assets [1] Other Presented on the balance sheets as follows: Deferred tax assets Deferred tax liabilities [1, 2] 2016 OTHER COMPREHENSIVE  INCOME OTHER COMPREHENSIVE  INCOME EQUITY (9) (5) (14) – (1) (1) (2) (89) (91) 2016 1,889 (647) (1,210) (895) 672 (191) 1,907 (2,098) (191) 2015 EQUITY – (2) (2) 2015 1,794 (674) (1,097) (770) 684 (63) 1,961 (2,024) (63) [1] In 2016, IGM Financial retrospectively adjusted the rate of tax used for deferred tax measurement of indefinite life intangible assets to reflect the expected manner of recovery of such assets acquired through business combinations that occurred prior to the conversion to IFRS. As a result, the deferred tax liabilities have increased by $122 million and the equity decreased by $122 million at January 1, 2015 (decrease of $77 million in retained earnings and $45 million in non-controlling interests). This adjustment had no impact on net earnings or earnings per share for the periods presented within these financial statements. [2] Lifeco corrected the classification of $73 million of deferred tax liabilities to investment contract liabilities at December 31, 2015, to conform to the current period presentation. The reclassification had no impact on the net earnings of the Corporation (refer to Note 11). Management of the Corporation and of its subsidiaries assess the recoverability As at December 31, 2016, the Corporation and its subsidiaries have non-capital of the deferred tax asset carrying values based on future years’ taxable income losses of $99 million ($150 million in 2015) available to reduce future taxable projections and believes the carrying values of the deferred tax assets as of income for which the benefits have not been recognized. These losses expire December 31, 2016 are recoverable. At December 31, 2016, Lifeco has recognized a deferred tax asset of $1,885 million ($1,784 million at December 31, 2015) on tax loss carry forwards totalling $6,874 million ($4,951 million in 2015). Of this amount, $6,748 million expires from 2028 to 2036. In addition, the Corporation and its subsidiaries have capital loss carry forwards of $185 million ($167 million in 2015) that can be used indefinitely to offset future capital gains for which the benefits have not been recognized. between 2017 and 2036, while $126 million has no expiry date. Lifeco will realize As at December 31, 2016, a deferred tax liability of $12 million ($7 million this benefit in future years through a reduction in current income taxes payable. in 2015) has been recognized with respect to a portion of the temporary One of Lifeco’s subsidiaries has had a history of recent losses. The subsidiary has a net deferred tax asset balance of $1,262 million (US$942 million) as at December 31, 2016 composed principally of net operating losses and future 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. 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 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. 78 POWER FINANCIAL CORPORATION 2016 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 Q [iii] [iv] 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 8,965,485 2,234,515 10,000,000 12,000,000 8,000,000 2016 STATED  CAPITAL $ 100 150 200 150 150 200 250 200 150 224 56 250 300 200 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 8,000,000 713,238,680 30,980 713,269,660 804 1 805 711,723,680 1,515,000 713,238,680 2015 STATED  CAPITAL $ 100 150 200 150 150 200 250 200 150 280 – 250 300 200 2,580 743 61 804 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 $25.00 per share, together with all declared and unpaid dividends to, but excluding, the date of redemption. [ii] The following First Preferred Shares series are entitled to fixed non-cumulative preferential cash dividends payable quarterly. The Corporation may redeem for cash the First Preferred Shares in whole or in part, at the Corporation’s option, with all declared and unpaid dividends to, but excluding, the date of redemption. The dividends and redemption terms are as follows: FIRST PREFERRED SHARES Non-cumulative, fixed rate Series D, 5.50% Series E, Series F, Series H, Series I, Series K, Series L, Series O, Series R, Series S, 5.25% 5.90% 5.75% 6.00% 4.95% 5.10% 5.80% 5.50% 4.80% Non-cumulative, 5-year rate reset [1] Series P, 2.31% [iii] Series T, 4.20% CASH DIVIDENDS PAYABLE QUARTERLY EARLIEST ISSUER REDEMPTION DATE [$/SHARE] 0.343750 0.328125 0.368750 0.359375 0.375000 0.309375 0.318750 0.362500 0.343750 0.300000 0.144125 0.262500 Currently redeemable Currently redeemable Currently redeemable Currently redeemable Currently redeemable Currently redeemable Currently redeemable Currently redeemable April 30, 2017 April 30, 2018 Currently redeemable January 31, 2019 REDEMPTION PRICE [$/SHARE] 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.50 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 3-month Government of Canada Treasury Bill rate plus the reset spread indicated. 79 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTNotes to the Consolidated Financial Statements Note 17 Stated Capital (continued) [iii] On February 1, 2016, 2,234,515 of the Corporation’s 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 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. [iv] The Series Q First Preferred Shares are entitled to a quarterly non-cumulative dividend at an annual floating rate equal to the 3-month Government of Canada Treasury Bill rate plus 1.60% and are redeemable: (i) for $25.00 per share plus declared and unpaid dividends to the date fixed for redemption on January 31, 2021 and on January 31 every five years thereafter or (ii) for $25.50 together with all declared and unpaid dividends to the date fixed for redemption in the case of redemptions on any other date after January 31, 2016 that is not a date on which Series Q First Preferred Shares can be converted. Subject to the Corporation’s right to redeem all the Series Q First Preferred Shares, the holders of Series Q First Preferred Shares will have the right, at their option, to convert their Series Q First Preferred Shares into Series P First Preferred Shares, subject to certain conditions, on January 31, 2021 and on January 31 every five years thereafter. Common Shares During the year 2016, 30,980 common shares (1,515,000 in 2015) were issued under the Corporation’s Employee Stock Option Plan for a consideration of $1 million ($49 million in 2015). Dividends declared on the Corporation’s common shares in 2016 amounted to $1.57 per share ($1.49 per share in 2015). Note 18 Share-Based Compensation STOCK OPTION PLAN Under Power Financial’s Employee Stock Option Plan, 12,325,620 common shares are reserved for issuance. The plan requires that the exercise price of the option must not be less than the market value of a share on the date of the grant of the option. Generally, options granted vest on a delayed basis over periods beginning no earlier than one year from the date of grant and no later than five years from the date of grant. Outstanding options, which are not fully vested, have the following vesting conditions: YEAR OF GRANT OPTIONS VESTING CONDITIONS 2012 2013 2013 2014 2014 2015 2015 2016 2016 119,665 281,085 26,737 338,327 1,092,062 588,449 925,044 577,526 1,089,170 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, 2016 and 2015, and changes during the years ended on those dates is as follows: 2016 2015 OPTIONS WEIGHTED-AVERAGE EXERCISE PRICE OPTIONS WEIGHTED-AVERAGE EXERCISE PRICE 8,773,932 1,666,696 (30,980) – $ 32.06 31.85 29.05 – 8,630,477 1,662,585 (1,515,000) (4,130) 10,409,648 32.04 8,773,932 5,371,583 30.28 4,671,985 $ 31.18 36.83 32.24 36.09 32.06 30.23 Outstanding at beginning of year Granted Exercised Forfeited Outstanding at end of year Options exercisable at end of year 80 POWER FINANCIAL CORPORATION 2016 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, 2016: 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 32.32 – 32.58 33.37 – 34.42 34.46 37.12 37.13 38.35 1,525,467 1,501,899 1,517,259 1,492,826 2,088,390 914,236 303,112 141,415 925,044 10,409,648 [YRS] 4.8 2.5 6.4 7.8 7.7 1.2 8.2 1.1 8.2 5.8 $ 25.84 28.95 31.44 32.44 33.99 34.46 37.12 37.13 38.35 32.04 1,405,802 1,501,899 575,646 459,921 312,042 914,236 60,622 141,415 – 5,371,583 $ 25.90 28.95 31.46 32.57 34.13 34.46 37.12 37.13 – 30.28 Compensation expense  During the year ended December 31, 2016, Power Financial granted 1,666,696 options (1,662,585 options in 2015) 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] 2016 4.2% 20.2% 1.1% 9 3.12 31.85 2015 4.5% 19.8% 1.2% 9 3.30 36.83 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 options of the Corporation. Under this Plan, each Director participating in the Plan or the fair value of the equity investments at the grant date, amortized over will receive half of his annual retainer in the form of deferred share units and the vesting period. Total compensation expense relating to the stock options may elect to receive the remainder of his annual retainer and attendance granted by the Corporation and its subsidiaries amounted to $81 million in 2016 fees entirely in the form of deferred share units, entirely in cash, or equally in ($67 million in 2015) and is recorded in operating and administrative expenses cash and deferred share units. The number of deferred share units granted is in the statements of earnings. 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 its affiliates, determined by dividing the amount of remuneration payable by the five-day- average closing price on the Toronto Stock Exchange of the common shares of the Corporation on the last five days of the fiscal quarter (the value of a deferred share unit). A Director will receive additional deferred share units in respect of dividends payable on the common shares, based on the value of a deferred share unit on the date on which the dividends were paid on the common shares. A deferred share unit is payable, at the time a Director’s membership on the Board is terminated (provided the Director is not then a director, officer or employee of 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, 2016, the value of the deferred share units outstanding was $18 million ($17 million in 2015) and is recorded within other liabilities. Alternatively, Directors may participate in or in the event of the death of the participant, by a lump-sum payment based the Share Purchase Plan for Directors. 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 $10 million ($7 million in 2015) recorded within other liabilities. 81 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTNotes to the Consolidated Financial Statements 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, 2016 and December 31, 2015. The non-controlling interests of Lifeco and IGM and their subsidiaries reflected in the balance sheets are as follows: DECEMBER 31 LIFECO IGM 2016 TOTAL LIFECO IGM 2015 TOTAL Non-controlling interests, beginning of year 11,011 1,796 12,807 Adjustment [Note 16] Restated balance Net earnings attributable to non-controlling interests Other comprehensive income (loss) attributable to  non-controlling interests Dividends Change in ownership interest and other [1] – 11,011 1,060 (486) (510) (91) – 1,796 283 (2) (198) (128) – 12,807 1,343 (488) (708) (219) 9,973 – 9,973 1,039 611 (500) (112) 1,910 11,883 (45) 1,865 298 5 (211) (161) (45) 11,838 1,337 616 (711) (273) Non-controlling interests, end of year 10,984 1,751 12,735 11,011 1,796 12,807 [1] Change in ownership interest and other includes mainly the 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 5,688 2,514 2,782 1,601 150 – 2016 TOTAL 7,289 2,664 2,782 LIFECO IGM 5,886 2,514 2,611 1,646 150 – 2015 TOTAL 7,532 2,664 2,611 10,984 1,751 12,735 11,011 1,796 12,807 As at December 31, 2016, Power Financial and IGM held 67.9% and 4.0%, respectively, of Lifeco’s common shares, representing approximately 65.0% of the voting rights attached to the outstanding Lifeco voting shares. Lifeco and IGM’s financial information as at and for the year ended December 31, 2016 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 82 2016 LIFECO IGM LIFECO 2015 IGM 399,912 374,904 25,008 15,625 10,878 4,747 399,935 374,675 25,260 14,831 10,105 4,726 2,956 (1,515) 6,254 (1,045) (4,565) 779 (50) 3,011 1,897 737 (75) (1,034) 5,123 (1,683) (3,424) 781 78 710 (508) (434) POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTNotes to the Consolidated Financial Statements Note 20 Capital Management As a holding company, Power Financial’s objectives in managing its capital and cost-effective source of capital. The Corporation is a long-term investor are to: and as such holds positions in long-term investments as well as cash and fixed ▪ provide attractive long-term returns to shareholders of the Corporation; income securities for liquidity purposes. ▪ 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 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 common shares, perpetual preferred shares and debentures. The boards of directors of the Corporation’s subsidiaries, as well as those of Pargesa and Groupe Bruxelles Lambert, are responsible for their respective companies’ capital structure, the Corporation may adjust the amount of dividends paid capital management. to shareholders, return capital to shareholders or issue capital. The capital structure of the Corporation consists of perpetual preferred shares, debentures, common shareholders’ equity and non-controlling The Corporation itself is not subject to externally imposed regulatory capital requirements. However, Lifeco and certain of its main subsidiaries and IGM’s subsidiaries are subject to regulatory capital requirements and they manage interests. The Corporation views perpetual preferred shares as a permanent their capital as described below. LIFECO Lifeco manages its capital on both a consolidated basis as well as at the ▪ In Canada, the Office of the Superintendent of Financial Institutions individual operating subsidiary level. The primary objectives of Lifeco’s capital (OSFI) has established a capital adequacy measurement for life insurance management strategy are: ▪ to maintain the capitalization of its regulated operating subsidiaries at a level that will exceed the relevant minimum regulatory capital requirements in the jurisdictions in which they operate; ▪ to maintain strong credit and financial strength ratings of Lifeco ensuring stable access to capital markets; and ▪ to provide an efficient capital structure to maximize shareholder value in the context of Lifeco’s operational risks and strategic plans. Lifeco has established policies and procedures designed to identify, measure and report all material risks. Management of Lifeco is responsible for establishing capital management procedures for implementing and monitoring the capital plan. The target level of capitalization for Lifeco and its subsidiaries is assessed by considering various factors such as the probability of falling below the minimum regulatory capital requirements in the relevant operating jurisdiction, the views expressed by various credit rating agencies that provide financial strength and other ratings to Lifeco, and the desire to hold sufficient capital to be able to honour all policyholder and other obligations of Lifeco with a high degree of confidence. companies incorporated under the Insurance Companies Act (Canada) and their subsidiaries, known as the Minimum Continuing Capital and Surplus Requirements (MCCSR). As at December 31, 2016, the MCCSR ratio for Great-West Life was 240% (238% at December 31, 2015). ▪ At December 31, 2016, the Risk-Based Capital ratio (RBC) of Great-West Life & Annuity, Lifeco’s regulated U.S. operating company, was estimated to be 455% of the Company Action Level set by the National Association of Insurance Commissioners. Great-West Life & Annuity reports its RBC ratio annually to U.S. insurance regulators. ▪ For entities based in Europe, the local solvency capital regime has changed to the Solvency II basis, effective January 1, 2016. During 2016, Lifeco’s regulated European insurance and reinsurance businesses were developing internal risk models and undertook steps to manage the potential capital volatility under the new regulations in co-operation with the European regulators. At the end of 2016 all European-regulated entities met all capital and solvency requirements as prescribed under Solvency II. ▪ 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, 2016 and 2015, Lifeco maintained capital levels above the minimum local regulatory requirements in each of its Lifeco’s subsidiaries Great-West Life, Great-West Financial and entities based other foreign operations. in Europe are subject to minimum regulatory capital requirements. IGM FINANCIAL IGM’s capital management objective is to maximize shareholder returns IGM’s capital is primarily used in its ongoing business operations to support while ensuring that IGM is capitalized in a manner which appropriately working capital requirements, long-term investments made by IGM, business supports regulatory capital requirements, working capital needs and business expansion and other strategic objectives. expansion. IGM’s capital management practices are focused on preserving the quality of its financial position by maintaining a solid capital base and a strong balance sheet. IGM regularly assesses its capital management practices in response to changing economic conditions. 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. 83 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTNotes to the Consolidated Financial Statements 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 to changes ▪ Credit risk is the potential for financial loss to the Corporation and its in (re)investment approaches and interest rate scenarios considered; subsidiaries if a counterparty in a transaction fails to meet its obligations. ▪ changes in actuarial, investment return and future investment activity ▪ Market risk is the risk that the fair value or future cash flows of a financial assumptions; instrument will fluctuate as a result of changes in market factors. Market ▪ actual experience differing from the assumptions; factors include three types of risks: currency risk, interest rate risk and ▪ changes in business mix, effective tax rates and other market factors; equity price risk. ▪ interactions among these factors and assumptions when more than one ▪ Currency risk relates to the Corporation, its subsidiaries and its jointly changes; and controlled corporations and associates operating in different currencies and converting non-Canadian earnings at different points in time at different foreign exchange levels when adverse changes in foreign currency exchange rates occur. ▪ Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in the market interest rates. ▪ Equity price risk is the uncertainty associated with the valuation of assets arising from changes in equity markets. POWER FINANCIAL ▪ 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. Liquidity risk, credit risk and market risk of Power Financial are disclosed in the first section of this note. In subsequent sections, risk related to Lifeco and IGM are discussed. LIQUIDITY RISK Power Financial is a holding company. As such, corporate cash flows are 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. principally made up of dividends received from its subsidiaries and a jointly The Corporation regularly reviews the credit ratings of its counterparties. controlled corporation, and income from investments, less operating The maximum exposure to credit risk on these financial instruments is their expenses, financing charges, income taxes and payment of dividends to its carrying value. common and preferred shareholders. The ability of Lifeco, IGM and Parjointco, which are also holding companies, to meet their obligations and pay dividends is dependent upon receipt of dividends from their own subsidiaries. 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 The Corporation regularly reviews its liquidity requirements and seeks accounting requirements are not met. The Corporation 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. The ability of Power Financial to arrange additional financing financial institutions. in the future will depend in part upon prevailing market conditions as well as the business performance of Power Financial and its subsidiaries. Power Financial’s exposure to and management of credit risk related to cash and cash equivalents, fixed income securities and derivatives have not Principal repayments on debentures (other than those of Lifeco and IGM changed materially since December 31, 2015. 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, 2015. MARKET RISK Power Financial’s financial instruments are comprised of cash and cash equivalents, fixed income securities, derivatives and debentures. CREDIT RISK Fixed income securities and derivatives are subject to credit risk. The Corporation 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 Currency risk In managing its own cash and cash equivalents as well as 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, 2016, approximately 90% of Power Financial’s cash and cash equivalents and fixed income securities were denominated in Canadian dollars. 84 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTNotes to the Consolidated Financial Statements Note 21 Risk Management (continued) Power Financial is exposed through Parjointco to foreign exchange risk as a result of Parjointco’s investment in Pargesa, a company whose Equity price risk Power Financial’s financial instruments do not have significant exposure to functional currency is the Swiss franc. Pargesa itself is exposed to currency equity price risk. risk through its subsidiary whose functional currency is the euro. 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 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. interest rate risk. LIFECO The risk committee of the board of directors of Lifeco is responsible for the oversight of Lifeco’s key risks. LIQUIDITY RISK The following policies and procedures are in place to manage liquidity risk: ▪ Lifeco closely manages operating liquidity through cash flow matching of assets and liabilities and forecasting earned and required yields, to ensure consistency between policyholder requirements and the yield of assets. Approximately 67% (approximately 69% in 2015) of insurance and investment contract liabilities are non-cashable prior to maturity or subject to fair value adjustments. ▪ Management of Lifeco closely monitors the solvency and capital positions of its principal subsidiaries opposite liquidity requirements at the holding company. Additional liquidity is available through established lines of credit or via capital market transactions. Lifeco maintains $350 million of liquidity at its level through committed lines of credit with Canadian chartered banks. As well, Lifeco maintains a $150 million liquidity facility at Great-West Life, a US$500 million revolving credit agreement with a syndicate of banks for use by Putnam, and a US$50 million line of credit at Great-West Financial. In the normal course of business, Lifeco enters into contracts that give rise to commitments of future minimum payments that impact short-term and long-term liquidity. The following table summarizes the principal repayment schedule of certain of Lifeco’s financial liabilities. DECEMBER 31, 2016 1 YEAR 2 YEARS 3 YEARS 4 YEARS 5 YEARS AFTER 5 YEARS TOTAL PAYMENTS DUE BY PERIOD Debentures and other debt instruments Capital trust debentures [1] Purchase obligations Pension contributions 712 – 108 273 1,093 200 – 53 – 253 – – 62 – 62 500 – 42 – 542 – – 15 – 15 4,601 150 3 – 6,013 150 283 273 4,754 6,719 [1] Payments due have not been reduced to reflect that Lifeco held capital trust securities of $37 million principal amount ($50 million carrying value). CREDIT RISK The following policies and procedures are in place to manage credit risk: ▪ Investment policies are in place that require only the purchase of investment-grade assets and minimize undue concentration within issuers, connected companies, industries or individual geographies. ▪ Investment limits specify minimum and maximum limits for each asset class. ▪ Identification of credit risk through an internal credit risk rating system which includes a detailed assessment of an obligor’s creditworthiness. Internal credit risk ratings cannot be higher than the highest rating provided by certain independent ratings companies. ▪ Credit risk associated with derivative instruments is evaluated quarterly based on conditions that existed at the balance sheet date, using practices that are at least as conservative as those recommended by regulators. Lifeco seeks to mitigate derivative credit risk by setting rating-based counterparty limits in investment policies and through collateral arrangements where possible. ▪ Counterparties providing reinsurance to Lifeco are reviewed for financial soundness as part of an ongoing monitoring process. The minimum financial strength of reinsurers is outlined in Lifeco’s Corporate Reinsurance Ceded Risk Management Policy. Lifeco seeks to minimize reinsurance credit risk by setting rating-based limits on net ceded exposure by counterparty as well as seeking protection in the form of collateral or funds-withheld ▪ Portfolios are monitored continuously, and reviewed regularly with the arrangements where possible. risk committee and the investment committee of the board of directors of Lifeco. ▪ Investment guidelines also specify collateral requirements. 85 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTNotes to the Consolidated Financial Statements Note 21 Risk Management (continued) 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 2016 3,259 88,325 11,478 16,970 21,651 8,467 10,781 5,627 1,310 1,835 1,166 516 273 648 528 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 Total balance sheet maximum credit exposure 172,834 174,783 [1] Includes $8,723 million as at December 31, 2016 ($13,830 million as at December 31, 2015) 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 $149 million changes in economic or political environments may impact their ability to of collateral received from counterparties as at December 31, 2016 ($107 million meet obligations as they come due. as at December 31, 2015) relating to derivative assets. 86 POWER FINANCIAL CORPORATION 2016 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, 2016 Bonds issued or guaranteed by: Treasuries Government-related Agency securitized Non-agency securitized Financials Communications Consumer products Energy Industrials Technology Transportation Utilities Short-term bonds DECEMBER 31, 2015 Bonds issued or guaranteed by: Treasuries Government-related Agency securitized Non-agency securitized Financials Communications Consumer products Energy Industrials Technology Transportation Utilities Short-term bonds CANADA UNITED STATES EUROPE TOTAL 1,422 18,379 100 2,392 3,167 634 2,799 1,618 1,358 506 2,246 6,226 3,871 786 3,903 3,685 4,293 3,268 1,336 3,305 2,102 3,951 1,054 826 4,454 10 10,880 6,765 158 1,875 5,245 970 3,224 986 1,634 471 1,095 4,259 1,520 13,088 29,047 3,943 8,560 11,680 2,940 9,328 4,706 6,943 2,031 4,167 14,939 5,401 44,718 32,973 39,082 116,773 CANADA UNITED STATES EUROPE TOTAL 1,376 17,171 105 2,851 3,467 652 2,689 1,565 1,432 513 2,160 5,898 3,241 1,064 3,972 4,161 3,790 2,970 1,204 2,935 2,047 3,706 877 802 4,307 216 10,974 7,095 218 2,131 5,916 1,028 3,075 928 1,635 247 912 4,277 1,336 13,414 28,238 4,484 8,772 12,353 2,884 8,699 4,540 6,773 1,637 3,874 14,482 4,793 43,120 32,051 39,772 114,943 87 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTNotes to the Consolidated Financial Statements Note 21 Risk Management (continued) The following table provides details of the carrying value of mortgage loans of Lifeco by geographic location: DECEMBER 31, 2016 Canada United States Europe DECEMBER 31, 2015 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): AA A BBB Exchange-traded Total SINGLE-FAMILY RESIDENTIAL MULTI-FAMILY RESIDENTIAL COMMERCIAL TOTAL 2,075 – – 2,075 3,709 1,895 383 5,987 7,108 3,274 3,207 12,892 5,169 3,590 13,589 21,651 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 2016 27,762 29,816 37,787 20,116 1,292 116,773 2016 221 288 16 3 528 2015 36,434 20,364 35,623 20,984 1,538 114,943 2015 209 248 – 4 461 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 2016 54 – 2 56 2015 33 2 3 38 Future asset credit losses The following outlines the future asset credit losses provided for in insurance contract liabilities. These amounts are in addition to the allowance for asset losses included with assets: DECEMBER 31 Participating Non-participating 88 2016 1,155 1,791 2,946 2015 1,395 2,163 3,558 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORT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. Lifeco’s debt obligations are denominated in Canadian dollars, euros and U.S. dollars. In accordance with IFRS, foreign currency translation gains and losses from net investments in foreign operations, net of related hedging activities and tax effects, are recorded in other comprehensive income. Strengthening or weakening of the Canadian dollar spot rate compared to the U.S. dollar, British pound and euro spot rates impacts Lifeco’s total equity. Correspondingly, Lifeco’s book value per share and capital ratios monitored by rating agencies are also impacted. The following policies and procedures are in place to mitigate Lifeco’s exposure to currency risk: ▪ Lifeco uses financial measures such as constant currency calculations to monitor the effect of currency translation fluctuations. ▪ Investments are normally made in the same currency as the liabilities supported by those investments. Segmented investment guidelines include maximum tolerances for unhedged currency mismatch exposures. ▪ For products with fixed and highly predictable benefit payments, investments are made in fixed income assets or real estate whose cash flows closely match the liability product cash flows. Where assets are not available to match certain period cash flows, such as long-tail cash flows, a  portion of these are invested in equities and the rest are duration matched. Hedging instruments are employed where necessary when there is a lack of suitable permanent investments to minimize loss exposure to interest rate changes. To the extent these cash flows are matched, protection against interest rate change is achieved and any change in the fair value of the assets will be offset by a similar change in the fair value of the liabilities. ▪ For products with less predictable timing of benefit payments, investments are made in fixed income assets with cash flows of a shorter duration than the anticipated timing of benefit payments or equities, as described below. ▪ The risks associated with the mismatch in portfolio duration and cash flow, asset prepayment exposure and the pace of asset acquisition are quantified and reviewed regularly. Projected cash flows from the current assets and liabilities are used in the CALM to determine insurance contract liabilities. Valuation assumptions have been made regarding rates of returns on supporting assets, fixed income, equity and inflation. The valuation assumptions use best estimates ▪ For assets backing liabilities not matched by currency, Lifeco normally of future reinvestment rates and inflation assumptions with an assumed converts the assets back to the currency of the liability using foreign correlation together with margins for adverse deviation set in accordance 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, with professional standards. These margins are necessary to provide for possibilities of misestimation and/or future deterioration in the best estimate assumptions and provide reasonable assurance that insurance contract liabilities cover a range of possible outcomes. Margins are reviewed resulting in an immaterial change to net earnings. periodically for continued appropriateness. ▪ 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. 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 0.14% (0.18% in 2015). The calculation for future credit losses on assets is based on the credit quality of the underlying asset portfolio. Interest rate risk The following policies and procedures are in place to mitigate Lifeco’s exposure to interest rate risk: 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 ▪ Lifeco uses a formal process for managing the matching of assets and Actuaries-prescribed scenarios. liabilities. This involves grouping general fund assets and liabilities into segments. Assets in each segment are managed in relation to the liabilities in the segment. The range of interest rates covered by these provisions is set in consideration of long-term historical results and is monitored quarterly with a full review annually. An immediate 1% parallel shift in the yield curve would not have a ▪ Interest rate risk is managed by investing in assets that are suitable for material impact on Lifeco’s view of the range of interest rates to be covered the products sold. by the provisions. If sustained however, the parallel shift could impact Lifeco’s ▪ Where these products have benefit or expense payments that are range of scenarios covered. dependent on inflation (inflation-indexed annuities, pensions and disability The total provision for interest rates also considers the impact of the Canadian claims), Lifeco generally invests in real return instruments to hedge its real Institute of Actuaries-prescribed scenarios: 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% parallel increase in the yield curve on the prescribed scenarios would not change the total provision for interest rates. ▪ 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. 89 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTNotes to the Consolidated Financial Statements Note 21 Risk Management (continued) Another way of measuring the interest rate risk associated with this The following provides information on the effect of an immediate 1% increase assumption is to determine the effect on the insurance and investment or 1% decrease in the interest rates at both the low and high end of the range contract liabilities impacting the shareholders’ earnings of a 1% change in of interest rates recognized in the provisions: Lifeco’s view of the range of interest rates to be covered by these provisions. DECEMBER 31 Change in interest rates 2016 2015 1% INCREASE 1% DECREASE 1% INCREASE 1% DECREASE Increase (decrease) in insurance and investment contract liabilities Increase (decrease) in net earnings (202) 149 677 (491) (163) 109 614 (430) Equity price risk Lifeco has investment policy guidelines in place that provide for prudent Some insurance and investment contract liabilities are supported by investment properties, common stocks and private equities, for example, investment in equity markets with clearly defined limits to mitigate price risk. segregated fund products and products with long-tail cash flows. Generally 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 determines insurance contract liabilities at a conditional tail expectation of 75 (CTE75) level. In other words, Lifeco determines insurance contract liabilities at a level that covers the average loss in the worst 25% part of the these liabilities will fluctuate in line with equity fair values. There will be additional impacts on these liabilities as equity values fluctuate. The following provides information on the expected impacts of a 10% increase or 10% decrease in equity values: loss distribution. DECEMBER 31 Change in equity values 2016 2015 10% INCREASE 10% DECREASE 10% INCREASE 10% DECREASE Increase (decrease) in non-participating insurance and investment contract liabilities Increase (decrease) in net earnings (51) 43 61 (50) (53) 45 139 (108) The best estimate return assumptions for equities are primarily based on long-term historical averages. Changes in the current market could result in changes to these assumptions and will impact both asset and liability cash flows. The following provides information on the expected impacts of a 1% increase or 1% decrease in the best estimate assumptions: DECEMBER 31 Change in best estimate return assumptions Increase (decrease) in non-participating insurance contract liabilities Increase (decrease) in net earnings IGM FINANCIAL 2016 2015 1% INCREASE 1% DECREASE 1% INCREASE 1% DECREASE (504) 407 552 (438) (534) 433 573 (457) The board of directors of IGM provides oversight and carries out its risk management mandate through various committees. LIQUIDITY RISK IGM’s liquidity management practices include: ▪ Maintaining liquid assets and lines of credit to satisfy near-term liquidity needs. ▪ Ensuring effective controls over liquidity management processes. ▪ Performing regular cash forecasts and stress testing. 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 private placements, Canadian bank-sponsored securitization trusts, and by issuance and sale of National Housing Act Mortgage-Backed Securities (NHA MBS), ▪ Regular assessment of capital market conditions and IGM’s ability to access including sales to Canada Housing Trust under the Canada Mortgage Bond bank and capital market funding. Program (CMB Program). ▪ Ongoing efforts to diversify and expand long-term mortgage funding sources. Certain subsidiaries of IGM are approved issuers of NHA MBS and are approved ▪ Oversight of liquidity by management and by committees of the board of directors of IGM. A key liquidity requirement for IGM is the funding of commissions paid on the sale of investment funds. Commissions on the sale of investment funds continue to be paid from operating cash flows. sellers into the CMB Program. Capacity for sales under the CMB Program consists of participation in new CMB issues and reinvestment of principal repayments held in principal reinvestment accounts. IGM maintains committed capacity within certain Canadian bank-sponsored securitization trusts. 90 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTNotes to the Consolidated Financial Statements Note 21 Risk Management (continued) IGM’s contractual maturities of certain liabilities were as follows: DECEMBER 31, 2016 Derivative financial instruments Deposits and certificates Obligations to securitization entities Debentures Pension contributions Total contractual maturities DEMAND LESS THAN 1 YEAR 1–5 YEARS AFTER 5 YEARS PAYMENTS DUE BY PERIOD – 453 – – – 18 8 20 8 1,340 6,310 – 38 525 – 453 1,404 6,863 – 2 71 800 – 873 TOTAL 38 471 7,721 1,325 38 9,593 In addition to IGM’s current balance of cash and cash equivalents, liquidity In certain instances, credit risk is also limited by the terms and nature of is available through IGM’s lines of credit. IGM’s lines of credit with various securitization transactions as described below: Schedule I Canadian chartered banks totalled $825 million as at December 31, 2016, compared to $525 million at December 31, 2015. The lines of credit as at December 31, 2016 consisted of committed lines of $650 million ($350 million in 2015) and uncommitted lines of $175 million ($175 million in 2015). IGM has accessed its uncommitted lines of credit in the past; however, any advances made by the banks under the uncommitted lines are at the banks’ sole discretion. As at December 31, 2016 and 2015, IGM was not utilizing its committed lines of credit or its uncommitted lines of credit. IGM’s liquidity position and its management of liquidity and funding risk have not changed materially since December 31, 2015. CREDIT RISK IGM’s cash and cash equivalents, securities holdings, mortgage portfolios and derivatives are subject to credit risk. IGM monitors its credit risk management practices on an ongoing basis to evaluate their effectiveness. At December  31, 2016, IGM’s cash and cash equivalents of $611  million ($983 million in 2015) consisted of cash balances of $85 million ($105 million in 2015) on deposit with Canadian chartered banks and cash equivalents of $526 million ($878 million in 2015). Cash equivalents are composed of Government of Canada treasury bills totalling $44 million ($132 million in 2015), provincial government treasury bills and promissory notes of $197 million ($447 million in 2015), bankers’ acceptances and other short-term notes issued by Canadian chartered banks of $247 million ($299 million in 2015), and highly rated corporate commercial paper of $39 million (nil in 2015). 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 ▪ Under the NHA MBS program totalling $4.9 billion ($4.6 billion in 2015), 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. ▪ Credit risk for mortgages securitized by transfer to bank-sponsored securitization trusts totalling $2.7 billion ($2.4 billion in 2015) is limited to amounts held in cash reserve accounts and future net interest income, the fair values of which were $55 million ($48 million in 2015) and $45 million ($39 million in 2015), respectively, at December 31, 2016. Cash reserve accounts are reflected on the balance sheets, whereas rights to future net interest income are not reflected on the balance sheets and will be recorded over the life of the mortgages. This risk is further mitigated by insurance with 29.1% of mortgages held in ABCP Trusts insured at December 31, 2016 (36.6% in 2015). At December 31, 2016, residential mortgages recorded on the balance sheet were 73.9% insured (76.8% in 2015). At December 31, 2016, impaired mortgages on these portfolios were $3  million ($3  million in 2015). Uninsured non- performing mortgages over 90 days on these portfolios were $1 million at December 31, 2016 ($1 million in 2015). 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. exposure to credit risk on these financial instruments is their carrying value. IGM regularly reviews the credit quality of the mortgages and the adequacy As at December 31, 2016, residential mortgages, recorded on IGM’s balance of the collective allowance for credit losses. sheet, of $8.0 billion ($7.4 billion in 2015) consisted of $7.6 billion sold to IGM’s collective allowance for credit losses was $1 million at December 31, 2016 securitization programs ($7.0 billion in 2015), $340 million held pending ($1 million in 2015), and is considered adequate by management to absorb all sale or securitization ($384 million in 2015) and $29 million related to IGM’s credit-related losses in the mortgage portfolios based on: i) historical credit intermediary operations ($28 million in 2015). performance experience and recent trends, ii) current portfolio credit metrics IGM manages credit risk related to residential mortgages through: ▪ adhering to its lending policy and underwriting standards; ▪ its loan servicing capabilities; 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 ▪ use of client-insured mortgage default insurance and mortgage portfolio changed materially since December 31, 2015. 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 is exposed to credit risk through the derivative contracts it utilizes to hedge interest rate risk, to facilitate securitization transactions, to hedge market risk related to certain share-based compensation arrangements and to hedge foreign exchange risk on payments due on the closing of the China AMC transaction (Note 9). These derivatives are discussed more fully under the market risk section below. 91 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTNotes to the Consolidated Financial Statements Note 21 Risk Management (continued) To the extent that the fair value of the derivatives is in a gain position, IGM is $47 million in 2015) and an outstanding notional value of $1.0 billion at exposed to the credit risk that its counterparties fail to fulfill their obligations December 31, 2016 ($740 million in 2015). IGM enters into interest rate under these arrangements. 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 $43 million ($58 million in 2015) does not give effect to any netting agreements or collateral arrangements. The exposure to credit risk, considering netting agreements and collateral arrangements and including rights to future net interest income, was $3  million at 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 $30 million ($54 million in 2015), on an outstanding notional amount of $2.1 billion at December 31, 2016 ($1.8 billion in 2015). The net fair value of these swaps of $7 million at December 31, 2016 ($7 million in 2015) is recorded on the balance sheet and has an outstanding notional amount of $3.1 billion at December 31, 2016 ($2.6 billion in 2015). December  31,  2016 ($1  million in 2015). Counterparties are all Canadian ▪ IGM is exposed to the impact that changes in interest rates may have on Schedule I chartered banks and, as a result, management has determined the value of mortgages committed to or held pending sale or securitization that IGM’s overall credit risk related to derivatives was not significant at to long-term funding sources. IGM enters into interest rate swaps to December 31, 2016. Management of credit risk related to derivatives has not hedge the interest rate risk related to funding costs for mortgages held changed materially since December 31, 2015. by IGM pending sale or securitization. The fair value of these swaps MARKET RISK was nil (nil in 2015) on an outstanding notional amount of $123 million at December 31, 2016 ($88 million in 2015). Currency risk IGM is exposed to foreign exchange risk on its investments in Personal As at December 31, 2016, the impact to annual net earnings of a 100-basis- point increase in interest rates would have been an increase of approximately Capital and China AMC. IGM has hedged its exposure to the final payments $0.2  million (a decrease of $0.7  million in 2015). IGM’s exposure to and due on the closing of the China AMC transaction through the use of forward management of interest rate risk have not changed materially since currency contracts. December 31, 2015. Interest rate risk IGM is exposed to interest rate risk on its loan portfolio and on certain of the Equity price risk IGM is exposed to equity price risk on its equity securities which are classified derivative financial instruments used in IGM’s mortgage banking operations. as either available for sale or fair value through profit or loss. IGM manages interest rate risk associated with its mortgage banking IGM sponsors a number of deferred compensation arrangements for operations by entering into interest rate swaps with Canadian Schedule I employees where payments to participants are deferred and linked to the chartered banks as follows: ▪ IGM has in certain instances funded floating rate mortgages with fixed rate Canada Mortgage Bonds as part of the securitization transactions under the CMB Program. As previously discussed, as part of the CMB Program, IGM is party to a swap whereby it is entitled to receive investment returns on reinvested mortgage principal and is obligated to pay Canada Mortgage Bond coupons. This swap had a negative fair value of $23 million (negative 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 2016 3,581 2,023 302 411 63 6,380 2015 3,352 1,863 263 339 66 5,883 92 POWER FINANCIAL CORPORATION 2016 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 2016 68 11 33 412 2015 370 11 32 413 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 unfunded post-employment health, dental and life insurance benefits to eligible employees, advisors and plans for certain employees and advisors as well as unfunded supplementary their dependents. The obligations for these benefits are supported by assets employee retirement plans (SERP) for certain employees. The Corporation’s of the Corporation and its subsidiaries. subsidiaries also maintain defined contribution pension plans for eligible employees and advisors. The Corporation and its subsidiaries have pension and benefit committees or a trusteed arrangement that provides oversight for the benefit plans. The defined benefit pension plans provide pensions based on length of service The benefit plans are monitored on an ongoing basis to assess the benefit, and final average earnings. For most plans, active plan participants share funding and investment policies, financial status, and funding requirements. in the cost by making contributions in respect of current service. Certain Significant changes to benefit plans require approval. pension payments are indexed either on an ad hoc basis or a guaranteed basis. The determination of the defined benefit obligation reflects pension benefits, in accordance with the terms of the plans, and assuming the plans are not terminated. The assets supporting the funded pension plans are held in separate trusteed pension funds. The obligations for the wholly unfunded 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 Corporation and its subsidiaries determine if an economic benefit exists in the form of potential reductions in future contributions, the present value of The significant defined benefit plans of Lifeco’s subsidiaries and IGM are future expenses to be paid from the plan and in the form of surplus refunds, closed to new entrants. New hires are only eligible for defined contribution where permitted by applicable regulation and plan provisions. benefits. As a result, defined benefit plan exposure will continue to be reduced in future years. By their design, the defined benefit plans expose the Corporation and its subsidiaries to the typical risks faced by defined benefit plans, such The defined contribution pension plans provide pension benefits based on as investment performance, changes to the discount rates used to value accumulated employee and employer contributions. Contributions to these the obligations, longevity of plan members, and future inflation. Pension plans are a set percentage of employees’ annual income and may be subject and benefit risk is managed by regular monitoring of the plans, applicable to certain vesting requirements. regulations and other factors that could impact the expenses and cash flows of the Corporation and its subsidiaries. 93 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTNotes to the Consolidated Financial Statements 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 Actual return on assets greater than interest income Benefits paid Settlement 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 Settlement Curtailment 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 2016 2015 OTHER POST- EMPLOYMENT BENEFITS DEFINED BENEFIT PENSION PL ANS OTHER POST- EMPLOYMENT BENEFITS DEFINED BENEFIT PENSION PL ANS 6,452 237 23 153 248 (258) (19) (13) (220) 6,603 – – – 21 – (21) – – – – 5,960 214 25 130 86 (231) – (7) 275 6,452 7,272 454 6,866 158 23 267 520 (13) (30) (258) 3 (19) (14) (259) 7,650 (1,047) (91) (1,138) 167 25 246 (150) (5) 1 (231) 15 – – 338 7,272 (820) (83) (903) 3 – 19 12 (8) (1) (21) – – (7) (1) 450 (450) – (450) 2016 7,147 503 – – – 21 – (21) – – – – 457 3 – 18 (5) (9) 4 (21) 2 – – 5 454 (454) – (454) 2015 6,803 469 2015 TOTAL 250 (1,607) (1,357) 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) DEFINED BENEFIT PENSION PL ANS 214 (1,352) (1,138) OTHER POST- EMPLOYMENT BENEFITS – (450) (450) 2016 TOTAL 214 (1,802) (1,588) DEFINED BENEFIT PENSION PL ANS 250 (1,153) (903) OTHER POST- EMPLOYMENT BENEFITS – (454) (454) 94 POWER FINANCIAL CORPORATION 2016 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, the present value of future expenses The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their to be paid from the plan, or surplus refunds; in the event the Corporation and Interaction, the Corporation and its subsidiaries must assess whether the its subsidiaries are not entitled to a benefit, a limit or “asset ceiling” is required pension asset has economic benefit to the Corporation and its subsidiaries on the balance sheet. The following provides a breakdown 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, plan amendments and curtailments Administration fees Defined contribution current service cost Expense recognized in net earnings Actuarial (gains) losses recognized Return on assets greater than interest income Change in asset ceiling Expense (income) recognized in other comprehensive income Total expense 2016 83 3 5 91 2015 23 4 56 83 2016 2015 PENSION PL ANS OTHER POST- EMPLOYMENT BENEFITS PENSION PL ANS OTHER POST- EMPLOYMENT BENEFITS 158 33 (11) 13 68 261 477 (248) 5 234 495 3 19 (7) – – 15 3 – – 3 18 167 36 15 7 54 279 (154) (86) 56 (184) 95 3 18 2 – – 23 (10) – – (10) 13 In 2016, the Corporation and its subsidiaries incurred $1 million of actuarial gains ($1 million of actuarial gains in 2015) 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 2015 52 36 12 100 2016 48 41 11 100 No plan assets are directly invested in the Corporation’s or subsidiaries’ at December 31, 2015) 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 $5,241 million at December 31, 2016 are invested in IGM’s mutual funds. A portion of Power Financial’s plan assets ($5,207 million at December 31, 2015) of which $5,176 million ($5,143 million are invested in segregated funds managed by a subsidiary of Lifeco. 95 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTNotes to the Consolidated Financial Statements 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 2017 are as follows: Funded (wholly or partly) defined benefit plans Unfunded defined benefit plans Defined contribution plans Total ACTUARIAL ASSUMPTIONS AND SENSITIVITIES Actuarial assumptions DECEMBER 31 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] Weighted based on the obligations of each plan. 96 2016 2015 DEFINED BENEFIT PENSION PL ANS 6,901 749 7,650 OTHER POST- EMPLOYMENT BENEFITS 450 – 450 DEFINED BENEFIT PENSION PL ANS 6,530 742 7,272 OTHER POST- EMPLOYMENT BENEFITS 454 – 454 2016 2015 DEFINED BENEFIT PENSION PL ANS OTHER POST- EMPLOYMENT BENEFITS DEFINED BENEFIT PENSION PL ANS OTHER POST- EMPLOYMENT BENEFITS 46 18 36 100 18.9 25 – 75 100 12.9 PENSION PL ANS 203 22 78 303 47 16 37 100 18.7 27 – 73 100 12.5 OTHER POST- EMPLOYMENT BENEFITS – 21 – 21 2016 2015 DEFINED BENEFIT PENSION PL ANS OTHER POST- EMPLOYMENT BENEFITS DEFINED BENEFIT PENSION PL ANS OTHER POST- EMPLOYMENT BENEFITS 3.8 – 4.3 3.2 – 4.1 3.9 – 4.3 3.7 – 4.1 3.1 – 4.1 3.8 – 4.3 3.9 – 4.1 3.9 – 4.3 3.8 3.3 3.3 3.3 4.1 – 3.8 – 5.2 4.5 2029 3.5 3.3 3.8 3.3 3.9 – 4.1 – 5.3 4.5 2029 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORT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 for those age 35 in the fiscal year Female Age 65 in fiscal year Age 65 for those age 35 in the fiscal year [1] Weighted based on the obligations of each plan. 2016 2015 DEFINED BENEFIT PENSION PL ANS OTHER POST- EMPLOYMENT BENEFITS DEFINED BENEFIT PENSION PL ANS OTHER POST- EMPLOYMENT BENEFITS 22.8 25.0 24.7 26.7 22.3 23.9 24.6 26.1 22.8 25.1 24.7 26.8 22.2 23.9 24.7 26.2 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 longevity improvements 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 on defined benefit obligation DECEMBER 31, 2016 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 (1,245) 337 620 (53) 43 1,574 (298) (557) 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. 97 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTNotes to the Consolidated Financial Statements 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, 2016 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 2,151 39 2 70 2,256 194 9 28 1,737 85 – – 6,144 318 11 98 2,262 2,487 1,822 6,571 1,089 428 467 – 1,987 – – 7,199 – 1,089 9,614 467 1,984 1,987 7,199 11,170 81 11 609 103 804 – – – – – – – – – – 81 11 609 103 804 211 49 – – 260 3 228 – 231 2 – 2 – 4 133 49 – – 182 (7) (1,265) – (1,272) 2 – 1 – 3 5,050 4,474 9,021 18,545 495 (1,087) – 318 1,000 13 1,331 – – 500 30 530 432 432 – – – 432 318 1,500 43 2,293 42 – – 3 45 42 (4) (436) 1 (397) 450 6,831 49 5,053 – 499 9,453 21,337 32 572 6 (1,478) Interest rate contracts Swaps Options purchased Futures – long Futures – short Foreign exchange contracts Forward contracts Cross-currency swaps Options purchased Other derivative contracts Equity contracts Futures – long Futures – short Other forward contracts CASH FLOW HEDGES Interest rate contracts Swaps Foreign exchange contracts Forward contracts Cross-currency swaps Other derivative contracts Forward contracts and total return swaps NET INVESTMENT HEDGES Foreign exchange contracts Forward contracts 98 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTNotes to the Consolidated Financial Statements Note 25 Derivative Financial Instruments (continued) 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) The amount subject to maximum credit risk is limited to the current fair Call options grant the Corporation and its subsidiaries the right to enter into value of the instruments which are in a gain position. The maximum credit a swap with predetermined fixed-rate payments over a predetermined time risk represents the total cost of all derivative contracts with positive values period on the exercise date. Call options are used to manage the variability and does not reflect actual or expected losses. The total fair value represents in future interest payments due to a change in credited interest rates and the the total amount that the Corporation and its subsidiaries would receive related potential change in cash flows due to surrenders. Call options are also (or pay) to terminate all agreements at year-end. However, this would not used to hedge minimum rate guarantees. result in a gain or loss to the Corporation and its subsidiaries as the derivative instruments which correlate to certain assets and liabilities provide offsetting gains or losses. As at December 31, 2016, Lifeco received assets of $159 million ($107 million in 2015) as collateral for derivative contracts from counterparties. INTEREST RATE CONTRACTS Interest rate swaps, futures and options are used as part of a portfolio of assets to manage interest rate risk associated with investment activities and insurance and investment contract liabilities and to reduce the impact of fluctuating interest rates on the mortgage banking operations and intermediary operations. Interest rate swap agreements require the periodic exchange of payments without the exchange of the notional principal amount on which payments are based. FOREIGN EXCHANGE CONTRACTS Cross-currency swaps are used in combination with other investments to manage foreign currency risk associated with investment activities, and insurance and investment contract liabilities. Under these swaps, principal amounts and fixed or floating interest payments may be exchanged in different currencies. The Corporation and its subsidiaries may also enter into certain foreign exchange forward contracts to hedge certain product liabilities, cash and cash equivalents and cash flows. 99 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTNotes to the Consolidated Financial Statements Note 25 Derivative Financial Instruments (continued) 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 ENFORCEABLE MASTER NETTING AGREEMENTS OR SIMILAR AGREEMENTS The Corporation and its subsidiaries enter into the International Swaps and and are used to periodically hedge the market risk associated with certain Derivative Association’s master agreements for transacting over-the-counter fee income. Equity put options are used to manage the potential credit risk derivatives. The Corporation and its subsidiaries receive and pledge collateral impact of significant declines in certain equity markets. according to the related International Swaps and Derivative Association’s Forward agreements and total return swaps are used to manage exposure to fluctuations in the total return of common shares related to deferred compensation arrangements. Forward agreements and total return swaps require the exchange of net contractual payments periodically or at maturity Credit Support Annexes. The International Swaps and Derivative Association’s master agreements do not meet the criteria for offsetting on the balance sheets because they create a right of set-off that is enforceable only in the event of default, insolvency, or bankruptcy. without the exchange of the notional principal amounts on which the For exchange-traded derivatives subject to derivative clearing agreements payments are based. Certain of these instruments are not designated as with exchanges and clearing houses, there is no provision for set-off at default. hedges. Changes in fair value are recorded in operating and administrative Initial margin is excluded from the table below as it would become part of a expenses in the statements of earnings for those instruments not designated pooled settlement process. as hedges. Lifeco’s reverse repurchase agreements are also subject to right of set-off in the event of default. These transactions and agreements include master netting arrangements which provide for the netting of payment obligations between Lifeco and its counterparties in the event of default. The following disclosure shows the potential effect on the 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, 2016 FINANCIAL INSTRUMENTS (ASSETS) Derivative financial instruments FINANCIAL INSTRUMENTS (LIABILITIES) Derivative financial instruments DECEMBER 31, 2015 FINANCIAL INSTRUMENTS (ASSETS) Derivative financial instruments Reverse repurchase agreements [3] FINANCIAL INSTRUMENTS (LIABILITIES) Derivative financial instruments REL ATED AMOUNTS NOT SET OFF IN THE BAL ANCE SHEET GROSS AMOUNT OF FINANCIAL INSTRUMENTS PRESENTED IN THE BALANCE SHEET OFFSETTING COUNTERPARTY POSITION [1] FINANCIAL COLLATERAL RECEIVED/ PLEDGED [2] NET EXPOSURE 572 572 2,050 2,050 (379) (379) (379) (379) (131) (131) (403) (403) 62 62 1,268 1,268 REL ATED AMOUNTS NOT SET OFF IN THE BAL ANCE SHEET 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 520 43 563 2,682 2,682 (358) – (358) (358) (358) (104) (43) (147) (586) (586) 58 – 58 1,738 1,738 [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 $159 million ($107 million at December 31, 2015), received on reverse repurchase agreements was nil ($44 million at December 31, 2015), and pledged on derivative liabilities was $475 million ($671 million at December 31, 2015). [3] Assets related to reverse repurchase agreements are included in bonds in the balance sheets. 100 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTNotes to the Consolidated Financial Statements Note 26 Fair Value Measurement 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 assets and liabilities recorded or disclosed at fair vaule, including liabilities not measured at fair value if the carrying amount is a reasonable their levels in the fair value hierarchy using the valuation methods and approximation of the fair value. Items excluded are: cash and cash equivalents, assumptions described in the summary of significant accounting policies and dividends, interest and accounts receivable, loans to policyholders, certain below. Fair values are management’s estimates and are generally calculated other financial assets, accounts payable, dividends and interest payable and using market conditions at a specific point in time and may not reflect future certain other financial liabilities. fair values. The calculations are subjective in nature, involve uncertainties and matters of significant judgment. The table distinguishes between assets and liabilities recorded at fair value on a recurring basis of those for which fair value is disclosed. DECEMBER 31, 2016 ASSETS 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 Funds held by ceding insurers Derivative instruments Other assets Assets disclosed at fair value Bonds Loans and receivables Mortgage loans Loans and receivables Shares Available for sale [1] Total LIABILITIES Liabilities recorded at fair value Investment contract liabilities Derivative instruments Other liabilities Liabilities disclosed at fair value Obligations to securitization entities Debentures and other debt instruments Capital trust debentures Deposits and certificates Total CARRYING VALUE LEVEL 1 LEVEL 2 LEVEL 3 TOTAL FAIR VALUE 88,283 11,819 339 7,673 182 4,340 8,605 572 516 – – – 7,583 53 – 214 3 302 88,282 11,819 339 9 – – 8,391 566 213 1 – – 81 129 4,340 – 3 1 88,283 11,819 339 7,673 182 4,340 8,605 572 516 122,329 8,155 109,619 4,555 122,329 16,970 29,295 376 46,641 168,970 2,009 2,050 10 4,069 7,721 7,513 161 471 15,866 19,935 – – – – 18,355 129 18,484 22,580 7,838 30,418 – 40,935 376 8,343 376 49,278 8,155 150,554 12,898 171,607 – 1 10 11 – 428 – – 428 439 1,989 2,023 – 4,012 – 7,885 212 472 8,569 12,581 20 26 – 46 7,873 – – – 7,873 7,919 2,009 2,050 10 4,069 7,873 8,313 212 472 16,870 20,939 [1] Fair value of certain shares available for sale cannot be reliably measured, therefore these investments are recorded at cost. 101 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTNotes to the Consolidated Financial Statements Note 26 Fair Value Measurement (continued) DECEMBER 31, 2015 ASSETS 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 Funds held by ceding insurers Derivative instruments Other assets Assets disclosed at fair value Bonds Loans and receivables Mortgage loans Loans and receivables Shares Available for sale [1] Total LIABILITIES Liabilities recorded at fair value Investment contract liabilities Derivative instruments Other liabilities Liabilities disclosed at fair value Obligations to securitization entities Debentures and other debt instruments Capital trust debentures Deposits and certificates Total CARRYING VALUE LEVEL 1 LEVEL 2 LEVEL 3 TOTAL FAIR VALUE 86,460 12,014 384 6,692 63 5,237 13,652 520 599 – – – 6,615 62 – 180 4 381 86,450 12,013 384 10 – – 13,472 516 204 10 1 – 67 1 5,237 – – 14 86,460 12,014 384 6,692 63 5,237 13,652 520 599 125,621 7,242 113,049 5,330 125,621 16,905 29,029 534 46,468 172,089 2,253 2,682 4 4,939 7,092 6,927 161 310 14,490 19,429 – – – – 18,145 108 18,253 23,474 7,238 30,712 – 41,619 534 7,880 534 49,499 7,242 154,668 13,210 175,120 – 3 4 7 – 467 – – 467 474 2,226 2,632 – 4,858 – 7,497 215 312 8,024 12,882 27 47 – 74 7,272 – – – 7,272 7,346 2,253 2,682 4 4,939 7,272 7,964 215 312 15,763 20,702 [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 2016 and 2015. 102 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTNotes to the Consolidated Financial Statements Note 26 Fair Value Measurement (continued) The Corporation’s assets and liabilities recorded at fair value and those for quotes, issuer spreads, two-sided markets, benchmark securities, offers which fair value is disclosed have been categorized based upon the following and reference data. Level 2 assets and liabilities include those priced using 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. 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 a matrix which is based on credit quality and average life, government and agency securities, restricted stock, some private bonds and equities, most investment-grade and high-yield corporate bonds, most asset-backed securities, most over-the-counter derivatives, mortgage loans, deposits and certificates, and most debentures and other debt instruments. Investment contracts that are measured at fair value through profit or loss are mostly included in the Level 2 category. investment fund units and other liabilities in instances where there are ▪ Level 3 inputs utilize one or more significant inputs that are not based on quoted prices available from active markets. observable market inputs and include situations where there is little, if ▪ 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 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 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. 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 assets and 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, 2016. DECEMBER 31, 2016 FAIR VALUE THROUGH PROFIT OR LOSS AVAILABLE FOR SALE FAIR VALUE THROUGH PROFIT OR LOSS AVAILABLE FOR SALE INVESTMENT PROPERTIES DERIVATIVES, NET OTHER ASSETS (LIABILITIES) INVESTMENT CONTRACT LIABILITIES TOTAL BONDS SHARES 5,237 (47) 14 (27) 5,256 Balance, beginning of year 10 Total gains (losses) In net earnings In other comprehensive income [1] Purchases Sales Settlements Other Transfers out of Level 3 Balance, end of year – – – – – – (9) 1 1 – – – – – – (1) – 67 2 – 50 (38) – – – 81 1 – 3 116 – – 9 – 61 (633) 102 (427) – – – 11 – (4) – 17 – – 129 4,340 (23) – – – (5) – (8) – 1 – – – – – 7 – 74 (630) 264 (470) 17 8 (10) (20) 4,509 [1] Amount of other comprehensive income for investment properties represents the unrealized gains on foreign exchange. Transfers out of Level 3 are due primarily to increased observability of inputs in valuation methodologies as evidenced by corroboration of market prices with multiple pricing vendors or the lifting of redemption restrictions on investments in mutual funds and segregated funds. 103 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTNotes to the Consolidated Financial Statements Note 26 Fair Value Measurement (continued) The following table sets out information about significant unobservable inputs used at year-end in measuring assets and 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 2.9% – 10.3% Reversionary rate Range of 5.0% – 8.3% Vacancy rate Weighted average of 3.1% 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 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 GAINS (LOSSES) ON DEFINED BENEFIT PENSION PL ANS SHARE OF JOINTLY CONTROLLED CORPORATIONS AND ASSOCIATES (172) 93 (79) 2,036 (988) 1,048 278 370 648 (374) (127) (501) (27) 1 (26) 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 GAINS (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) TOTAL 1,741 (651) 1,090 TOTAL 390 1,331 20 1,741 YEAR ENDED DECEMBER 31, 2016 Balance, beginning of year Other comprehensive income (loss) Balance, end of year YEAR ENDED DECEMBER 31, 2015 Balance, beginning of year Other comprehensive income (loss) Other Balance, end of year 104 POWER FINANCIAL CORPORATION 2016 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 2016 2015 2,043 (124) 1,919 (4) 1,915 713.2 0.4 713.6 2.69 2.68 2,449 (130) 2,319 (4) 2,315 713.0 0.7 713.7 3.25 3.24 For 2016, 7,294,383 stock options (3,457,961 in 2015) have been excluded from the computation of diluted earnings per share as they were anti-dilutive. Note 29 Related Parties PRINCIPAL SUBSIDIARIES AND JOINTLY CONTROLLED CORPORATIONS The financial statements of Power Financial include the operations of the following subsidiaries, indirect subsidiaries and jointly controlled corporations: CORPORATIONS INCORPORATED IN PRIMARY BUSINESS OPERATION Great-West Lifeco Inc. The Great-West Life Assurance Company [1] 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 [2] United States IGM Financial Inc. [3] Investors Group Inc. Mackenzie Financial Corporation Parjointco N.V. Pargesa Holding SA Wealthsimple Financial Corp. [4] Canada Canada Canada Netherlands Switzerland Canada Financial services Financial services Financial services Financial services Holding company Holding company Financial services [1] Great-West Life Assurance Company holds a 3.8% equity interest in IGM Financial. [2] Lifeco holds 100% of the voting shares and 96.2% of the total outstanding shares. [3] IGM Financial holds a 4.0% equity interest in Lifeco and a 22.7% equity interest in Wealthsimple Financial Corp. [4] Together with IGM Financial, Power Financial holds a 69.2% equity interest. % EQUIT Y INTEREST 2016 2015 67.9 100 100 100 100 100 96.2 61.5 100 100 50 55.5 46.5 67.4 100 100 100 100 100 95.7 60.4 100 100 50 55.5 33.2 105 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTNotes to the Consolidated Financial Statements Note 29 Related Parties (continued) TRANSACTIONS WITH RELATED PARTIES In the normal course of business, Power Financial and its subsidiaries In  2014 and 2015, the Corporation entered into tax loss consolidation transactions with IGM. A wholly owned subsidiary of Power Financial issued enter into various transactions; subsidiaries provide insurance benefits, $2.0 billion 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 $2.0 billion 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. Lifeco provides asset management and administrative services for employee benefit plans relating to pension and other post-employment benefits for employees of Power Corporation, Power Financial and Lifeco and its subsidiaries. In 2016, IGM sold residential mortgage loans to Great-West Life, London Life and segregated funds maintained by London Life for $184 million ($206 million in 2015). In October 2016, Power Financial, together with Lifeco and IGM, announced the formation of a new investment fund, Portag3  Ventures Limited Partnership, dedicated to primarily backing early-stage innovative financial services companies. 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 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 2016 21 10 17 48 2015 18 6 14 38 Note 30 Contingent Liabilities 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. position of the Corporation. Actual results could differ from the best estimates of the Corporation’s and its subsidiaries’ management. LIFECO During the year, a subsidiary of Lifeco, Canada Life, received the required regulatory approvals and is now in the final stages of implementing the settlement of the class action related to the four partial declared wind-ups in respect of an Ontario defined benefit pension plan. 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. Management of Lifeco believes the claims are without merit and will be aggressively defending these actions. IGM FINANCIAL IGM is currently in discussions with the Ontario Securities Commission regarding potential distributions to Investment Planning Counsel clients, related to clients who may have been eligible for lower fees in certain circumstances. At December 31, 2016, no reliable estimate of a possible payment was determinable. 106 POWER FINANCIAL CORPORATION 2016 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 INVESTMENT COMMITMENTS With respect to Lifeco, commitments of investment transactions made in the execute agreements that provide for indemnifications to third parties in normal course of operations in accordance with policies and guidelines and transactions such as business dispositions, business acquisitions, loans and that are to be disbursed upon fulfilment of certain contract conditions were securitization transactions. The Corporation and its subsidiaries have also $1,172 million as at December 31, 2016, with $1,084 milion maturing within one agreed to indemnify their directors and certain of their officers. The nature of year and $88 million maturing within two years. these agreements precludes the possibility of making a reasonable estimate of the maximum potential amount the Corporation and its subsidiaries could be required to pay third parties as the agreements often do not specify a maximum amount and the amounts are dependent on the outcome of PLEDGING OF ASSETS FOR REINSURANCE AGREEMENTS In addition to the assets pledged by Lifeco disclosed elsewhere in the financial future contingent events, the nature and likelihood of which cannot be statements: determined. Historically, the Corporation has not made any payments under [i] The amount of assets included in the Corporation’s balance sheet which such indemnification agreements. No provisions have been recognized have a security interest by way of pledging is $1,709 million ($645 million related to these agreements. at December 31, 2015) in respect to reinsurance agreements. LETTERS OF CREDIT Letters of credit are written commitments provided by a bank. The total amount of letter of credit facilities at Lifeco is US$2.9  billion, of which US$2.7 billion were issued as of December 31, 2016. The Reinsurance operation also periodically uses letters of credit as collateral under certain reinsurance contracts for on-balance sheet policy liabilities. In addition, under certain reinsurance contracts, bonds presented in portfolio investments are held in trust and escrow accounts. Assets are placed in these accounts pursuant to the requirements of certain legal and contractual obligations to support contract liabilities assumed. [ii] Lifeco has pledged, in the normal course of business, $62  million ($70 million at December 31, 2015) of its assets for the purpose of providing collateral for the counterparty. 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 147 133 102 2017 2018 2019 2020 82 2021 66 2022 AND THEREAFTER 317 TOTAL 847 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 Corporation minerals-based specialty solutions for industry; cement, aggregates and evaluates the performance based on the operating segment’s contribution concrete; testing, inspection and certification; design and distribution of to earnings. The following provides a brief description of the three reportable sportswear; wines and spirits; materials technology and recycling; and oil, operating segments: gas and alternative energies. ▪ Lifeco is a financial services holding company with interests in life insurance, The column entitled “Corporate” is comprised of corporate activities of health insurance, retirement and investment management services, asset Power Financial and also includes consolidation elimination entries. management and reinsurance businesses primarily in Canada, the United States and Europe. Revenues and assets are attributed to geographic areas based on the point of origin of revenues and the location of assets. The contribution to earnings ▪ IGM Financial is a financial services company operating in Canada primarily of each segment includes the share of net earnings resulting from the within the advice segment of the financial services market. IGM earns investments that Lifeco and IGM have in each other. revenues from a range of sources, but primarily from management fees, which are charged to its mutual funds for investment advisory and management services. IGM also earns revenues from fees charged to its mutual funds for administrative services. 107 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORT Notes to the Consolidated Financial Statements Note 32 Segmented Information (continued) CONSOLIDATED NET EARNINGS FOR THE YEAR ENDED DECEMBER 31, 2016 LIFECO IGM PARGESA CORPORATE TOTAL REVENUES Premium income, net Net investment income 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 Net earnings ATTRIBUTABLE TO Non-controlling interests Perpetual preferred shareholders Common shareholders TOTAL ASSETS AND LIABILITIES 31,125 10,145 5,101 46,371 34,675 2,602 5,450 302 – 188 2,857 3,045 – 1,090 916 92 43,029 2,098 3,342 10 3,352 396 2,956 1,166 – 1,790 2,956 947 – 947 168 779 306 – 473 779 – – – – – – – – – – (88) (88) – (88) – – (88) (88) – (130) (164) (294) 31,125 10,203 7,794 49,122 – 34,675 (102) 14 18 3,590 6,380 412 (70) 45,057 (224) 4,065 (20) (244) 17 (261) (129) 124 (256) (261) (98) 3,967 581 3,386 1,343 124 1,919 3,386 DECEMBER 31, 2016 LIFECO IGM PARGESA CORPORATE TOTAL Invested assets (including cash and cash equivalents) 162,535 8,819 – 786 172,140 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 259 26,405 10,409 200,403 400,011 – 2,811 1,263 4,831 – – – – 33 32 – – 3,103 27,700 15,240 200,403 14,913 2,811 851 418,586 374,904 10,878 – 588 386,370 [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, 2016 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 108 79,317 44,904 33 4,459 10,361 74,909 – 4,537 2,388 47,919 3,070 18,704 2,491 172,140 3,103 27,700 15,240 35,414 90,080 200,403 169,079 87,243 162,264 418,586 20,078 9,448 19,596 49,122 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTNotes to the Consolidated Financial Statements Note 32 Segmented Information (continued) CONSOLIDATED NET EARNINGS FOR THE YEAR ENDED DECEMBER 31, 2015 LIFECO IGM PARGESA CORPORATE TOTAL REVENUES Premium income, net Net investment income 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 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 1,149 – 1,862 3,011 991 – 991 210 781 322 – 459 781 – – – – – – – – – – 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 10,105 – 570 385,350 [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 36,512 109 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORT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, 2016 and December 31, 2015, 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, 2016 and December 31, 2015, 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 24, 2017 Montréal, Québec 1 CPA auditor, CA, public accountancy permit No. A104630 110 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTPower Financial Corporation Five-Year Financial Summary DECEMBER 31 [IN MILLIONS OF CANADIAN DOLL ARS, EXCEPT PER SHARE AMOUNTS] (UNAUDITED) 2016 2015 [1] 2014 [1] 2013 [1] 2012 [1] CONSOLIDATED BALANCE SHEETS Cash and cash equivalents Total assets Shareholders’ equity CONSOLIDATED STATEMENTS OF EARNINGS REVENUES Premium income, net Net investment income Fee income Total revenues EXPENSES Total paid or credited to policyholders Commissions Operating and administrative expenses Financing charges Total expenses 4,396 418,586 19,481 4,188 417,630 19,473 3,989 4,344 3,313 373,843 341,682 268,428 16,942 15,916 13,374 31,125 10,203 7,794 49,122 24,501 4,319 7,692 36,512 21,222 13,563 6,990 41,775 20,236 19,257 2,661 5,933 8,375 5,302 28,830 32,934 34,675 22,842 29,160 17,811 22,875 3,590 6,380 412 3,133 5,883 413 2,901 5,162 413 2,590 4,474 400 2,487 3,806 409 45,057 32,271 37,636 25,275 29,577 Earnings before investments in jointly controlled corporations and associates, and income taxes 4,065 4,241 4,139 3,555 3,357 Share of earnings (losses) of investments in jointly controlled corporations and associates Earnings before income taxes Income taxes Net earnings ATTRIBUTABLE TO Non-controlling interests Perpetual preferred shareholders Common shareholders PER SHARE Net earnings attributable to common shareholders Adjusted net earnings attributable to common shareholders Dividends declared on common shares Book value per common share MARKET PRICE (Common shares) High Low Year-end [1] Restated – refer to Note 16 of the 2016 Consolidated Financial Statements. (98) 3,967 581 3,386 1,343 124 1,919 3,386 2.69 2.95 1.57 224 4,465 679 3,786 1,337 130 2,319 3,786 3.25 3.14 1.49 211 4,350 834 3,516 1,248 132 2,136 3,516 3.00 2.96 1.40 23.69 23.69 20.18 34.70 29.02 33.56 38.78 30.28 31.81 36.70 30.14 36.18 134 3,689 678 3,011 984 131 1,896 3,011 2.67 2.40 1.40 18.51 36.79 27.02 36.00 130 3,487 559 2,928 1,193 117 1,618 2,928 2.29 2.37 1.40 15.68 30.15 24.06 27.24 Quarterly Financial Information [IN MILLIONS OF CANADIAN DOLL ARS, EXCEPT PER SHARE AMOUNTS] (UNAUDITED) 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 2016 First quarter Second quarter Third quarter Fourth quarter 2015 First quarter Second quarter Third quarter Fourth quarter 12,970 13,470 14,106 8,576 13,369 4,901 9,281 8,961 564 834 860 1,128 956 963 975 892 259 505 539 616 573 616 602 528 0.36 0.71 0.76 0.86 0.80 0.87 0.84 0.74 0.36 0.71 0.76 0.86 0.80 0.86 0.84 0.74 111 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORT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, 3] 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] M EMBER 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 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 GARY A. DOER, O.M. [1, 2, 3] Senior Business Advisor, Dentons Canada LLP GÉRALD FRÈRE [2] Managing Director, Frère-Bourgeois S.A. ANTHONY R. GRAHAM, LL.D. [4] Vice-Chairman, Wittington Investments, Limited J. DAVID A. JACKSON, LL.B. Senior Counsel, Blake, Cassels & Graydon LLP 112 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTOfficers PAUL DESMARAIS, JR., O.C., O.Q. ANDRÉ DESMARAIS, O.C., O.Q. R. JEFFREY ORR Executive Co-Chairman Executive Co-Chairman President and Chief Executive Officer MICHEL PLESSIS-BÉLAIR, FCPA, FCA HENRI-PAUL ROUSSEAU, PH.D. AMAURY DE SEZE Vice-Chairman Vice-Chairman Vice-Chairman GREGORY D. TRETIAK, FCPA, FCA CLAUDE GÉNÉREUX Executive Vice-President and Chief Financial Officer Executive Vice-President OLIVIER DESMARAIS Senior Vice-President PAUL DESMARAIS III Senior Vice-President PAUL C. GENEST Senior Vice-President ARNAUD VIAL Senior Vice-President JOCELYN LEFEBVRE, CPA, C.A. DENIS LE VASSEUR, CPA, C.A. STÉPHANE LEMAY Managing Director, Power Financial Europe B.V. Vice-President and Controller Vice-President, General Counsel and Secretary FABRICE MORIN Vice-President RICHARD PAN Vice-President EOIN Ó HÓGÁIN, CFA Vice-President LUC RENY, CFA Vice-President 113 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORT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 416-607-2250 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 D: PWF.PR.E Series E: PWF.PR.F Series F: PWF.PR.G Series H: PWF.PR.H Series I: PWF.PR.I Series K: PWF.PR.K Series L: PWF.PR.L Series O: PWF.PR.O Series P: PWF.PR.P Series Q: PWF.PR.Q Series R: PWF.PR.R Series S: PWF.PR.S Series T: PWF.PR.T Shareholder Services Shareholders with questions relating to the payment of dividends, change of address, share certificates, direct registration and estate transfers 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  F inancial  Corporation are used with permission. 114 POWER FINANCIAL CORPORATION 2016 ANNUAL REPORTDE SIG N: A R D O ISE.COM 2 0 1 6 A N N U A L R E P O R T P O W E R F I N A N C I A L C O R P O R A T I O N A D A N A C N I D E T N I R P 

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